Market Perspectives March 28, 2014

Distillers Dried Grains with Solubles (DDGS)

DDGS Comments:There is presently a slight decline in DDGS prices from the spot market going into the month of June. That is perhaps one reason that buyers are showing great interest in the May-forward time period. Another reason seems to be because many market participants are hesitant to act before seeing the contents of USDA reports that will be published on Monday, March 31, 2014. Please note, the preceding Outlook section of this report highlights some near-term factors that could influence U.S. corn prices.

DDGS demand from Mexican buyers is presently slow because of ample local feed grain supplies and the fact that more will soon come from the state of Nayarit. More feed grain supplies will also be available from northeastern Mexico later this spring and summer. Nevertheless, Mexican buyers are expected to eventually return with increasing inquiries regarding DDGS pricing. They could be returning in a similar time period as Chinese buyers.

Chinese buyers are showing increased interest in pricing DDGS in forward months. Their bids are presently below most asking prices but the difference between buyer and seller is likely to close once purchasing approval is granted for all varieties. Several DDGS merchandisers reported that there is about a $10-$15 spread between the bid and ask for more distant delivery. Prices in the nearby spot market remain strong and some of the reasons for that are discussed in the Ethanol section of this report.

Ethanol Comments: Recall how ethanol prices declined last season as it become increasingly evident that corn production was going to rebound and corn prices would fall. Ethanol price behavior this season is not conveying such a confident perspective in relation to future corn prices and production. Presently, ethanol producers know that they can make a favorable margin with current corn prices so long as they are able to move the product.

The current large premium of New York Harbor ethanol prices over ethanol prices in the Midwest may take a month or more to correct even though the rail lines are working aggressively to correct the logistical backlog. Ethanol plants appreciate the fact that potential margins are good, but those returns remain only potential when the inventory is not being moved. Consequently, ethanol plants are as anxious as anyone in the supply chain to see an improvement in logistical conditions. While waiting on conditions to improve, a number of plants will continue with their plans to undergo spring maintenance.

The present awkward dynamic is indicated in the fact that the potential margins being offered to producers continue to escalate even while total U.S. ethanol stocks build and production declines. U.S. total ethanol stocks for the week ending March 21 increased by 2.5 percent to 15.7 million barrels while weekly ethanol production declined slightly to 885,000 barrels per day. This occurs as the differential between spot corn and co-products valves continues to widen, as implied in the data below for the week ending March 28:

– Illinois differential is $8.31 per bushel, in comparison to $7.89 the prior week and $1.93 a year ago.
– Iowa differential is $6.33 per bushel, in comparison to $5.48 the prior week and $2.00 a year ago.
– Nebraska differential is $5.98 per bushel, in comparison to $5.11 the prior week and $2.02 a year ago.
– South Dakota differential is $6.69 per bushel, in comparison to $6.26 the prior week and $2.26 a year ago.