Distillers Dried Grains with Solubles (DDGS)
DDGS Comments: The setback that occurred early this week in corn futures is making market conditions a little difficult for DDGS buyers to interpret: Should they expect prices to continue trading lower and hold off on purchases, or should they immediately seek to take advantage of the lower prices? Using this week’s price setback as a buying opportunity presently seems like it was the correct strategy, because corn futures contracts steadily worked higher as the week progressed.
It was noted in the Ethanol section of this report that a primary reason for this week’s lower prices was an attempt by traders who had purchased puts with lower strike prices to drive the nearby December contract down before those options expired. However, that tactic did not work very well. A substantial number of traders still hold speculative short positions in the nearby December contract. It would not be advantageous for any uncovered buyer of DDGS if those speculative traders simultaneously decide to reduce their short positions next week because there is often reduced trade volume during the U.S. Thanksgiving holiday. As well, the majority of DDGS merchandisers will be out of the office Thursday and Friday of next week.
Domestic cattle producers are the largest consumers of DDGS, but many of them have recently reduced the proportion of DDGS in their rations due to the comparatively inexpensive cost of corn. The greater bulk volume of corn is less of a concern for those domestic DDGS end-users because they use trucks to transport shorter distances. Consequently, if DDGS merchandisers find their domestic demand has slowed, then that could increase their willingness to negotiate on price with foreign buyers. This fact may already have been discerned by various foreign buyers because merchandisers report that buyers, particularly from China, are requesting slightly lower prices. However, those buyers should also be aware that DDGS merchandisers need to arrange logistics during the approaching holiday season (Thanksgiving, Christmas and the New Year) which lasts into the first of January, 2014. Domestic buyers are also likely to return in greater forces after the start of the new year.
Various Asian buyers seem to have anticipated such market developments, and one DDGS merchandiser reported large sales this week of 14,000 metric tons, mostly to China and Vietnam for the January/February/March time frame at the following price levels:
Qingdao: $326
HCMC: $339
Ethanol Comments: A story by Reuters made an interesting point this week by highlighting the fact that last week’s announcement about the Environmental Protection Agency’s desire to cut the ethanol blending requirements for next season should have substantially reduced the value Renewable Identification Numbers (RINs), but that did not happen.
The story noted that the limited decline in RIN prices seemed to imply that market participants are uncertain that EPA intentions will not be overruled. In other words, there is some possibility that EPA’s proposal will get over turned by a legal challenge. No such lawsuit can be filed until the agency finalizes it rules, which could be as late as June. Consequently, the statement was made in the prior Outlook section that any action by the EPA is unlikely to have a major influence on ethanol production in the present 2013/14 season. Further confirmation is found in the fact that the price of ethanol futures did not fall apart this week.
Ethanol production was 904,000 barrels per day (bpd) for the week ending November 15, 2013, which was down about 2.5 percent from the prior week’s level of 927,000 bpd. Please note that the production level for this week was more than 11 percent larger than the year-ago level, but the total U.S. ethanol stocks experienced a week to week decline, from 15.2 down to15.1 million barrels. The present total U.S. ethanol stocks level of 15.1 million barrels is more than 20 percent below the year-ago stocks level of 18.9 million barrels. That fact is emphasized to point out that any potential policy alteration by EPA is not going to produce a sudden glut of ethanol that will stifle production.
Ethanol market related news this week was further supportive as large increases were reported in the differentials between corn and the co-products values cross the Corn Belt:
– Illinois differential increased to $4.74 per bushel, which is up strong from $3.29 the prior week and well above $1.39 for this same week a year ago.
– Iowa differential increased to $4.08 per bushel, which is up strong from $2.51 the prior week and well above $1.19 for this same week a year ago.
– Nebraska differential increased to $3.94 per bushel, which is up strong from $2.30 the prior week and well above $1.59 for this same week a year ago.
– South Dakota differential increased to $3.98 per bushel, which is up strong from $2.62 the prior week and well above $1.39 for this same week a year ago.