Distillers Dried Grains with Solubles (DDGS)
DDGS Comments: A number of DDGS end users are patiently waiting for increasing U.S. harvest pressure to force the price of corn back down. That strategy can work if increased selling by U.S. farmers causes corn futures contracts to return a portion of the 30-cent per bushel rally that has occurred since the first week of September. However, a complete return to those prior low prices seems unlikely because a sizable amount of waiting demand is implied by the increased buying of corn futures contracts approximately 15 cents below current prices. As a matter of fact, that waiting demand below current price levels seems to be a major reason for the rebound in corn contracts since the first of September. Furthermore, the preceding Outlook section of this report notes that total corn consumption has increased this past summer above the year-ago rate. Such evidence supports the notion that global buyers are attracted by recent prices.
Concentration of certain nutritional benefits is one advantage that DDGS has over corn that can allow for reduced transportation costs. This is a factor that can cause demand for DDGS to increase more sharply once it becomes evident that corn prices have limited downside remaining. Cash grain prices may remain flat for several months as the newly harvested crop is placed into storage. However, it is at that point that DDGS can rebound quicker because it is produced more uniformly throughout the year. Therefore, the savvy buyer of DDGS is attempting to purchase when the price of corn is at a low, but before the spread between the price of DDGS and corn starts to widen out.
Ethanol Comments: The U.S. national average price of regular gasoline decreased for a sixth week in a row to $2.32 per gallon, but this period of price decline may be coming to an end: The price of WTI crude oil increased by 84 cents to $45.55 per barrel for the week ending September 25, 2015. Stability in the price of crude should eventually influence the price of gasoline – and then the price of ethanol.
Total U.S. ethanol stocks of 18.8 million barrels are exactly the same size as the year-ago level even though the current average daily production rate of 943,000 barrels per day (bpd) is more than seven percent larger than the year-ago production rate. This fact seems to imply stable consumption. A further positive point of consideration is that U.S. ethanol imports have fallen back off to zero, after temporarily increasing last week to an average daily rate of 44,000 bpd.
Considering that U.S. ethanol stocks are presently identical to last year, the differential between the spot market price for corn and the bi-products of ethanol and DDGS appears to have room to strengthen more, as can be seen in the data for the week ending September 25, 2015:
- Illinois differential is $1.79 per bushel, in comparison to $1.68 the prior week and $2.28 a year ago.
- Iowa differential is $1.58 per bushel, in comparison to $1.45 the prior week and $2.07 a year ago.
- Nebraska differential is $1.64 per bushel, in comparison to $1.45 the prior week and $1.79 a year ago.
- South Dakota differential is $1.86 per bushel, in comparison to $1.72 the prior week and $2.26 a year ago.
Increased Ethanol Exports: U.S. fuel ethanol exports climbed in July, putting shipments for the year 705,000 barrels ahead of the same period last year. Compared to ethanol exports for the past five years, 2015 sales are at the second fastest clip since 2011 – when the U.S. exported 28.4 million barrels. Notably, the increase in ethanol exports from June to July outpaced the increase in export sales of U.S. finished gasoline over the same period. The chart below shows the most recently available data covering U.S. ethanol exports.