Distillers Dried Grains with Solubles (DDGS)
DDGS Comments: The release of the October 10 WASDE was awaited with anticipation by both end-users and merchandisers in the DDGS market. This report can commonly result in explosive price reactions, but that was not the case this year. As noted in the earlier Outlook section of this report, corn prices are now expected to remain in a trading range through year-end. A similar behavior is likely for DDGS prices. Corn futures contracts rallied this past week, but there was not much of an increase in DDGS prices. As a result, DDGS prices are not expected to change much next week even if corn contracts give back the gains that occurred this week.
Buyers of DDGS must now decide upon the most opportune strategy: the prospect of limited upside may cause some buyers to purchase just immediate needs, while the prospect of limited downside could cause others to conclude that now is the most appropriate time to extend coverage. Deciding which scenario is most appropriate is expected to become increasingly dependent on logistical rates.
Merchandisers can generally arrange more favorable logistical rates for sizeable volume – especially when they can give the transport company some notice ahead. That is specifically important this season because the large harvest is resulting in heavy traffic, and this can cause periodic bottlenecks in different sections of the country. Congestion can cause freight rates to momentarily escalate and increase costs in the spot market while contractually agreed upon rates remain unaffected. Consequently, it could be opportune for DDGS buyers to do a lot of comparative shopping and then purchase in sizable amounts for the future when prices are trading in a horizontal pattern.
Ethanol Comments: Rail logistical issues are expected to continue hampering the flow of ethanol for another five or six weeks as harvest of bumper crops continues. Adding to the level of frustration is the fact that bottlenecks can become more commonplace during periods of increased traffic. Yet, maintaining such levels of surplus capacity so as to avoid all congestion during times of periodic high demand is a cost that the customer base would presumably not wish to support with constant higher rates. The present period of delays is inconvenient, but it has been on the horizon for some time and its approach was discussed and anticipated. In like manner, future improvements in logistical flow are expected.
It is noted that reassurance of improved logistics a couple of months down the road is not necessarily consoling to participants within the ethanol industry, but the current market data is not overly pessimistic. Total U.S. ethanol stock level are more than 20 percent larger than a year ago, but recall that stocks were just starting to rebuild in October 2013. Furthermore, the most recent data for week ending October 3 shows that there was a slight decrease in total ethanol stocks to 18.7 million barrels (from the prior week of 18.8 million barrels) even though production increased to an average daily rate of 901,000 barrels per day (from the prior week average of 881,000 bpd). Lastly, the differential between the cost of corn and returns on the co-products of ethanol and DDGS declined modestly even though there was more than a 20-cent per bushel increase in the spot price of corn. The differential for the week ending October 10, 2014 is as follows:
- Illinois differential is $2.06 per bushel, in comparison to $2.12 the prior week.
- Iowa differential is $1.94 per bushel, in comparison to $1.99 the prior week.
- Nebraska differential is $1.72 per bushel, in comparison to $1.84 the prior week.
- South Dakota differential is $1.97 per bushel, in comparison to $2.18 the prior week.
Note: the year-ago values will be unavailable for several weeks because of the government furlough that occurred last year during this time.