Distillers Dried Grains with Solubles (DDGS)
DDGS Comments: Large speculators struggled this week to keep nearby corn contracts below levels where cross-over patterns will trigger some exiting of fellow short traders. Some of those speculators have been surprised by the amount of commercial buying that is meeting them as the December 2013 corn contract trades around the $4.40 per bushel region. However, DDGS merchandisers seem to be well aware of the amount of commercial interest at present price levels. One merchandiser noted that he just sold his last batch of “December shipments” this week, a total of 10,000 MT, and he has had record sales for the fourth quarter. The present fourth quarter sales are offsetting the slow sales in the first quarter (due to plant closures), and several merchandisers may have a record year in total DDGS sales volume. Sales volume was particularly strong for those merchandisers who have strong demand from Chinese customers.
Domestic Chinese demand for U.S. DDGS is expected to remain firm well into the future and is in direct competition with buyers from Japan, Vietnam and Korea. Asian buyers are considering multiple factors such as logistics, individual client demand, and present U.S. corn prices. Domestic U.S. buyers of DDGS cannot always justify directly competing against Asian buyers because their logistical costs are often less than their international counterparts. Consequently, they can find it more cost advantageous to pay for the transport of more bulky corn rather than more concentrated DDGS. However, both domestic and international buyers of DDGS seem to recognize that the substantial pool of speculators with short positions in corn futures will eventually be triggered out of their positions. As a result, DDGS merchandisers are receiving a lot of inquiries for pricing into the first and second quarter of 2014.
Ethanol Comments: A problem can develop when a lack of available data creates a vacuum that inflates the importance of market rumors. A prime example of this fact occurred last week when stories were circulated that EPA would alter the 2014 Renewable Fuels Standard (RFS) volume obligations and potentially increase corn ending stocks by as much as 500 million bushels for the 2013/14 season. Corn futures declined in reaction to that story. In reality, no official limitation was proposed or approved. Secondly, the RFS only is only related to minimum usage and places no limitation on production. Consequently, any adjustment to 2014 RFS policy is likely to have a limited impact on total corn consumption, which could easily be offset by increased exports and domestic feed demand due to current low price levels. Such facts should become increasingly evident with the return of actual market data.
A gap exists in the release of weekly data from the U.S. Energy Information Administration due to the recent government shutdown. Data relating to ethanol stocks will not become available until Monday, October 21, and there is also a gap in data from the USDA’s Ag Market News Service. However, USDA staff should be credited for their ability to publish the weekly differential between ethanol corn and co-products processing values after just one day on the job. While there is no prior week data, there is a significant year-over-year difference in implied returns for the week ending October 18 that exhibits the industry’s current financial stability:
– Illinois differential was $3.41 per bushel, in comparison to $1.46 for this same week a year ago.
– Iowa differential was $3.04 per bushel, in comparison to $1.34 for this same week a year ago.
– Nebraska differential was $2.93 per bushel, in comparison to $1.39 for this same week a year ago.
– South Dakota differential was $3.28 per bushel, in comparison to $1.54 for this same week a year ago.