Distillers Dried Grains with Solubles (DDGS)
DDGS Comments: The overall implication of this week’s price action is that DDGS buyers are being presented pricing opportunities by merchandisers who presently desire to increase their volume sold. For example, consider the fact that DDGS prices have recently weakened while corn futures contracts strengthened. This is one indicator that merchandisers have abundant inventory that they desire to move. A second potential indicator of this circumstance is the discount for October DDGS prices.
DDGS inventories at ethanol facilities have increased in part because of a common expectation among buyers that harvest will press corn contracts back down toward the lows that occurred in August. However, the Outlook section of this report explains the circumstances that are necessary for that even to happen. It is possible that DDGS buyers could be waiting on corn pricing conditions that are not going to develop if total U.S. corn production declines. Therefore, it may be advantageous to consider the ebb and flow of DDGS inventories when creating purchasing strategies. It is possible for DDGS prices to decline even if the price of corn remains flat, but that condition is not permanent.
Ethanol Comments: The current 2015/16 crop year for U.S. corn is only about five weeks old, yet some market participants are touting the fact that the sales pace for corn exports is slower than normal. Presently about only about 23 percent of USDA estimated total U.S. exports of 1.85 billion bushels has been sold when the normal amount sold by this time is closer to 45 percent. This slower sales pace is primarily the result of many global end users purchasing corn in a hand-to-mouth manner because of the expectation that the U.S. corn harvest will again force prices back down. The correctness of this assumption will be better defined after USDA data is published on October 9, 2015. The key point being, this circumstance has granted more time for ethanol facilities to define their purchasing strategies while U.S. gasoline prices stabilize. The average retail price of U.S. gasoline decreased for the seventh week in a row to $2.318 per gallon on October 5, as reported by the U.S. Energy Information Administration (EIA).
Total U.S. ethanol stocks remained unchanged from the prior week at 18.2 million barrels. A positive note is that this amount is slightly below the year-ago stocks of 18.7 million barrels. This occurred even as the currently average daily production rate of 950,000 barrels per day (bpd) increased above the prior week’s level of 943,000 and is 5.4 percent above the year-ago average daily rate of 901,000 bpd. Additionally, the stable stocks level exists even though ethanol imports returned with an average rate of 17,000 bpd.
The differential between the combined market returns for ethanol and DDGS and the price of corn does not imply that margins will incentivize ethanol facilities to increase production. The following data show that the differentials in three of the four regions of the Corn Belt declined for the week ending October 2, 2015 and remain below a year ago:
- Illinois differential is $1.72 per bushel, in comparison to $1.79 the prior week and $2.12 a year ago.
- Iowa differential is $1.54 per bushel, in comparison to $1.58 the prior week and $1.99 a year ago.
- Nebraska differential is $1.70 per bushel, in comparison to $1.64 the prior week and $1.84 a year ago.
- South Dakota differential is $1.74 per bushel, in comparison to $1.86 the prior week and $2.18 a year ago.