In the last two months, distillers grains prices have counter-seasonally decreased. Typically, prices for dried distillers grains plus solubles (DDGS), wet distillers grains plus solubles (WDGS), and modified distillers grains plus solubles (MDGS) in South Dakota increase during May and June. This year, though, DDGS prices have fallen more than $93/ton in the last two months and more than $125/ton since its spring high in late March. Last week’s average price for DDGS in South Dakota was $116.88/ton. Similarly, WDGS and MDGS prices are $32-33/ton lower than at the beginning of May, with weekly average prices of $35.25/ton and $65.88/ton, respectively.
Several factors have contributed to the decline in distillers grains prices in May and June. First, ethanol production has increased from about 900,000 barrels per day at the beginning of May to about 950,000 barrels per day by the end of June. Therefore, distillers grains production increased from about 88,949 metric tons per day to about 94,819 metric tons per day, a 6.6% increase in quantity supplied.
The decline in soybean meal prices during the month of June also contributed to lower distillers grains prices. July 2014 soybean meal futures declined $59/ton from $506/ton at the beginning of June to $447/ton at the end of last week. Although nutritional characteristics of the two feedstuffs are different, they both are used as protein sources in livestock rations. Thus, as substitutes, a lower soybean meal price leads to lower demand for distillers grains.
Another factor that significantly contributed to the decline in distillers grains prices was the ban that China placed on imports of U.S. distillers grains due to presence of a genetically modified trait not approved by China for import. China, the largest buyer of distillers grains in the world, was sharply increasing its imports of distillers grains in recent months to support its livestock industry. On June 9, 2014, China announced it would not issue import permits for U.S. distillers grains. However, its largest port had stopped issuing new permits during May. The distillers grains price reaction was almost immediate in the U.S. Average DDGS prices in South Dakota dropped by $14/ton in the week following the news of the export ban. DDGS prices are now $60/ton lower since the Chinese import ban was announced.
Of course, corn prices have also fallen sharply in the last two months. Corn prices paid by ethanol plants have dropped about $0.70/bu since the beginning of May. While lower corn prices generally translate into lower absolute prices for distillers grains, the decline in distillers grains prices due to the factors discussed above is proportionally larger than the decline in corn prices. As shown in Figure 1, distillers grains prices expressed as a percentage of corn prices declined during May and June. DDGS prices declined from 127% of the price of corn (dry matter basis) at the beginning of May to 84% at the end of June. DDGS had traded as high as 153% of the corn price in late March 2014. While the MDGS and WDGS products are less directly affected by the loss of export demand, their price ratios relative to corn also decreased. MDGS prices declined from 108% of corn price at the beginning of May to 85% at the end of June. WDGS prices are now 65% of corn price, down from 105% at the beginning of May.
Looking ahead, additional weakness in distillers grains prices is possible. Seasonally, distillers grains prices decline in the late summer as cattle on feed inventories are seasonally smallest. This year, cattle on feed numbers may tighten even more than normal due to declining availability of feeder cattle. Further, lower corn prices should encourage additional ethanol production.
Figure 1.
The information in this report is believed to be reliable and correct. However, no guarantee or warranty is provided for its accuracy or completeness. This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers. The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information. There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.
Source : SDSU