DDGS Market Perspectives Aug 1, 2014

DDGS Comments: Containerized DDGS rates fell by significant amounts this week as merchandisers are forced to competitively realign their customer base since Chinese buyers are being locked out of the market to U.S. DDGS by actions taken by their own government. That is unfortunate because Chinese customers have developed a strong appreciation for DDGS, with the trade eventually accounting for more than half of the global DDGS exports. The forced alternation to their demand has resulted in some dramatic price shocks, but the market will adjust as new destinations are increasingly found.

In the search to broaden the customer base, merchandisers are presently offering DDGS at values that are substantially discounted to the price of corn. Merchandisers are seeking new clients who have a reputation of dependability. The merchandiser’s strong interest in obtaining a dependable customer base can work to the good of a buyer who is willing to establish a relationship that maintains consistent product flow. Domestic buyers seem to recognize this and a number of feedlots are reported to be showing interest in obtaining more DDGS.

Domestic buyers remain the largest consumers of DDGS and many of those experienced buyers seek to negotiate extended contracts in periods when feed prices are weak, especially because they know that prices normally do not stay at extreme highs or lows. (The outlook section at the beginning of this week’s publication discusses the topic of future changes in market conditions.) The preceding table covering DDGS prices shows that market participants anticipate higher prices in October, presumably because the customer base is expected to have stabilized by that point in time. 

Ethanol Comments: Export demand for U.S. ethanol is coming from locations such as India and the Middle East, reports a story by Dow Jones. That story basically confirms what was being indicated in EIA’s weekly data over the past couple of months. Those stable exports and weak corn prices have allowed ethanol facilities to maintain sizable production levels and favorable margins. Unfortunately, declining DDGS prices may become somewhat of an anchor on ethanol producer returns.

Even though spot corn prices continued to decline this week, the drag of weaker DDGS prices seemed to offset that benefit. The differential between the cost of corn and the co-products at ethanol facilities are the following for week-ending Friday, August 1, 2014:

 
• Illinois differential is $3.41 per bushel in comparison to $3.51 the prior week and $2.26 a year ago.
 
• Iowa differential is $3.26 per bushel in comparison to $3.32 the prior week and $1.86 a year ago.
 
• Nebraska differential is $3.12 per bushel in comparison to $3.22 the prior week and $2.09 a year ago.
 
• South Dakota differential is $3.68 per bushel in comparison to $3.67 the prior week and $1.70 a year ago.  

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  Australia: Barley exports are set to hit record levels in 2014/15 as Chinese buyers turn to it in the face of expensive domestic corn, according to Reuters. Exports are expected to be around 3 MMT through the end of July and booked shipping records indicate that it could potentially outstrip the record 6.15 MMT of barley Australia shipped in the 2011/12 season. The Australian Bureau of Agricultural and Resource Economics

   

  and Sciences estimated in June that coarse grain exports would total some 5.2 MMT this year and has predicted that barely production will fall by around 20 percent to 7.5 MMT.

   

  Brazil: The government has given approval for ADM to begin shipping corn from their new terminal on the mouth of the Amazon, according to Reuters. The terminal is located just outside of Belem, and will have an initial annual shipping capacity of 1.5 MMT, which is expected to increase to 6 MMT by 2016. The opening of this terminal in northern Brazil is expected to reduce shipping costs by 34 percent compared to cargoes arriving from Brazil’s main port of Santos in the country’s south.

   

  China: Drought and high temperatures have caused damage to over a million hectares of farm land in the provinces of Henan and Inner Mongolia, reports Reuters. Henan is one of China’s larger barley producing provinces, and the province’s drought is the worst seen in four decades. It has negatively impacted 900,000 hectares of crops and forced the provincial government to restrict usage for water intensive industries. Inner Mongolia has been in a state of drought since April. This has negatively impacted 150,000 hectares of farm land, 16.4 million hectares of pasture land and severely impacted the drinking water supply of 300,000 people. The drought in Inner Mongolia is believed to have caused around $37 million of damage so far.

   

  South Africa: South Africa has raised its forecast for corn production to 14.02 MMT, which is an increase from the prior estimate of 13.9 MMT. Sorghum production estimates jumped by 9.6 percent to 255,700 MT.