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DDGS Market Perspectives Maarch 21, 2014

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Publish time: 1st April, 2014      Source: Grains Council
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                   DISTILLERS DRIED GRAINS WITH SOLUBLES (DDGS)
    
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    DDGS Comments:Merchandisers report that foreign demand for DDGS seems to be on hold. One reason is because a number of Asian buyers already have contracts for the current time period. Some of those buyers are now fishing for prices in the October/November/December time period but their bids are below values that are obtainable with the present prices of corn futures contracts. There also seems to be some subtle inquiry from Chinese buyers about DDGS prices beyond May. DDGS merchandisers may find it easier to negotiate with buyers for this time period because of the favorable returns that facilities are receiving due to strong demand for ethanol. (Please see the discussion in today？s ethanol section).
    
    There is presently strong incentive for facilities to increase production of ethanol, which will also cause an increase in DDGS production. Strong demand for ethanol could remain into mid-summer. As discussed last week, adverse winter weather has caused a temporary backlog in the DDGS contractual obligations. Any increase in DDGS could help meet those existing obligations more quickly. Afterward, greater amounts of DDGS could become available for purchase, which could conveniently meet returning Chinese demand for the May time period. However, an important point to consider is that U.S. corn prices could also be higher and more volatile at that time. (Please see the proceeding Outlook section of this report). Consider that DDGS prices remain approximately the same from this week and last week as corn futures contracts trade in a sideways pattern. As a result, it now appears to be an ideal time for DDGS buyers to approach merchandisers to investigate pricing prospects for the May time period.
    
    Ethanol Comments: News sources point out the fact that this past winter was the coldest in three decades. Below a certain temperature, rail switches can freeze up and locomotives become finicky. And of course, it is not easy for one train to simply bypass another. The result is a ripple effect of delay throughout the whole rail system. Rail hubs, such as Chicago, became heavily congested. East Coast end-users of ethanol found themselves in short-supply and anxiously awaiting product that was stuck on the other side of major rail hubs in the Midwest. Transportation delays have been equally burdensome for ethanol producers who had to reduce production because of their inability to keep product moving out of their on-site storage facilities.
    
    Weather conditions will improve now that spring has arrived and some market participants expect that improved logistics and increased production to logically cause a decline in the price of ethanol. A decline in ethanol prices does make sense, but U.S. gasoline consumption normally increases going into the summer. Increasing foreign fuel demand could also keep ethanol exports at higher-than-expected levels.
    
    Present data indicates that it may take longer-than-expected before increased production and a rebound in U.S. ethanol stocks applies considerable pressure to prices. Consider that the latest reported ethanol production rate increased to an average weekly volume of 891,000 barrels per day (bpd), above the prior- week？s rate of 869,000 bpd. This is more than 10 percent above the production rate for the same week a year ago. In the meantime, the weekly stocks levels fell a substantial 4 percent, from 15.9 down to 15.3 million barrels for the week ending March 14. Of course, weather is a factor in this decline but presumably strong demand is also a factor since the total stocks level is 17.3 percent below the same period a year ago.
    
    A further indicator of the strong demand is the escalating differential between corn and co-product processing values across the Corn Belt. Differentials for the week ending March 21, 2014 are as follows:
    
     Illinois differential is $7.89 per bushel in comparison to $5.90 the prior week and $2.10 a year ago.
     Iowa differential is $5.48 per bushel in comparison to $3.95 the prior week and $2.18 a year ago.
     Nebraska differential is $5.11 per bushel in comparison to $3.69 the prior week and $2.19 a year ago.
     South Dakota differential is $6.26 per bushel in comparison to $4.03 the prior week and $2.14 a year ago.
    
    
    COUNTRY NEWS
    
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    China: USDA has announced that China has made its first purchase of U.S. corn in two months, according to Reuters. Total Chinese purchases this year of U.S. corn now total some 4 MMT with 1.392 MMT having already been shipped.
    
    Japan: The Ministry of Agriculture has announced that it received no bids in its weekly tender for the importation of feed barley and wheat, reports Reuters. It had sought 120,000 MT of feed wheat and 200,000 MT of barley and will seek the same in a tender closing on March 26.
    
    South Africa: Yellow corn prices rose by 1.2 percent to 204.21/MT as the rand weakened against the dollar, according to Bloomberg News.
    
    Ukraine: Continued political unrest is having a negative impact on Ukrainian small grain traders who are struggling to get financing from local banks, reports to Reuters. These traders are being forced to seek loans from larger, international trading houses. This credit crunch has the potential in a worst-case scenario to reduce Ukraine？s corn crop by 20 MMT (a third of the predicted total) as farmers are having difficulties in procuring funds to buy seed. Tensions and Russia？s effective annexation of Crimea have also caused the Ukrainian hryvnia to weaken.