DDGS Comments: DDGS prices traded below corn throughout much of the fourth quarter of 2014. Then in the month of December, DDGS prices started steadily increasing by greater percentages than did the price of corn in anticipation of returning Chinese demand. The price of some DDGS increased through the month of December to levels of more than 125 percent the price of local corn.DDGS prices will presumably struggle to go any higher in relation to corn without China purchasing a significant amount of containerized DDGS during the first quarter of 2015.
DDGS merchandisers report that they are receiving a good number of inquiries from Chinese buyers about potential business in the first quarter.However, the majority of DDGS merchandisers are now requiring Chinese customers to make down payments of up to 35 percent. If such requirements slow Chinese demand, then any future increase in the price of DDGS is likely to be proportionally less than an increase in the price of corn. Such a development could create a favorable opportunity for buyers from destinations such as Mexico or other Asian locations.
USDA is publishing a number of important reports on Monday and if the data is considered bullish for corn, then DDGS buyers may observe the price of corn increasing more rapidly than the price of DDGS from current price levels. In other words, DDGS prices could decline in relation to the price of corn in the next few weeks and present a buying opportunity.
Ethanol Comments: A number of ethanol producers have skillfully hedged themselves by purchasing corn contracts at lower price levels. That is good news and it will help the associated ethanol facilities maintain favorable returns. Another favorable item is that ethanol exports throughout much of 2014 were strong and acted as a relief valve in consuming surplus stocks. Ethanol exports in November were at the highest level since December 2011. Unfortunately, there are also a few less favorable developments that have started to weigh on spot margins for the overall industry.
The price of petroleum has collapsed in the past month and there presumably has been a significant decline in recent exports as the prices of ethanol rise above gasoline. The lower price of gasoline in proportion to ethanol may also encourage domestic petroleum refineries to slow ethanol blending and instead increasingly utilize any surplus Renewable Identification Numbers (RINs) that they have acquired through time. Such factors are expected to weigh on ethanol producer margins in the near-term.
The differential between the cost of corn and the return for the co-products of ethanol and DDGS is not a producer margin, but it is an effective barometer that shows a substantial decline from year-ago levels for the week ending Friday, January 9, 2015.
- Illinois differential is $1.67 per bushel, in comparison to $2.44 the prior week and $4.40 a year ago.
- Iowa differential is $1.53 per bushel, in comparison to $2.14 the prior week and $3.00 a year ago.
- Nebraska differential is $1.53 per bushel, in comparison to $2.10 the prior week and $3.06 a year ago.
- South Dakota differential is $1.79 per bushel, in comparison to $2.15 the prior week and $3.25 a year ago
Country News
Brazil: Rainfall in the top corn-producing state of Mato Grosso was slightly above average in December and the southern grain-producing states have also seen significant precipitation and localized flooding, according to Retuers. Rainfall for January is also expected to be above average.
China: Growing demand from China’s livestock feeding sector is responsible for the U.S. selling the highest amount of sorghum in 19 years, reports Bloomberg News. Sorghum sales of 584,324 MT had been reported as of December 18, 2014, with over half going to China. It is predicted that China will import 5 MMT of sorghum in the year-long period that began on October 1, 2014, which is up from the 4.16 MMT it brought in the prior year. The amount of U.S. sorghum inspected for export has doubled from last year to total 2.83 MMT.
Ukraine: Ukraine’s Agricultural Ministry is slated to meet with major grain traders on January 13 to discuss the country’s exports and domestic markets in the wake of Russia’s decision to curb grain exports, according to Reuters. One February 1, Russia is set to implement grain export duties of €35/MT in order to keep its domestic grain prices under control. Ukrainian authorities have previously stated that the country will likely increase the asking price for its grain exports in the wake of Russia’s decision.
Ukrainian grain exports totaled 19.6 MMT between July 1, 2014 and January 6, 2015. These exports included 7.61 MMT of corn and 3.63 MMT of barley, compared to 10.7 MMT of corn and 2.1 MMT of barley exported in the same time last year. Ukraine is expected to export around 33 MMT of grain this year out of a total harvest of 64 MMT. The country exported around 32 MMT of grain last year.