DDGS Comments: Buying of DDGS slowed this past week and there is now about a $10/MT spread between most bids and offers. End users logically expect the price of DDGS to decline in unison with this week’s setback in corn futures contracts. In response, merchandisers note that the corn is seldom purchased at the time that DDGS are produced. Furthermore, it is hard for DDGS merchandisers to instantaneously drop their price in relation to the behavior of corn futures because such price action can often be temporary. The preceding Outlook section within this report explains why that presently may be the case.
Pricing and usage agreements can work in favor of both the merchandiser and the buyer during periods of uncertain price action. The merchandiser may agree to very thin margins in exchange for the buyers agreeing to purchase a set amount of inventory. Establishing such an agreement allows the merchandiser and buyer to then work as a team in devising a purchasing strategy for corn. Together they define the intended futures price and basis. More sizable agreements can also be mutually beneficial in allowing the team to negotiate better freight rates and maintain a steady flow of inventory. In contrast, consistent buying and selling in the spot market generally does not work in favor of both parties.
The price for both domestic and international DDGS were up about $5/MT this past week. Containerized DDGS that were purchased one to two months into the future for Asian destinations tended to have an additional modest reduction in price. Such reductions are not always offered on domestic bulk rates, presumably because of the tendency by domestic end users to purchase in the spot market.
Ethanol Comments: Factors such as a renewed strength in the U.S. Dollar, the passage of peak U.S. driving demand, a lethargic Chinese economy and a potential Iranian deal combined to enable global crude oil prices to drift below $50 per barrel this past week. This low price level for gasoline can reduce the immediate demand for ethanol exports, particularly until there is better evidence that crude oil stocks are in decline. As well, there is no indication of declining ethanol stocks to incentivize blenders to secure more inventories.
U.S. ethanol stocks were 19.6 million barrels for the week ending July 17, which is basically unchanged from the prior-week’s level of 19.7 million barrels and 9 percent above the year-ago level of 17.9 million barrels. However, there was a modest decline in the average daily ethanol production rate for that week to 973,000 barrels per day (bpd), in comparison to the prior-week’s level of 984,000 bpd. Without increased demand, sizable declines in ethanol stocks seems unlikely so long as the weekly production level remain above the yea-ago level, which for the same week a year ago was an average rate of 959,000 bpd. The end result is that margins continue to slowly narrow and the advantage goes to the most cost-efficient ethanol producer. The differential between the cost of corn and the co-products is the following for primary Corn Belt locations for week ending July 24, 2015:
- Illinois differential is $1.61 per bushel in comparison to $1.53 the prior week and $3.51 a year ago.
- Iowa differential is $1.46 per bushel in comparison to $1.56 the prior week and $3.32 a year ago.
- Nebraska differential is $1.19 per bushel in comparison to $1.20 the prior week and $3.22 a year ago.
- South Dakota differential is $1.90 per bushel in comparison to $1.99 the prior week and $3.67 a year ago.
Country News
China: Corn imports increased by more than double in June and reached their highest level in a decade as buyers sought to beat a late-month surge in U.S. corn prices, reports Bloomberg News. June shipments reached 872,928 MT compared to 404,102 MT in May, which is the highest recorded since 2005. Corn imports in June 2014 totaled 27,230 MT. Chinese buyers were also incentivized to seek corn abroad as domestic supplies are both more expensive and of lower quality, despite the government’s best efforts to sell from the state stockpiles.
Iran: Iranian traders have purchased 180,000 MT of Brazilian corn for shipment in July and August this week, according to Reuters. This was the country’s first major grain purchase in months.
Further, Iran has imposed import duties on barley that will be in effect until September 22, 2015. Iran is the world’s third-largest feed barley importer after Saudi Arabia and China.
Ukraine: The Ministry of Agriculture has announced that it may reduce its outlook for the 2015 corn crop due to excessive heat and drought, reports Reuters. A June estimate placed corn output at 26.4 MMT in 2015 compared to 28.5 MMT last year. As of now the projection for the overall grain harvest remains unchanged at 60 MMT.