Summer 2012: Expect higher ethanol coproduct prices
BROOKINGS, SD – Seasonally, the price for distillers grains usually declines going into summer as cattle feedlot inventories decline and more cowherds and stockers are turned out to pasture. This year, however, distillers grains prices have been increasing going into summer, says Darrell R. Mark, Ph.D., Adjunct Professor of Economics at South Dakota State University.
“The average price for dried distillers grains plus solubles (DDGS) in South Dakota increased about $3 a ton during each week of May although it did moderate some in the first two weeks of June. While domestic demand from the cattle industry is not substantially deviating from normal seasonal trends, several other supply and demand factors have driven the price increases in recent weeks and are likely to continue through the summer months,” said Mark, a market analyst for iGrow.org.
Figure 1 shows the price for DDGS, modified wet distillers grains plus solubles (MDGS), and wet distillers grains plus solubles (WDGS) expressed as a percentage of corn price on a dry matter basis.
“This allows an appropriate price comparison to be made between the three products that only substantially differ by water content,” Mark said, explaining that DDGS is 10 percent water, MDGS is 50 percent water, and WDGS is 65 percent water.
He goes on to explain that comparing the price of these products as a percentage of the dry matter price of corn is helpful to observe differences between distillers grain prices and corn prices.
“Note in the graph that in May 2012, DDGS averaged 90 percent of corn price, MDGS averaged 81 percent of corn price, and WDGS averaged 82 percent of corn price, which is quite close to price levels in mid-June. The previous three-year average for May is 83 percent, 69 percent, and 71 percent for DDGS, MDGS, and WDGS, respectively.
Mark says tight corn supplies, high corn prices and relatively poor ethanol processing margins are one set of factors significantly contributing to the distillers grain price increase.
“With high corn prices, ethanol producers have struggled to maintain margins, and are finding incentive to run at reduced capacity and shut down plants for longer periods of time for maintenance, etc.,” Mark said. “Doing so can lessen their losses, but it does reduce the amount of distillers grain produced as well. Thus, with lower supply of distillers grains, prices tend to rise, as have been seen throughout 2012.”
Mark points out that this price increase presents an important logistical challenge to cattle feeders when it comes to securing physical supply of distillers grains.
“With extended plant shutdowns and lower market supply, cattle feeders need to be certain that they can obtain the product they need for their rations,” he said.
Mark encourages producers to discuss this issue with their current distillers grain suppliers and understand their plant production schedule. He also suggests they purchase product from two or more plants to help offset risk associated with losing distillers grain from one particular plant.
High soybean meal prices are also contributing to the price increase in the distillers grain markets, Mark says.
“While soybean meal and distillers grains are not one-for-one substitutes from a nutritional standpoint, many livestock rations can be adjusted to some degree to replace some high priced soybean meal with distillers grains,” he said. “Doing so increases the demand for distillers grains and increases prices, as have been observed in the last couple of months.”
He points to a drop in South American soybean production due to drought conditions as one of the primary drivers to the sharp increase in soybean meal prices (more than $100 a ton since January).
Export demand is the third factor Mark points to for supporting distillers grain prices.
“DDGS is the most exportable product due to its lower moisture content. Thus, DDGS prices typically are higher than MGDS and WDGS prices (see Figure 1),” he said. “Still, when export demand increases and pulls more DDGS to foreign destinations, less DDGS is available on the domestic market, which tends to increase MDGS and WDGS prices too.”
While export demand for distillers grains could remain for some time, Mark expects the impact of the high old crop corn prices and soybean meal prices to lessen by early fall as U.S. corn and soybean supplies become available.
“With the prospects for a record large corn crop and lower prices, ethanol production is likely to increase as margins improve, thus increasing distillers grain production,” he said. “And, once U.S. soybean supplies are available to compensate for reduced South American supplies, meal prices will moderate to some degree as well. In the mean time, cattle feeders should focus on securing physical needs through the summer and contracting one to two months of product on any modest price breaks that materialize.”
Editor’s Note: For more information on distillers grain markets, visit iGrow.org’s Youtube channel and view the “Ethanol Coproduct Markets” webinar. To listen to an iGrow Radio Network interview with Darrell Mark and to read Mark’s weekly market comments, visit iGrow.org.