Beyond Boats To China

After halting distillers grains imports late last year, the world's top DDGS buyer is poised to resume business, but on what terms?
By Tom Bryan | January 18, 2015

The prospect of China reissuing distillers grains import permits bodes well for the product's American exporters, but Randy Ives isn't ready to gloat about it. “We have to be cautious,” says the longtime DDGS marketer and director of ethanol services at Gavilon. “The uncertainty from China has put the industry in a tough position in the past. Collectively, we need to take additional steps to manage the contract performance risk that’s been an issue before.”

Ives and other DDGS exporters are necessarily guarded about China’s decision in late December to lift its ban on Syngenta’s MIR 162, the genetically modified grain trait at the center of the country’s three-month-long constriction on U.S. corn and DDGS. “Of course, it’s huge news for distillers grains, but that doesn’t instantly return them to the pedestal of being an important trade partner to the ethanol industry and to the U.S. ag industry as a whole,” Ives says.

Ives is one of many U.S. DDGS marketers who greeted the late-December announcement from China with incredulity and a stern vow to not get stung again. Less than two years after carrying out a questionable anti-dumping probe that severely disrupted the international DDGS market, China’s feed regulators claimed to have discovered traces of then-banned MIR 162 in cargos of both corn and DDGS in late 2013 and throughout 2014. By mid-September, China was fully enforcing the ban, quarantining large quantities of U.S. corn and DDGS on its docks and turning shipments away at sea. American exporters, logistics providers and Chinese importers together lost millions as communication was lost, contracts were broken and DDGS prices slid more than $100 a ton. By October, imports to China were nil as the commodities world waited for a resolution.  

As painful as China’s fourth-quarter DDGS timeout was, Ives says, the market displayed incredible resilience and American traders remained buoyant through it all. “Our product’s global market is larger, more distributed and more stable than it used to be,” Ives says. “We have buyers in 80 countries now, so when China stepped out last fall, customers in other nations stepped in and have stayed. On top of that, we knew China would come back. We just didn’t know when.”

China’s sudden acceptance of MIR 162 was reportedly accelerated by pressure from the U.S. government as well as an internal push from China's feed millers. Whatever the cause of the decision, it is clearly welcome news for American producers and marketers of distillers grains. By Christmas, the announcement’s buzz alone had caused DDGS prices to rise $70 a ton. Traders warn, however, that the  MIR 162 resolution is not a panacea for every challenge they face in China. “There are other problems, other barriers, in play yet,” Ives says. “We’re still trying to figure out what the running rules are and what other technicalities we will have to abide by.”

Ives says selling DDGS into China could change. Some exporters might start demanding deposits, for example, asking for up to 20 percent down before shipment.

Changes on China’s end may include volume requirements, or DDGS import allocations. In the past, importers have sought and received permits based on shipment orders they had already placed. “That could possibly change, where importers could be required to have an import permit in hand before buying the product,” Ives says, explaining that tighter control over permits could buy China time to work through its grain reserves.

Still, the end of the MIR 162 ban does mean that DDGS exports in 2015 have the potential to exceed the record volumes sold in 2014, according to Alvaro Cordero, manager of global trade at the U.S. Grains Council. “Despite how 2014 ended in China, distillers grains had a fabulous year—a record year—and we’ll probably do it again,” says Cordero. “By October, when China started to shut down, we had already achieved higher annual DDGS export sales than we had for the entire previous year.”

In fact, DDGS exports for calendar year 2014 not only set a new annual record, but surpassed the long-anticipated 10 million metric-ton mark for the first time in history. While November and December sales were not available at press time, DDGS exports had already reached 9.96 million metric tons—more than any previous year’s total by almost 200,000 metric tons and more than a quarter of the nearly 37 million metric tons produced in the U.S. last year. Sales of DDGS exclusively to China reached 4.24 million metric tons, just 5 percent short of the record set in 2013. “That’s remarkable considering that it happened in less than 9 months,” Cordero says. 

Cordero, a former commodities trader, says he understands the unease DDGS marketers have about losses they incurred because of China’s actions. However, he says, the wide margins made on DDGS sales in early 2014 more than offset those hits. “If you sum up the money that was made when prices were good, bad and ugly in 2014, the industry came out of it in a positive position,” Cordero says. “Yes, it was hard for a while, but put this in perspective: It was a few bad months.”

Marketers like Sean Broderick of CHS Inc. were somewhat reticent about the DDGS market prior to China’s acceptance of MIR 162. Those bearish positions started to flip when the ban was lifted, Broderick says, telling Ethanol Producer Magazine before Christmas that DDGS marketers were bullish but treading carefully. “We are cautiously optimistic about this  having seen the pitfalls of pricing ourselves out of so many markets,” Broderick says. “Any distillers grains that gets into China right now is going to be valuable. Their desire to bring it in is going to be pretty huge, but it’s going to contrast with our desire to protect ourselves. The industry will probably load a lot of boats to China this year, but we also have to keep the interests of our other customers in mind.”

At peak, China was importing almost 20 percent of all distillers grains produced in dry form in the United States. “That’s sort of insane,” Ives says. “If we want to do what’s best for the industry, we need to continue to diversify our demand base.”

Broderick says, however, that diversification is hard when China is willing to pay more for DDGS than the rest of the world. “You just can’t ignore it despite your best efforts,” he says.

Huge Price Swings 
DDGS exporters are entering 2015 with a wind at their backs, having worked fervently to find new destinations for DDGS when China wasn’t accepting the product in the fourth quarter of last year. Losing the China market spurred traders, under pressure, to sell the product at whatever prices worked for opportunistic buyers. At its lowest price point last year, DDGS was available for 70 percent the price of corn. That was a stark contrast to the product’s market value before China blocked imports. “We were in a very tight year where protein was high-priced and people were willing to pay a premium for distillers,” Ives explains. “We weren’t 85, 95 or 105 percent the price of corn, we were 150 percent the price of corn on some spot sales.”

Those big prices—at times hitting $350 per ton FOB to New Orleans—drew criticism from both new and established buyers. “The domestic guys had a problem with it. Thailand had a problem with it. It was hard to blame them for pushing back, but all we could say was ‘China will take it,’” Ives says. “The demand was that huge.”  

Before China virtually stopped importing DDGS in October, it was averaging nearly 500,000 tons a month through August and trending toward 6 million metric tons on the year. By September, restrictions had tightened and just 167,000 tons officially got through customs before rejections started in earnest the following month. By the time it was over, every major U.S. exporter had been adversely effected. Chinese importers also took big hits. Some traders estimate that as much as $600 million worth of DDGS was stranded in quarantine on Chinese docks in the thick of the restrictions. Back in the U.S., marketers worked their contacts hard and gradually sold down about  1.5 million metric tons of DDGS originally contracted for China.

“It all happened pretty fast,” Ives explains. “Marketers that owned product at $200 a ton at the plant were faced with buyers in China that couldn’t perform on their contracts. It was difficult to find destinations for DDGS and financial losses incurred were considerable.”

Today, U.S. DDGS exporters are hinting at taking action to go after those broken contracts in China. “Regardless of what happened, they still bought it and we still have a valid contract that says we owe them a bunch of distillers at that price,” Ives says. “We intend to negotiate some sort of payment for it.”
  
Predictable Comeback  
Prior to China’s acceptance of MIR 162, DDGS values “at the plant,” or the contracted prices paid to producers, had already rebounded to $125 to $150 a ton. “The Northern Hemisphere market is actually quite strong,” Jason Charles, senior trading manager with Purina Animal Nutrition LLC, said in mid-December, explaining that the DDGS market was in a state of improving health even without the help of its largest foreign customer. “When China went away, we had a half million tons of distillers to do something with. Somehow, some way, it all started moving.”

Charles said the industry went through about 60 days of “not knowing what direction it was going” as DDGS initially contracted for China slowly found buyers elsewhere. “Thirty days ago, the bid-ask CIF NOLA was $130 on $155. Today, it’s $215 on $230,” Charles said in December, explaining that prices at the time were already lifting as China showed signs of opening back up.

Looking back, Broderick agrees that the removal of excess DDGS from the market, along with improved logistics and a general sense of optimism was boosting prices before China lifted its ban on MIR 162. Broderick says the sheer speculation that China would start issuing import permits in the spring was giving DDGS a boost. Just before and immediately after the MIR 162 announcement, DDGS prices shot straight up. “We’re already back where we were when China was going full bore,” Broderick says. “In mid- to late-December, we went from $110 FOB-Illinois to $185. “That’s a huge move, and it was driven by bulk shipments out of the Gulf (of Mexico).”  

Before the Dec. 22 announcement about MIR 162, China’s commodities import inspection agency, the General Administration of Quality Supervision, Inspection and Quarantine, gave no outward indication that it was preparing to allow U.S. corn and DDGS back into the country. However, Ethanol Producer Magazine learned in late December that one major U.S. exporter had been allowed to ship 50,000 tons of DDGS to China, a vessel originating out of the Gulf. Several more shipments were planned for January. That limited activity got people talking. “Our importers called us and said a resolution was coming but nobody really had facts. It was all innuendo,” Ives says. “I really didn’t expect anything to happen until spring and then there it was.”

Portfolio Broadens
China’s renewed acceptance of DDGS represents a huge opening for the product's global market, but exporters are applying a disciplined approach to the opportunity. While China consumes 50 percent of all DDGS exports, Cordero says it is important to remember how critical other large, medium and small markets are. Since October, for example, Mexico has been the world’s top DDGS importer as China momentarily left the picture. In fact, America’s free-trade partner to the south was trending toward 1.5 million metric tons of DDGS imports at the end of 2014. “Mexico stepped up pretty seriously in the fourth quarter,” Broderick says.

Cordero says 13 of the world’s top 15 DDGS importers increased their consumption of the product last year. “Mexico was up 21 percent. Japan was up 36 percent. Korea ended up more than 70 percent,” he says. “Look around the world. Look at exports to the U.K., Columbia, Thailand and Indonesia. They’re all up by two digits.”

Charles says North Africa is another bright spot for DDGS exports. “Algiers, Algeria and Morocco are getting additional traction,” he says.

Egypt, too, is a growing market for distillers grains. Cordero says importing corn into Egypt has opened a door for more DDGS. “Once corn starts moving into these markets, combination cargos become a reality,” he says, explaining that low corn prices allow exporters of DDGS to enter markets where they have been losing market share to other feeds in recent years. “Once we walk in with corn, we’re going to walk in with those combination cargos that include distillers,” he says.

In Europe, where DDGS is difficult to import because of EU restrictions on genetically modified corn, only Ireland, Turkey and Spain remain significant buyers of the product. Turkey, however, rejected three shipments of DDGS in late November and early December, supposedly on the basis of the cargos being contaminated with an unapproved genetic corn trait. Ireland made a resurgence in buying when DDGS prices came down to 80 percent the price of corn in October. “Those low prices really brought back customers,” Ives says. “It’s amazing how fast everyone started putting on new sales around the world when the prices came down. Customers in countries that hadn’t used a pound of DDGS in six to nine months came back pretty quickly.”

Bargain DDGS prices, while short-lived, may have even gained the attention of buyers in prospective markets like the southern states of Mexico where, Cordero says, there is a large untapped market. “The potential there is enormous at more than 1 million metric tons of DDGS,” he says. “They have 4 million head of cattle or more.”

Nicaraugua, too, has huge growth potential with more than 5 million head of cattle. “They already buy DDGS—very little and just for poultry—so we just need to educate their beef industry,” Cordero says. “These almost untouched markets, which are barely on our charts today, could bring a lot of stability to our industry.”

The global DDGS market will be much less susceptible to disruptions if the USGC can successfully build more midsize markets outside of China. “Japan and South Korea are consistent 500,000-metric-ton markets,” Cordero says. “Those steady buyers help us sustain drops like the one we just experienced.”

In fact, Ives says, every DDGS-importing nation is critical to the market’s total non-U.S. sales volume. “Somebody cares about every one of those countries, all the way down to the bottom of the list,” he says. “Somebody is trading to Panama, even though they only take 12,000 tons a year.”

Cordero agrees, saying that the USGC’s principal goal is to build a broader global marketplace, as well as a larger one. “Some of these nations that buy DDGS are individually small, but they all add up,” he says. “And most of them are growing their purchases.”

In fact, the only notable nongrowers in 2014 were Canada and Morocco. Canada, typically a top-three international buyer of DDGS, only imported 327,000 metric tons through October and was surpassed by South Korea, Vietnam, Japan and Turkey. Canada’s 2014 buying was down 20 percent while Morocco had dipped by nearly a third.      

Another Big Year
Marketers of DDGS expect the product's price to stay around 110 to 120 percent the price of corn in 2015, but they’re remaining conservative with their predictions. “I am not really bullish on any feed or coarse grain going into the next six months,” Charles says. “It all comes down to feedstock and in the U.S. we are going to have close to a 2 billion-bushel corn carryout and a 400 to 425 million-bushel bean carryout into August. This in itself is bearish enough, but when looking at massive global stocks, one becomes additionally bearish. We are harvesting every ninety days around the globe. It’s a revolving door. Things change often and volatility calls for vigilance.”

Broderick says the global demand for distillers grains will stay strong in 2015 and the market will be ready to supply China when it starts issuing new import permits and fully reenters the market. “In the end, it all depends on their reserves,” he says. “They have the ability to switch things on and off very quickly. The demand is over there and it sounds like the demand exists right now for it.”

Cordero believes that, with low corn prices encouraging combination cargoes, this year’s DDGS exports could easily match 2014 numbers. “If you ask me, that would be a great thing,” he says. “With the way we ended last year, it would be awesome if we achieved the same or better numbers in 2015.”

Author: Tom Bryan
Editor In Chief, Ethanol Producer Magazine
701-746-8385
tbryan@bbiinternational.com