Pushing DDGS

Prices may be low, but the cure is kicking in and markets are expanding worldwide for the ethanol industry's most important coproduct, distillers grains. This article appears in the May print edition of Ethanol Producer Magazine.
By Susanne Retka Schill | April 26, 2017

With record ethanol production comes record distillers grains supplies. Combine those big supplies with big declines in exports to two major international buyers, and you have a formula for low prices. Indeed, in mid-March, DTN was reporting average DDGS prices in the lower $90 per-ton range.

But, the old adage is kicking in: The cure for low prices is low prices. And, attractive low prices they are. At the end of March, the U.S. Grains Council’s Market Perspectives reported DDGS prices at the Gulf were 41 percent of soybean meal, which equates to a $1.55 per protein-unit cost advantage for DDGS on the export market.

So, despite a big decline in sales to two major importers—China, due to its antidumping tariff and Vietnam, due to fumigation issues—by the end of January, total U.S. DDGS exports were down just 2 percent in the marketing year starting in September. And, by the end of February, they were up 3 percent. Essentially, 5 million metric tons (mmt)—a big chunk of the total 11 mmt to 12 mmt market—are finding new homes. Eight of 10 countries at the top of the DDGS destination list are increasing their imports and, even more encouraging to exporters, more countries are taking advantage of the low prices and trying larger volumes of the feed.

Looking at the numbers for the current marketing year through February, China dropped from No. 1 export destination to No. 2, down 69 percent compared to the same period a year ago. Mexico has moved to the No. 1 spot, with its total at the end of January matching last year’s and a month later 10 percent over last year’s pace. Big increases in DDGS purchases are seen from Turkey, up 153 percent, Thailand, up 87 percent, and Japan, up 82 percent. Other countries in the top 10 have more moderate increases, including Indonesia, South Korea and Vietnam. Canada, often among the top three destinations in past years, is down 4 percent from last year, coming in at eighth place among exporters. In January, EU destinations were down 3 percent, but the power of price kicked in and by February, it was showing a 36 percent increase from the pace at the same time a year ago.

Kurt Shultz, USGC director of global strategies, says the U.S. Grains Council has gone to its directors and consultants in the different markets around the world and encouraged them to push distillers grains into new markets or ramp up existing markets. “What we’ve seen is markets stepping up and increasing their purchases,” he says. “You can’t isolate it to one single market, but it’s really created an opportunity for us to move product, and into markets that we haven’t been able to get into in the past. For example, Saudi Arabia. We’ve been trying to push distillers grains in Saudi for years.  Part of it is they have a subsidy program that favors barley, and doesn’t necessarily favor distillers grains. But the most it ever imported was maybe two or three years ago when they brought in about 4,000 tons. Just in February, they bought 18,000 tons of distillers grains, with another 20,000 ton purchase in the works. That’s not a huge purchase, but for them it is.”

Sean Broderick, senior merchandiser with CHS, and chair of the USGC’s A-Team advisory committee, remembers a similar situation a few years ago. Chinese imports of U.S. DDGS ground to a halt over concerns about unapproved corn traits. “They were importing a whole bunch, they stopped, the market went down, and we were on the lower end of the price spectrum,” he recalls. “We did a huge expansion in the number of customer countries.” At the time, discussions about destinations receiving meaningful tonnages focused on the top five, he recalls. “Now with the prices doing it again, we’re poised to make inroads in places like Oman and Pakistan or even India, which is looking at distillers grains a lot harder lately.”

Building Sustainable Markets
A new market needs to reach a critical size to become sustainable, Shultz says. “If you have DDGS coming in small quantities—less than 50,000 tons a year, it really is challenging for nutritionists and purchasing managers.” Once it grows above that level, supplies become more consistent, storage gets dedicated to the new product and feedmills begin using the feed ingredient with less hesitation. “So now is an opportunity for a lot of countries to start increasing their purchases, take advantage of the pricing and become more familiar with DDGS,” he says.

The multiplication of buyers creates a healthier market, he adds. “We’re not dominated by one market that can turn us on or off.  I know it’s not been easy for the ethanol industry and DDG exporters with these low prices, but I think what’s going to come out of this is they are going to have more customers and more diversified buyers.” Distillers exports are poised to push beyond the 11 mmt to 12 mmt levels seen in recent years, Shultz says, particularly if the headwinds from the Vietnamese and Chinese markets subside. He outlined the prospects in several countries:

Mexico has risen to No. 1 this year. DDGS imports rose by 310,000 metric tons (mt) from 2014-’15 to 2015-’16 and are up nearly 10 percent from last year’s pace. A nearby market provides advantages in the multiple supply channels, via rail, truck or vessels, and the country’s livestock industry has been growing in recent years, Shultz says. “There’s still plenty of opportunity with DDGS for growth in Mexico.”

The other close-by customer, Canada, has room for growth.  Exports to Canada have been below the 2011-’12 peak of 646,000 tons, coming in 100,000 tons below that last year. That may not change, Shultz adds, as this marketing year’s shipments through February were 4 percent lower than last year at the same time.   

Saudi Arabia’s increase is important because it’s a big dairy country.  Government policies are changing with the realization the desert kingdom may want to conserve the groundwater resources that have been used to grow alfalfa, wheat and barley. That change is opening the door for the importation of more feed ingredients for the 6 million-ton, compound-feed market, Shultz says. If DDGS could capture a 10 percent share, it would amount to 600,000 tons, which in 2016 would have landed Saudi in seventh place as a DDGS customer.

“What’s interesting,” Shultz continues, “is you see a lot of countries pop in very quickly. For example, Pakistan, which has imported very small volumes in the past, has already imported 60,000 tons. Bangladesh, Myanmar—DDGS is getting around the globe.” 

Building new markets is a multifaceted challenge. Adding a new feed product requires storage capacity and proper handling logistics need to be in place. The USGC organizes seminars for potential customers to outline DDGS’ nutritional profile and its best use in a ration.

Each country is different, Shultz points out. Tunisia, with its 10 million people, essentially has three feed companies and Saudi Arabia, just 10. Working with a smaller number of large feed buyers can be easier than where there are hundreds of smaller companies.  “When you use distillers, if you’re not bringing in a certain tonnage, it’s not worth the risk, because you don’t see the price advantage until you get to a certain volume,” Shultz says.

The USGC offers extensive educational support to new customers. “I’ve gone to importers who brought in their first shipment of DDG into a market—maybe 5,000 tons—and I’ve told them we will provide them with whatever nutritional support they need to use that product as fast as possible.”  The last thing they want to see happen is for that new customer to leave the first shipment sit in a warehouse for weeks or months, due to buyer uncertainty. To avoid that, USGC support often includes seminars for feed companies’ customers.

Educational seminars also have been a big part of making the transition to lower-oil DDGS in the export market, teaching users about needed nutritional adjustments. When the ethanol industry first began spinning the oil out, there was a big spread between those plants extracting the oil and those that hadn’t yet adopted the technology, Broderick says. Today, the market has primarily adjusted.
“The industry is surprisingly consistent in how much residual oil is in the product. Generally, it’s between 6.5 to 8, and probably closer to 6.5 percent,” Broderick says. Some ethanol producers take out more, coming in closer to 4 percent fat, he says, and those DDGS are traded differently. The majority trades at a 35 pro/fat standard—a combined value where protein content is between 28 and 29 percent of the total and fat is between 6 to 7 percent. “It seems like the plants have aligned themselves and the customers have aligned themselves on what they want. And, we’re better as shippers, knowing what we’re getting and what we’re shipping, and who wants which product.”

Logistics
Logistics play a big role in market development. Asian markets for DDGS have grown partly because so many containers used to ship goods to the U.S. are available at reasonable rates to ship DDGS back across the Pacific Ocean. “It’s cheaper to ship a container loaded in Chicago to Shanghai on a per-ton basis than it is for me to load that DDGS in Chicago in a railcar to the West Coast,” Broderick says. “It’s probably $25 a ton cheaper, so it’s 30 percent cheaper to send it over to Asia than the West Coast.”

Price and logistics impact domestic markets, too. Broderick explains that due to freight costs, DDGS generally stay in traditional areas. “When prices go down, we push into other regions, like the Southeast.” With that region’s numerous poultry and hog operations, the expansion in the domestic DDGS market may soon mirror exports. “Anecdotally, we hear people in the Midwest who feed hogs save $15 to $20 a ton on finished feed by putting in a decent amount of distillers. It’s financially lucrative for them to put in distillers grains, and they’re looking to put in more.”

Author: Susanne Retka Schill
Managing Editor, Ethanol Producer Magazine
sretkaschill@bbiinternational.com
701-738-4922