Researchers study DDGS trade risk management

By Ryan C. Christiansen | August 04, 2008
Web exclusive posted August 8, 2008 at 1:25 p.m. CST

A team of Kansas State University researchers are exploring the pricing history and valuation methods for distillers grains in a global market context. That data will be used to help the researchers and the Kansas City Board of Trade design risk management tools for commodities traders.

The researchers have been awarded $83,150 from the USDA Federal-State Marketing Improvement Program for the one-year study, which begins in September. The researchers previously looked at distillers grains pricing and determined that the price of the ethanol production byproduct fluctuates wildly and that buyers and sellers have difficulty determining a transaction price that is representative of the market value of the commodity.

"We're taking some of what we started and taking it to more depth," said Ted Schroeder, an agricultural economics professor at KSU. "We really want to continue to explore information about price discovery and value discovery in distillers grains markets. We want to continue to examine pricing methods that are being used so that we can get a better perspective on how these things are being valued."

Schroeder is working primarily with colleagues Sean Fox, an agricultural economics professor, Jim Drouillard, an animal sciences and industry professor, and Jeri Stroade, an agricultural economics extension specialist. The researchers are examining the feasibility and parameters for a distillers grains futures contract. Schroeder said the team will look at how distillers grains are being valued relative to other feed sources.

"With (narrow) margins in the ethanol industry, the value proposition of distillers grains for ethanol producers is certainly much more important than it used to be," Schroeder said. "How that product is being valued relative to other feed ingredient sources is really important. To some extent, we want to see whether the protein component value of distillers grains is consistent with its protein content, relative to its substitution potential."

The researchers will look at the nutrient specification standards that have been established for distillers grains and compare those with what, exactly, is being produced in the industry.

"We understand that the different ethanol production processes result in sometimes quite different byproducts," Schroeder said, adding that the team will profile the nutritional makeup of the byproduct from various processes and look at what the future might hold for distillers grains as newer processes - such as dry fractionation to extract oil - are adopted by the industry.

"Ultimately, if I was to look at it in a broader sense as an economist, what we are really interested in is the potential global market development and price risk management tools that are needed," Schroeder said. "We think that there is some considerable global market potential for a product that has as high a protein as this distillers grains product tends to have, but also we recognize that there is a lot of variability, depending upon the method used to create that product."

Schroeder said the study will require a lot of collaboration with ethanol producers. "I hope that the industry is receptive to our, at times, intrusive questions," he said. "We're really out trying to help generate information and knowledge to help the industry grow, to help it be more prosperous. It really is a collaborative exercise."