DDGS: Supplying Demand

The success of the dry-mill ethanol production process means that in the near future, the ethanol industry could produce more distillers grains than the domestic livestock feed market and the fledgling export market will bear. Distillers dried grains with solubles is already considered by many to be an undervalued co-product of ethanol production. How will the ethanol industry expand the market and how will they move it all from here to there?
By Ryan C. Christiansen | February 04, 2009
The shelf life for distillers wet grains with solubles, with 65 percent to 70 percent moisture content, is less than one week, thus limiting its market area to within 61 miles of a dry mill-ethanol plant, on average. By contrast, the market for distillers dried grains with solubles (DDGS) is global. Plants typically sell two-thirds of distillers grains dried, but the drying process can consume about 30 percent of the plant's operating budget. For DDGS to remain a valued commodity, demand must keep pace with production. Can demand keep up?

Production Projections
Conservative estimates by the Food and Agricultural Policy Research Institute at Iowa State University in Ames say the U.S. ethanol industry is projected to produce 43 million metric tons of DDGS during the 2013-'14 market year, based on projected ethanol production of 16.8 billion gallons. This rise in DDGS production from 15 million tons in 2006-'07 means there might be a lot more potential supply than demandunless the industry is able to grow the market, according to Dermot Hayes, co-director of FAPRI.

"To put this quantity in perspective," Hayes says, "the amount of DDGS that will need to be marketed in 2013-'14 will be approximately equal to the amount of soybean meal produced in 2006-'07. This means the DDGS market will have to grow to absorb as much product over a five-year period as the soybean meal market has absorbed over several decades."

Hayes' observation appears in a new electronic book titled "Using Distillers Grains in the U.S. and International Livestock and Poultry Industries" published by the Midwest Agribusiness Trade Research and Information Center at ISU. Hayes is co-editor of the publication.

The rapid rise in production of DDGS is not only due to a rapidly expanding ethanol industry, but to the success and popularity of the dry-mill ethanol production process during which distillers grainswet and dryare produced, as opposed to wet milling, which produces corn gluten feed and meal. There were 59 dry-mill plants producing 2.6 billion gallons of ethanol in 2004; by 2010, it is expected there will be 189 dry-mill plants producing 12.4 billion gallons of ethanol, according to Frank Dooley, an agronomist at Purdue University in West Lafayette, Ind., and Bobby Martens, a logistician at ISU. Corn ethanol expansion in the U.S. will likely be predominantly dry-mill facilities, which means DDGS production is expected to rise in direct proportion to ethanol, says John Fox, an agronomist at Kansas State University in Manhattan. Dooley, Martens, and Fox were contributors to the MATRIC publication.

On average, a dry mill plant can produce 2.79 gallons of denatured ethanol and 17.5 pounds of DDGS from one bushel of corn. In round figures, dry mill plants can produce 40 million tons of DDGS from 5 billion bushels of corn.

The Domestic Market
From 2004 to 2007, the Corn Belt produced 88 percent of the nation's corn, 97 percent of the nation's ethanol and 40 percent of beef and dairy, Dooley and Martens say. Fox says this proximity of supply to demand enabled domestic livestock feeders to absorb more than 85 percent of the distillers grains produced. Dairy and beef cattle each used 42 percent of domestic consumption; swine consumed 11 percent and poultry consumed 5 percent.

Less than half of livestock operations use distillers grains, citing the lack of availability, Fox says, but more than half of those who don't are considering using it. Based on a USDA National Agricultural Statistics Service 2006 survey of livestock producer intentions, and on recommended DDGS feed inclusion rates, the potential market for DDGS in the U.S. is 39 million tons, near to the 2013-'14 market year production projection of 43 million metric tons, Fox says. However, it's not likely livestock producers will fully adopt DDGS. Full adoption assumes DDGS will be priced low enough, notes Nicholas Paulson, an agronomist at the University of Illinois at Urbana-Champaign in Urbana, Ill. Paulson also contributed to the MATRIC publication.

With the capacity to store only two weeks of DDGS on average, producers depend upon reliable transportation. Many farmers can be reached by truck, but only larger livestock operations can utilize truckload quantities. One 48,000-pound truckload can feed 200 dairy cows, 400 beef cattle, or 1,600 hogs for a month at recommended rates. On average, the market for trucking is 250 miles from the plant, Dooley and Martens say. Producers shipped DDGS by truck 47 percent of the time in 2007, or 322,000 truckloads, which are expected to increase to 574,000 in 2010.

Rail is used to ship DDGS longer distances, expanding the domestic market. Unit trainloads with 100-ton jumbo hoppers filled with DDGS can typically reach the coast from the Corn Belt in as little as 12 days, but few feedlots are able to receive and store 10,000 tons of DDGS at one time, Dooley and Martens say.

The Export Market
Only 15 percent DDGS are exported. The number of states with dry-mill plants is expected to double from 13 in 2004 to 26 in 2010, making DDGS production more geographically disperse. However, ethanol production remains concentrated in the Corn Belt with eight states in 2007 producing a DDGS surplus, Dooley and Martens say. By 2010, 14 states are expected to be producing surpluses totaling 25 million tons, 10 million of which are expected to be absorbed domestically. During the 2007-'08 marketing year, DDGS exports were 3.9 million tons, according to the U.S. Grains Council. DDGS exports for 2008-'09 are projected at 5.4 million tons, Fox says.

Historically, DDGS prices have tracked corn, Paulson says, but DDGS should be valued slightly higher, although still lower than soybean meal. "Ethanol producers need to consider the benefits of developing export markets to enhance demand for the DDGS they produce," Paulson says. Expanding global demand for meat, higher feed grain prices and relatively low tariff rates for DDGS will help, Fox says. But there are strong competitors.

"One of the main challenges that I've seen with getting [DDGS] overseas is stiff competition from wheat [and] soybean meal around the world," says Ryan LeGrand, export marketing manager for Hawkeye Gold LLC, a subsidiary of Hawkeye Energy Holdings LLC. Hawkeye Gold markets DDGS for Hawkeye plants throughout Iowa. LeGrand says DDGS is a harder sell in the current market against Black Sea wheat and Indian soybean meal. On the other hand, when wheat growers recently had a bad year, "we were seeing demand [for DDGS] coming out of the woodwork from all over the world," he says.

Historically, the EU has been an important export market for DDGS. The EU imported 53 percent of U.S. DDGS exports in 2005, Fox says. However, EU restrictions on imports of genetically modified crops have hurt. "The European Union has, for all practical purposes, been eliminated as an export market," Fox says.

Canada and Mexico remain strong markets, Fox says, with Canada's potential at 3.8 million tons and Mexico at 3.1 million. Fox says because Japan, Taiwan and South Korea rely heavily on imported feed, exports to those countries have increased. They potentially could import 5.4 million tons.

Recently, smaller international markets have developed that each year account for a larger share of exports, Paulson says. The export share to small markets in Central and South America, the Caribbean, Southeast Asia, and Africa increased to nearly 25 percent in 2007. Even conservative estimates say potential demand in small international markets might be more than 16 million tons, Paulson says.

All together, potential domestic and international demand could absorb the anticipated increase in DDGS production, Fox says, but the USGC needs to continue to educate foreign buyers about DDGS.

"The [USGC] has done a lot of good work in developing markets overseas," says Bruce Abbe, executive director for the Midwest Shippers' Association, a state-funded cooperative in Eden Prairie, Minn., that promotes and facilitates direct sales of Midwest agricultural commodities from producers to end users, both domestic and international. "This past year, we saw significant demand," he says. "There is interest from China, in particular."

To expand export markets, the ethanol industry needs to address product variability issues, Fox says. One way to do that is to sell DDGS as a branded product.

"We sell the Hawkeye Gold brand as a consistent product across our entire network of plants," LeGrand says, "and we try to promote value and quality above others on that basis. It takes some time to get a brand established. We're going down that path and it is working well."

But branding and the promise of consistency is not enough for all international buyers. "In particular, the Asian customers seem to like to go and see things firsthand: the plant, the production and all of that type of thing," says Sean Broderick, senior merchandiser for CHS Inc., an Inver Grove Heights, Minn., company with DDGS marketing agreements at 28 ethanol facilities. "[Asian customers] have made a lot of visits over here," Broderick says. "They have seen a lot of different plants and I think they are just more comfortable trading with you if they have seen the product."

Fox says the industry must also address product flowability issues. Dooley and Martens say DDGS that has moisture content higher than 10 percent can solidify during shipment, forcing load operators to hammer the sides and bottoms of hoppers to induce flow. This has led railroads to require DDGS to be shipped in hopper cars owned or leased by the shipper. (There was a 25,000-unit increase in demand for jumbo hoppers between 2005 and 2007, Dooley and Martens say.) "They did that because the cars were being beaten up," says Broderick, who has been marketing DDGS since 1991. "There were a lot of plants that were just sort of loading it haphazardly. They weren't letting it cool [and] loaded it right out of the spout."

"Over the years, it has gotten a lot better," says Paul Lundequam, transportation manager for the Arcadia Cooperative Association in Arcadia, Wis. The co-op has a transloading facility for moving DDGS and other grains from hopper cars to containers that have been used to import supplies for Ashley Furniture Industries Inc. in Arcadia.

"Five years ago, if the truck didn't come straight from the distillers plant within six hours, it was a good hour to an hour-and-a-half to unload the truck, just beating on the trailer," Lundequam says. "But now, most times [we] don't ever hit the trailer anymore with a hammer until it's just to clean out the last little bit."

"[Change] in the industry has been two-fold," Broderick says. "One is the knowledge that the plants have themselves about the best ways to load. The other side of it is the acceptance of the customers and the unloaders that DDGS is not shelled cornit takes a little bit of extra creativeness, or effort, to unload the product."

Shipping DDGS to international markets includes using a combination of rail, containers and barge. Dooley and Martens say transportation has become the third-highest expense for ethanol producers after feedstock and energy costs.

Both Canada and Mexico are well-served by rail, and the absence of tariffs under the North American Free Trade Agreement only makes exports by rail more likely, Fox says. The anticipated rise in exports means by 2010, shipments are expected to nearly triple to 251,000 carloads.

To get DDGS to ports, a combination of rail and barge might be used. Because much of DDGS is produced in states along the Mississippi River, barge transportation might be competitive with rail, Dooley and Martens say. However, ethanol plants in the north can utilize 1,500-ton barges only four or five times per year before the river closes for winter.

Smaller than truckloads by 25 percent, 20-foot shipping containers hold only 18 tons of DDGS, but they are increasingly being used to ship to Asia from inland ports near Chicago, Kansas City, Memphis and Columbus, Dooley and Martens say. "A lot of the transportation systems are shifting to that method," Abbe says. "The new major ports in China are all intermodal container-based ports."

Shipping by container eliminates the transloading of DDGS multiple times. "A container can be shipped all the way to the end destination [where] people can unload it," Abbe says. "It's much, much more tailor-made for DDGS."

DDGS marketers began using containers at just the right time, Broderick says. "The good thing about containers is that they came on at the time when we were really expanding the industry, and a number of export customers could try [DDGS] in pretty small increments without the commitment to infrastructure that you might have if you're buying in bulk," he says.

Shipping by container has also assisted marketers with selling DDGS as a branded product. After containers are sealed at the source, "they can be sent all the way to the end market and [they don't] even have to be opened [along the way]," Abbe says. "It is ideal for identity preservation."

But containers create more overhead for the ethanol producer. "The downside is that you have documentation on each one of those containers that you have to look after," Broderick says.

Will the ethanol industry produce more DDGS than the domestic livestock feed market and the fledgling DDGS export market will bear?

"I've been hearing that since 1991 when having three trucks a day was a lot of product," Broderick says. "In the end, the market takes care of things. Price kind of solves everything in the end."

Ryan C. Christiansen is an Ethanol Producer Magazine staff writer. Reach him at rchristiansen@bbiinternational.com or (701) 373-8042.