China Trade Explodes

China promises a tantalizingly big market for U.S. DDGS, but numerous issues may prevent it from ever being fully realized.
By Susanne Retka Schill | February 09, 2010
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The growth in distillers grains exports to China is nothing short of breathtaking—nearly 6,000 percent higher for the first three quarters of 2009 compared with the same period the year before. After conferences, trade missions and tests with container lots, this past summer the Chinese began importing bulk distillers dried grains with solubles (DDGS) in vessels. China is on course to import 400,000 metric tons (MT) of DDGS when 2009 shipments are totaled, compared to just 8,505 MT the year before. It is an impressive win for the U.S. Grains Council, which began promoting DDGS in China in 2006 when there were basically no imports of U.S. DDGS and only small amounts of exports from Chinese ethanol plants to the Southeast Asia region. "Since that time, we have had one buyer mission per year come to the U.S. to visit ethanol plants to see the product is different and better than Chinese DDGS," said Dan Keefe, USGC manager of international operations for DDGS.

This past summer, a 13-member trade team from China that included major DDGS buyers and end users visited U.S. ethanol plants, U.S. DDGS suppliers as well as farmers who raise corn and feed DDGS. U.S. exports shot up in the third quarter partly as a result of that visit, and partly because U.S. DDGS are competitively priced with other feed ingredients available to southern China's swine and poultry feeders.

It is not easy to sell to China. For one thing, trade developments involve diplomats and sometimes delicate trade policy negotiations. Then, not only do the U.S. suppliers have to develop relationships with their Chinese customers, but U.S. ethanol plants supplying the DDGS have to register with the Chinese Minister of Agriculture. In order to break into the market, U.S. DDGS suppliers have had to demonstrate consistent quality, with no mycotoxin contamination. Most of the markets in Southeast Asia are skittish about mycotoxins in DDGS, partly as a result of last year's feed contamination scandal when some Chinese feed suppliers adulterated feeds to boost protein levels. China's own ethanol industry has also created perception problems for DDGS. Chinese ethanol producers focus more on ethanol production and are known for inconsistent DDGS due to the use of multiple feedstocks such as wheat, barley and other small grains, and virtually no corn, which increases the variability of feed performance. China's ethanol industry also has not monitored itself for mycotoxin concentrations in DDGS, creating skittish feed buyers throughout Southeast Asia.

Besides hosting buyer visits, the USGC has organized two major conferences in China that were attended by importers and major feed millers from southern China who learned about U.S. DDGS characteristics and requirements for successful imports. Troy Skelton, export trader for CHS Inc., one of the speakers at those conferences, explained the details in DDGS contracts. Unlike grain commodities such as corn or soybeans, there are no USDA quality specifications for DDGS, Skelton explains. Instead, the contract must specify quality parameters. The trade standard calls for a combined 36 percent protein and fat content where protein may range between 26 percent and 28 percent, and fat may range between 9 percent and 10 percent. If the shipment doesn't meet those specifications, the contract specifies the discounts that will apply. Moisture content is less of an issue for bulk shipments, he adds, since any variation in moisture tends to equalize when barges are transloaded into the holds of vessels. Each 40-foot container, on the other hand, must meet the moisture specification. Consistency of DDGS has been an issue in the past, Skelton adds, "But as the U.S. industry has matured and the 200-some managers have become comfortable with their equipment, it's gone away." With fewer new plants coming on line, he explains, there are fewer plants ironing out their drier operations. "We have had fewer quality issues in the past year," he says.

Quality is one of the reasons U.S. DDGS has made inroads into the Chinese market. "They are even willing to pay a premium for U.S. distillers grains compared to domestic distillers— $10 to $12 per metric ton higher," Skelton says. Most of the DDGS have been traded into southern China, he adds, which is analogous to the poultry and swine production areas in the southeastern U.S. "Corn and ethanol is produced and consumed in northern China, and it is too expensive to ship to southern China." Skelton adds that in January, it appeared as though the market growth had topped out, with a DDGS price at just under $250 per metric ton delivered to southern China appearing to be the maximum competitive price.

International Strategies
The experience of introducing DDGS to the Chinese market illustrates the approach the USGC has taken in a number of markets. "Seven years ago you could count the number of markets on one hand, with the biggest being the EU," says Chris Cory, USGC senior director of international operations. "The other markets had only used it once, and some had bad experiences." One of the reasons for that was the U.S. ethanol industry was young, and geared to producing ethanol. With new drier technologies and the saturation of some local markets with wet distillers grains, the industry began turning to exports, learning the requirements for that market. A number of firms specialize in DDGS export sales, and the USGC helps both those exporters and individual ethanol plants work through each country's paperwork requirements.

The USGC follows a development timeline when introducing DDGS to a new market: first, educational sessions on nutrition, handling and buying specifications; second, sample containers provided for testing, sometimes purchased by the potential buyers and sometimes supplied by the USGC. The USGC also contracts with nutritionists to consult with new users on how to best incorporate DDGS in a properly balanced feed ration. The first two steps may take a couple of years before the first commercial shipments are tendered, after which the USGC monitors the new customers' experiences to help insure the feed ingredient is being handled and used successfully. "New users typically limit the inclusion rate," Cory explains. "We help them fine-tune their use to become economically efficient."

While the introduction process works the same for every market, each country presents its own challenges. Five years ago, the Egyptian government did not allow DDGS imports, for example, and the USGC met with the ministry of agriculture to request a formal evaluation of DDGS. In Chile, the USGC was faced with reintroducing DDGS after an earlier bad experience had soured the Chilean livestock industry. "We worked with the largest dairy cooperative and ran 28 feeding trials," Cory says. Half were run in the summer, half during the winter to evaluate performance and economics. The USGC brought in U.S. nutritionists to work with the cooperative's nutritionists to set up the protocols for the trials and explain the proper use of DDGS. All trials showed improved performance and all but one of the 28 trials showed improved economics. "It was a big hit," Cory says. The 2008 feed trials were followed by a series of seminars with dairy cooperatives, feed millers and importers. Now Jordan is one of the latest development projects, with the first sample containers due to arrive in port when this issue of EPM is published. "Many of these aren't going to be big markets like China," Cory admits. But he points out that a large number of smaller markets will be needed to build the demand required to utilize the DDGS produced when corn ethanol reaches its 15 billion gallon a year peak.

Multiple markets are also desirable to help offset policy shifts in any one market. The big leap in shipments to China, for example, could not have been timed better, offsetting a potential market disruption when Turkey briefly banned DDGS imports last summer. The Turkish feed industry, the third largest customer for U.S. DDGS last year, was quite alarmed when a government official banned DDGS imports due to concerns about the use of genetically modified corn. Like many countries, Turkey is feed deficient and a disruption in expected imports can create a serious feed shortage in a few short weeks. The problem was resolved when it was determined in court that the official did not have the authority to make that decision.

While the USGC continues to push into new markets in the Middle East, Southeast Asia and elsewhere, it also continues to work in existing markets. Mexico has been the biggest buyer of DDGS in recent years, importing over 1 million tons. "There's room for growth in Mexico," Cory says. "The larger feeders are using DDGS, but the medium and smaller users are still not using any." The USGC continues to sponsor seminars in Canada, the second largest market for U.S. DDGS, and monitors other situations around the world.

China, however, may soon eclipse Turkey's slot in third place and potentially become the top DDGS export market. The USGC, however, is projecting a relatively modest 1 million-ton-per-year market for China, although there actually is potential for four times that. Given the government's involvement in setting corn prices and regulating trade, traders are conservative in their projections for what the Chinese will buy since it is not easy to project market share for a market that is not freely traded. Some traders are also hesitant to jump on the Chinese freight train—DDGS are not yet an officially registered feed ingredient. As with all things regarding Chinese trade, there is great potential for huge new markets, and great care is needed to develop long-term, stable trade relationships. EP

Susanne Retka Schill is editor of Ethanol Producer Magazine. Reach her at (701) 738-4922 or sretkaschill@bbiinternational.com.