Hot Destinations for DDGS Exports: China, Mexico, Canada

The landscape of U.S. distillers grains exports changed dramatically in 2010 and—depending on the outcome of the Chinese dumping accusation—could change radically in 2011, as well.
By Holly Jessen | February 15, 2011

In 2010, China sped past Turkey, Canada and Mexico, becoming the No. 1 destination for exported U.S. distillers grains, gobbling up 28 percent of the total DDGS exported worldwide. The odds that the upward trend would continue in 2011 came to a screeching halt in early January, however, with the announcement of China’s anti-dumping investigation. 

In just four years, China’s importing of DDGS went from zero to millions of metric tons in 2010, according to information from the USDA Foreign Agricultural Service. It started out modestly with 1,150 metric tons (mt) in 2007 and grew to more than 542,000 mt in 2009. But that’s nothing compared to what happened in 2010. “They just skyrocketed,” says Mike Callahan, director of international operations for the U.S. Grains Council. “There are lots of numbers running around out there but I think the final tally, once it’s all in, China will have imported close to 3 million tons during 2010.” Others have estimated it could reach as high as 5 million metric tons (mmt).

The official number for January to November 2010 is 2.3 mmt, a huge increase from the 445,058 mt exported to China during the same time period in 2009. “Certainly China is an example of extraordinary takeoff in demand,” Callahan says. “DDG has been a widely, easily accepted feed ingredient in most of our other Asian markets, but certainly not to the extent that China has embraced the product.”

Lest China get all the attention, it’s important to note that the No. 2 and No. 3 export markets, Mexico and Canada, have been steady growth markets since 2003. For example, through November, Mexico imported 1.5 mmt of U.S. DDGS and Canada imported 933,346 mt. That might be a fraction of the product sent to China in the past year, but there’s no doubt that Mexico and Canada have had a bigger overall impact on the industry during the past decade.

Mexico crossed the one million mark in 2008, importing nearly 1.2 mmt of DDGS. Economic conditions in 2009 and early 2010 slowed, but did not stop, the growth as livestock producers cut back on their animal numbers. “Livestock sectors are not back in the levels they were in 2008—they are working toward that,” says Hernandez. “My impression is that they will be full speed ahead by the end of next year.”

In Canada, the biggest increase in imports from the U.S. was from 318,864 mt in 2007 to 793,947 mt in 2008. In 2009 Canada brought in 819,743 mt, somewhat less than was expected, but an increase nonetheless. In 2010, January through November, 933,346 mt were brought into Canada, a 27 percent increase from the same time period in 2009.

China’s Appetite for DDGS

Overall, the price of imported DDGS compared to Chinese corn or imported corn prices appears to be the primary driver of DDGS imports to China, according to “Market Issues and Prospects for U.S. Distillers Grains Supply, Use, and Price Relationships,” a USDA report released in December. Another thing that has helped facilitate that increase is the availability of shipping containers and the growth of larger bulk shipments in ocean vessels.

The USGC considers it a natural growth in trade for a country experiencing increasing urbanization. As more people migrate from rural to urban areas the demand for animal products, meat, milk and eggs, is growing. “DDGS is just another product [Chinese livestock producers] have realized there is value in that they need to capture,” Callahan tells EPM.

China simply doesn’t have enough domestic feed ingredients to fulfill demand, nor does it have sufficient ethanol capacity to supply its own DDGS to the feed industry. There is a small ethanol industry in China, most of which use corn as the primary feedstock. The Chinese government, however, has put the brakes on expansion in the corn-to-ethanol industry, Callahan says. In addition, U.S. DDGS typically has better nutritional quality than the product made at Chinese ethanol plants.

Another factor is that it has proven easier for U.S. exporters to send DDGS to China than corn. For example, imported corn is assessed a 13 percent tax and a 1 percent import duty while DDGS is only assessed a 5 percent import duty. Assuming the anti-dumping case is resolved favorably, Callahan says there’s definitely room for growth in the Chinese market for U.S. DDGS. He was in China just before the announcement and it looked like 2011 was on track for even more growth. “The people there were saying, ‘Gee whiz, we’ll at least take 4 million in 2011, or maybe even more than that—we want as much of it as we can get,’” he says. 

As it is, however, the anti-dumping case is likely to disrupt trade in 2011. How much is going to depend on whether China decides to impose heavy duties, which could begin as early as June 2011. Will it be 10 to 25 percent, possibly low enough for trade to continue? Or, will the duties reach 100 percent? “Right now the buyers are sitting on the sidelines to see what is going to happen,” he says.

To rule against the U.S., China must show evidence that DDGS have been dumped on the Chinese market at prices lower than what other buyers pay, injuring Chinese interests, according to the USGC. The decision is expected by the end of 2011, with the possibility of a six-month extension.

Good Neighbors

Mexico and Canada are good markets for U.S. DDGS for the same reason—proximity. Sharing borders with the U.S. makes it easier to transport product whether by truck, rail or barge. Another big factor in both markets is the attractive price.

And, both countries have room to grow in terms of accepting increasing amounts of DDGS. In Mexico, DDGS is still considered a new product, says Julio Hernandez, country director in Mexico for the USGC. As a result, the organization has been working to educate livestock producers on its use. That includes working with new users, helping current users learn the benefits of increasing inclusion levels and educating animal nutritionists. “We have a very ambitious and aggressive program,” Hernandez says.

In contrast, in Canada DDGS is a well-known and increasingly trusted product that’s already used by many livestock producers. The country will remain a large importer but will eventually reach a saturation point, says Neil Campbell, a consultant for USGC in Canada. The country’s entire feed market is about 19 mmt yearly, a much smaller feed market than China or Mexico. In addition, Canada is a major grain exporting nation that also produces a significant amount of DDGS at its own ethanol plants. “I would expect us to probably maintain our position as No. 3,” he tells EPM.

The key to growing the market in Canada has been feeding trials to demonstrate higher inclusion rates. In the past three to four years the main priority was swine, the largest market segment for potential DDGS demand in Canada, Campbell says. With demand now solid in the swine market, a cattle feeding trial of 20, 30 and 40 percent inclusion rates was recently completed, with the final report available in late March. “If that trial works out the way that we think it should, that should provide a demand boost of probably 200,000 to 300,000 tons of distillers grains a year,” he said.

The two countries also share the same barrier to increasing imports of the product. There’s a need for infrastructure to receive, store and distribute it. In Mexico the businesses are often simply too small or poor to make the needed upgrades, Hernandez tells EPM. Canada, on the other hand, has historically focused more on exporting product than importing and doesn’t have the necessary receiving and storage facilities, particularly in Western Canada. “It’s something that up until this distillers grains boom, nobody would have even thought,” Campbell says. “Why would we import any feed ingredient to any large extent, outside of maybe soybean meal from the United States?  One of our long-term competitive advantages in terms of meat exports has been our ability to have low-cost feed produced in our own country.”

Long-term Supplies

As ethanol production increases, so does the supply of DDGS which is expected to reach 33.3 million metric tons for the 2009-’10 marketing year, more than four times greater than in 2003-’04 and more than double since 2006-’07, according the USDA report on DDGS.

The rapid growth has prompted fears that DDGS will someday exceed feed-use potential. However, Linwood Hoffman and Allen Baker, authors of the USDA report, say that’s not likely. The potential for domestic and export use of U.S. DDGS currently exceeds production and will probably continue to do so in the future.

For one thing, the use of corn for ethanol production is expected to continue to grow, but at a much slower rate. The USDA projects that 4.5 billion bushels of corn will be used for ethanol production in 2009-’10. By 2019-’20 the projection climbs only slightly, to 5 billion bushels. As a result, the supply of DDGS is expected to increase from about 33.3 mmt in 2009-’10 to about 38.6 mmt in 2019-’20. 

Higher export numbers also have an impact on the amount of DDGS available in the domestic feed market. The U.S. only imports a very small amount of DDGS, with 1 percent or less brought in during the past seven years. The export numbers have increased or held steady since 2002-’03 when 0.8 mmt, or 14 percent, of U.S. DDGS were exported. For 2009-’10 it’s estimated that 8.3 mmt, or 25 percent, of DDGS will be exported. Depending on who is asked, the potential for DDGS exports ranges from 20 mmt to 52 mmt. The study concluded, Hoffman tells EPM, that there’s enough use potential in the U.S. and export feed markets to consume the U.S. DDGS supply as long as prices remain favorable.

Author: Holly Jessen
Associate Editor, Ethanol Producer Magazine
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