China Trade Requires Long-term Vision

By Tom Dorr | February 15, 2011

One of the notable developments in the U.S. ethanol economy has been the sustained growth in exports of distillers dried grains with solubles (DDGS). By the end of last year, U.S. DDGS exports totaled more than 8 million metric tons with a value that topped $700 million. In Africa, the Americas and Asia, foreign livestock producers have discovered how valuable DDGS can be as a key component of livestock feed and how adopting DDGS can help them become more efficient producers of meat, milk and poultry products for their consumers.

Nowhere has the adoption of DDGS been more dramatic than in China, where it rocketed from less than 2,000 metric tons of DDGS imports in 2007 to more than 2.3 million in 2010. Clearly, DDGS delivers great benefits to China’s livestock industries at the same time growing Chinese demand benefits the expanding U.S. ethanol sector.

The steady growth of DDGS trade with China in response to growing demand makes the Chinese government’s decision to file anti-dumping charges against imports of U.S. DDGS not only surprising, but mutually disruptive to trade. It puts at risk mutually beneficial trade flows that, unless resolved amicably, will have implications for both countries.

Even if the case is dismissed or mitigated during the injury investigation, the anti-dumping charges will likely have a negative effect on the United States’ ethanol industry. The charges mean additional costs in time and attention throughout the U.S. ethanol industry as it responds to the case, and increased uncertainty for ethanol producers and the corn growers who supply them. In a commodities market where a negative weather forecast can drop the price of corn in minutes, it’s not hard to see that uncertainty in the DDGS market can be bad news, not only for farmers who supply grain to the ethanol plants, but for every U.S. farmer who sells corn into commercial channels.

There is also the very direct effect the charges will have on the ethanol industry itself.  At 2010 levels, Chinese purchases of DDGS represent about 7.5 percent of total DDGS sales. For an industry where coproduct sales can represent as much as 30 percent of a facility’s revenue stream, China has become a critical export market.

So what can ethanol producers expect as this case progresses?

The first, critical step was completed in January, when almost 70 U.S. companies registered with the Chinese government as “interested parties” in the case—a process that was coordinated by the U.S. Grains Council. While it sounds like a formality, this registration is a very important means for signaling that the U.S. ethanol industry takes China’s concerns and actions seriously and respects the need to work with each other to resolve trade problems. It also has important implications because registered parties can qualify for lower, negotiated tariffs if, in the end, the case results in tariffs being assessed. 

The case is now in the fact-finding stage, during which Chinese investigators will research DDGS sales, pricing and specific company practices for evidence of injury and dumping. To reach a final ruling against the U.S. trade, China must show evidence that DDGS has been dumped in the Chinese market at prices below those being paid by other buyers in other markets and that this practice has caused economic harm to the domestic industry. Provisional tariffs could be assessed as early as June, even before a final decision is reached. Under the current timetable, China is expected to make a decision on its findings by Dec. 28, although that deadline can be extended if necessary.

China’s economic growth over the past two years has meant new trade patterns for a number of agricultural products including U.S. DDGS, and it’s not unusual to expect that both countries will go through a bit of a transition and adjustment in response to this new supply/demand paradigm.
At the council, we remain hopeful for a positive resolution to the case as U.S. DDGS offers such significant advantages to both parties—for the U.S. ethanol industry, a vibrant, growing market, and for the Chinese livestock industry, a valuable tool to feed a growing, economically more powerful nation. In the big picture, our goal is to encourage a resolution that focuses on the long-term U.S.-China trade relationship and the market potential not only for DDGS but for trade in a full array of U.S. and Chinese agricultural products.

Author: Tom Dorr
President and CEO, U.S. Grains Council
(202) 789-0789
grains@grains.org