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DDG Outlook
Thursday, January 22, 2015 4:51PM CST

By Cheryl Anderson
DTN Staff Reporter

DAVENPORT, Neb. (DTN) -- The outlook for dried distillers grains in 2015 will likely be characterized by how trade resumes with China, as well as how the new Food Safety Modernization Act affects ethanol producers, according to industry experts.

The past year was one of volatile relations with China, over the country's rejection and subsequent approval of Syngenta's Agrisure Viptera (MIR 162) biotech trait, which caused huge disruptions in dried distillers grains trade.

There was widespread speculation that China's actions were largely politically motivated, and while DDG trade with China is slowly resuming in 2015, it may take some time to rebuild trust and heal relations, according to Jason Charles, domestic export trader for Land O'Lakes Purina Feed LLC in Minneapolis.

Syngenta announced Dec. 22 it received formal approval for imports of DDG with the trait, but the trust of Chinese traders is not something that will be recovered immediately, Charles said. U.S. companies are going to be very cautious about trade with China.

U.S. suppliers are now trying to protect themselves against losses; some reportedly require large down payments on all shipments to China. A class-action lawsuit against Syngenta is in the works, arguing that company should not have sold the MIR 162 trait in corn to farmers before it was approved in China, and that Syngenta failed to inform U.S. farmers planting the seed with the trait that their crops might not be marketable there.

"The rejection of MIR 162 for strictly political reasons caused a lot of problems for middle-sized companies, loaders and small grains companies, costing them millions and millions of dollar," Charles said. "These companies will be very cautious and vigilant in dealing with China."

OTHER TRENDS TO WATCH

Another big issue for 2015 will be the Food Safety Modernization Act, according to Kurt Rosentrater, executive director of the Distillers Grains Technology Council and professor at Iowa State University's Department of Agricultural and Biosystems Engineering. The second comment period for the revised rule for good manufacturing practices has closed and the U.S. Food and Drug Administration is reviewing comments.

Rosentrater said ethanol producers will need to do some due diligence with their facilities to make sure they comply with the new regulations.

"It will be interesting to see, once the final rule is published, how the ethanol industry will be affected and what requirements ethanol producers will need to do," Rosentrater said.

Another industry trend will be continued development on processes to extract valuable co-products such as proteins and fiber from distillers grains.

"Oil removal came into the industry rapidly, but now companies are moving forward on some newer fractionation products, such as extracting and fermenting the fiber in distillers, as well as new products made from extracting protein," Rosentrater said. "The fractionation story is not over yet. Oil removal has been successful, and now new technologies are becoming commercially viable to remove fiber and protein. We will see more of that happening."

MILK INDUSTRY CHALLENGES

The industry will also need to keep an eye on the dairy sector, which could be a big challenge with milk at $15 per hundredweight, lower than breakeven level. Continuing low milk prices could lead to fewer domestic livestock, Charles said.

"If we stay at these price levels, production will go down. Dairy farmers will feed less of everything in order to mitigate that loss," Charles said. "Instead of pumping in rations to achieve maximum performance, they will do something different until prices come back up."

Competition with soybean meal and canola meal will also be a factor to watch.

FUTURE MARKETS

Charles said he believes the market will be very bearish, at least 90 days into spring weather and new crops. He said the feed and grain sector will also likely be bearish, barring any inclement spring weather.

"With another good-to-average crop in the Northern Hemisphere in 2015, we will continue this bear market and continue to add to global supplies, which will continue to cheapen prices," Charles said.

Ample global feed stocks will also likely lead to bearish commodities and grains, he said. With countries in the Southern Hemisphere predicted to have record corn and soybean crops, Charles expects overly-ample stocks of corn, soybean and wheat. He advised everyone to keep an eye on global stocks, which are at the point of being burdensome.

Charles said he believes DDG prices are nearing their high point.

DTN Senior Analyst Darin Newsom believes prices could still move higher, as corn prices have drifted lower during the winter quarter, possibly setting the stage for a more bullish spring quarter.

"As producers head back to the fields and corn and DDG export business heats up, merchandisers will have to push harder to source cash supplies to meet demand," Newsom said. "If corn prices start to work higher, and more cattle start to show up in placements in the winter and spring, DDG prices could also start to move higher."

DTN Ethanol Analyst Rick Kment said although the market tone remains bearish because of potential bearishness in the grain sector, the focus will be on the balance between possible lower DDG supplies and recently heated-up DDG demand and prices.

"If ethanol margins continue to remain weak through the spring and summer, given the low energy prices, there is expected to be a pullback in ethanol production. This also means a pullback in DDG prices," Kment said. "The fact that DDG prices have rallied through the fourth quarter of the year, as demand has heated up, may create some additional uncertainty about how much additional support can be seen in the market at current corn and soybean meal prices."

Kment said since corn and soybean meal prices set the standard by which all co-product feeds are priced, a strong shift higher in grain markets could limit the potential DDG price gains.

DDG SUPPLIES READILY AVAILABLE

As long as corn is readily available, Charles said he expects DDG supplies to be readily available as well. "As long as we can continue to move ethanol, distillers will move as well," he said.

Exports may return to average expectations, except for China.

"I don't anticipate exponential growth in demand from China in this calendar year, as it will take some rebuilding with U.S. exporters," he said. "We need to revitalize container trade to China and get that trust back. We need to continue upward momentum. Revitalization will bullishly impact the distillers trade."

ADVICE FOR END USERS

Charles said he advises livestock producers to just buy hand-to-mouth for the coming months, then look at factors such as spring weather, how many acres of corn and soybeans are planted, and how well the Brazilian and Argentine harvests turn out.

"If I was an end user, I would buy hand-to-mouth through March 1, then nothing else until we have more information on the global grain situation, production, acres, etc.," he said.

With the majority of ethanol plants now removing corn oil from their DDG, Rosentrater advised livestock producers to be more aware that the DDG they buy has lower oil content and do what they need to do to make DDG work in their rations.

Cheryl Anderson can be reached at Cheryl.anderson@dtn.com.

(ES/AG/CZ)


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