Ethanol Coproduct Markets

Much of the attention in the ethanol fuel industry in the last few months has been on the end of the Volumetric Ethanol Excise Tax Credit (VEETC), commonly referred to as the blender’s credit, on December 31, 2011. Certainly, the ethanol industry did ramp up production heading into the end of the year as it sought to capture as many credits as possible.  Weekly ethanol production topped 960,000 barrels last December, but has backed off to around 925,000 barrels in recent weeks.  Still, current production is almost 4% higher than last year.  However, profit margins for ethanol producers have declined precipitously since the beginning of the year.  Now facing negative returns, ethanol plants are likely to slow production.  Some plants could even be temporarily shuttered for extended repairs, etc.  ADM recently announced that it was permanently closing its 30-million gallon Walhalla, North Dakota plant in April, although the company indicated that its decision was related to market conditions other than the VEETC.

While the ethanol production changes thus far are not dramatic and still higher than year-ago levels, the recent declines have implications for cattle feeders and other livestock producers using ethanol coproduct feeds in their rations.  To the extent that the ethanol grind declines with the loss of the VEETC and the ‘blend wall’ is reached, production of distillers grains and corn gluten feeds will also decline, limiting livestock producers’ available supply.  Of course, this would indicate that more corn would be directly available for feed, but rations can’t be abruptly changed either.

Seasonally, prices for dried distillers grains plus solubles (DDGS) are higher than their annual average from November through early February (Figure 1).  DDGS prices are typically at their lowest during the summer months.  Note that in Figure 1, the seasonal price pattern for the last ten years is highly correlated with cattle on feed numbers, which reflects one of the primary demand (use) markets for DDGS.  Prices for DDGS, wet distillers grains plus solubles (WDGS), and modified wet distillers grains plus solubles (MWDGS) this past month have been slightly higher than year-ago levels (Figure 2), due to a higher cattle on feed inventory, additional use in swine and poultry rations, and declining coproduct production.

Figure 1

Figure 2

As shown in Figure 1, DDGS prices seasonally decline going into March by as much as 7%.  In a year when prices perfectly follow the 10-year seasonal pattern, this would suggest a livestock producer should follow a hand-to-mouth buying strategy for the next month and then lock in April and May needs in later March.  While adherence to the seasonal trend could occur in 2012, it would be prudent for coproduct buyers to prepare for stable to rising prices.  DDGS prices tend to be somewhat volatile and can depart from their seasonal pattern substantially in some years.  More important to consider, though, is the impact of ethanol plants lowering production, as discussed above.  Should that occur across the market place, coproduct availability will tighten.  Because cattle producers that are feeding distillers grains in their feedyard rations can’t easily/quickly remove them without upsetting cattle’s digestive systems, they will continue purchases and could bid prices higher.

Given the possibilities for ethanol plant production slowdowns and temporary (but extended) plant shutdowns for repairs due to the current poor economics of grinding corn for ethanol, cattle feeders should consider fixing price for part of their needs for the next 2-3 months or, at least, lock in the minimum physical supply (unpriced) they need to maintain minimum ration inclusion levels.  As Figure 2 shows, WDGS and MWDGS prices have remained relatively stable in the last couple of months and DDGS prices have declined from their December highs.  Remember, though, that the prices in Figure 2 are on an as-fed basis (water included).  For purchasing decisions, be certain to compare prices on a dry matter (DM) basis.  Based on average moisture contents, currently MWDGS prices are lower than WDGS prices on a DM basis, and DDGS prices are higher.  Expressed as a percentage of the DM price of corn, the DM price of MWDGS is 79%, whereas WDGS is 83% of the DM corn price and DDGS is 85% of the DM corn price.

The information in this report is believed to be reliable and correct.  However, no guarantee or warranty is provided for its accuracy or completeness.  This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers.  The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information.  There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.