DTN Weekly Distillers Grains Update

Oregon Company Turns Crop Residue Into Profits

OMAHA (DTN) -- Once considered an underutilized resource, an Oregon company is contracting with farmers to harvest their crop residue and turning it into a product purchased by feedlots and other industries.

According to Harrison Pettit, vice president of corporate development for Pacific Ag in Hermiston, Oregon, the company is 18 years old and began as a regional business in the lower Columbia basin of the Pacific Northwest. The area contains about half a million irrigated acres that straddle the Columbia River in eastern Oregon and southeastern Washington.

"Pacific Ag was founded as a harvest and supply company, but ended up focusing on crop residue because it was an underutilized form of roughage," Pettit said.

The Columbia Basin is an area with very high-value irrigated agriculture with a very tight rotation. The high-value crops in that area are potatoes and onions, but those can only be grown every three or four years on the same acres. Typically, those crops are rotated with forage crops that leave residue such as grass, alfalfa or wheat.

Pettit said over the course of the past 10 to 12 years, the company developed a business model to come in, harvest the residue and market it.

The company's success was enabled by having a market that was larger than just the local need. Around 2009, the company moved out of its own market into the High Plains region and into the Midwest, since they had developed a crop residue supply chain on a large scale, especially for demand from cellulosic ethanol plants. Pacific Ag's business model has led them operate in nine states, including North Dakota, Kansas, Iowa, Oklahoma, Texas and North Carolina.

Pettit said the company's presence in the High Plains is now focused on feedlots and dairies because of the tremendous amount of animals on feed in those areas, as well as great resources in terms of wheat, straw and corn stover.

Through the years, the company has refined its practices and advanced its systems, all leading to dramatic growth in their scale of operation.

BUSINESS MODEL

Pacific Ag contracts with growers to pay them a certain amount per ton. The company comes in with its own equipment and employees and does all the harvesting of residue.

The company pays the farmer 50% when they build the stack, then the other 50% when they move or sell the stack. Because the crop residue is not indexed to grains prices, the company is able to keep prices steady.

Pettit said the company is very conscious of soil health and consults with the farmer on how much stover will be removed. Attention is paid to meet any standards set by the Natural Resources Conservation Service and an agreement is made as to how much stover to leave in the field.

Residue is an integral part of soil health, Pettit said. There are circumstances in which no residue should be removed, and there are circumstances in which substantial residue should be removed because there is so much there and it prohibits emergence of new growth. In no condition does the company ever remove more than 50% of the residue.

"Our interests are very aligned with the grower. They are the ultimate stewards of their own land because that's their greatest asset," he said. "We want a long-term relationship with that grower, so it's in our best interest to make sure we are maintaining the soil and helping manage the residue."

The residue is harvested with a baler that also functions as densifying equipment. The company has pushed equipment manufacturers to improve the density of bales, and are now capable of producing 3- by 4- by 8-foot bales that are now at 11-12 pounds per square foot, much denser than the 8-10 pounds that was previous the norm.

GREATER YIELDS EQUAL GREATER RESIDUE

With the higher-yielding corn seeds that have been developed, crop residue can become a problem for farmers.

Projections are for technology to reach an average national standard of 300 bushels per acre for corn grain, compared the current norm of about 160. With greater yields driven mainly by increasing the number of plants per acre, there are more stems, leaves and cobs left per acre after harvest.

"There's an almost linear relationship between yields of grain and yields of gross biomass that is produced by a corn plant on a per-acre-basis," Pettit said.

Farmers with 150-bushel corn probably don't have a residue management problem, but those with 160-180-bushel corn or more probably have more residue than they would like on those fields.

"The big seed companies may have a hard time selling 300-bushel corn seed if they're creating a residue management problem," he said. "So the more opportunities there are to utilize that residue material, the better it is for selling higher-yielding grain."

By removing the residue, they are also providing a service for farmers in terms of residue management. Too much residue can be costly to shred, turn in or otherwise manage, but is necessary because too much plant material acts like a mulch and can prevent emergence of the next crop.

Pettit said Pacific Ag is focusing on areas with high concentrations of high-yielding acres, such as central Iowa, or irrigated corn acres in the Texas Panhandle.

SUPPLYING CUSTOMERS

The largest customers for the crop residue are feedlots, dairies, mushroom plants and companies that produce erosion control products.

Sometimes the residue is harvested to a specification that meets the needs of each particular end-use customers, he said. Some residue is ground so it can be delivered and fed at a feedlot.

Wheat straw can be cut to a certain stem length to meet the needs of mushroom plants. Mushrooms are grown indoors on big trays with a compost that is comprised, on a dry matter basis, of about 70% wheat straw or other residue. Pettit said it takes about three weeks to prepare and pasteurize the compost, which is then inoculated with spores from which the mushrooms grow.

Erosion control customers also need the wheat straw dried and cut to a certain length for their purposes. These companies produce erosion control blankets and tubes (or wattles) that are filled with straw and put on construction job sites to control storm water and other erosion around earth-moving activities.

Pettit added that mushroom plants are typically built near population centers, not necessarily near wheat fields, so it typically has been a challenge for them to source material for compost because of urban expansion.

Crop residue can also be converted into cellulosic sugars for the production of fuels and chemicals.

EXPORT MARKETS

Pettit said there is a robust export market from the Pacific Northwest for the 3- by 4- by 8-foot bales.

"Diets all over Asia and the Middle East have increasing amounts of protein, so the general trend line is that many countries in those areas are forage short," he said.

Some countries in the Middle East have issues in terms of water resources, Pettit said. Many countries have banned the use of water to grow forage for livestock, so there is a huge need to import forages.

The largest customer is the United Arab Emirates, where it is used predominantly for sheep, goats and camels, but some dairy and beef as well. Other large buyers include Japan, Korea and China.

RESIDUE AND DDG: A GREAT COMBINATION

Cattle need roughage in their diet to enable the rumen to work properly. Untreated corn stover is not a rich source of nutrition, but rather a good source of roughage.

Because of the high protein content in distillers dried grains, it is a nice complement to low-protein roughage sources like corn stover, Pettit said. In recent years, DDG has become a staple in beef, dairy, swine and poultry diets.

"Corn stover has some energy and very low protein. But with wet or dry distillers, you're getting a protein-rich source of nutrition, but no roughage," Pettit said. "That's why the two together are often very complementary in a ration."

Some university livestock researchers have done feeding trials in recent years with using DDG with low quality forage, such as corn stover. Most cattle love the taste of DDG, so mixing it in with low quality forage is a great way to make it more palatable.

Price also makes DDG a great choice for livestock producers to use in rations, as currently DDG is priced at about 87% of the value of corn.

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

Follow Cheryl Anderson on Twitter @CherylADTN

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IN THE NEWS

Regulations for New Ethanol Coproducts Must Evolve

The number and types of new ethanol coproducts are continuing to evolve. And with all the new products on the market, more regulatory diligence is needed as well, according to an article for Ethanol Producer (http://bit.ly/…) written by Kurt Rosentrater, executive director of the Distillers Grains Technology Council.

Some of the new developments in the coproducts industry Rosentrater mentioned are commercialized cellulosic ethanol, Generation 1.5 processes being implemented, evolving Generation 1 dry grind plants, and scientists developing "new ways to extract more uses and value upstream from kernels of corn and downstream from coproduct materials."

With increased focus on human food safety, the safety of feed fed to livestock has also become an important issue. This has been implemented in the past two years in the form of the new Food Safety Modernization Act, including the Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventive Controls for Food for Animals, as well as the Sanitary Transport of Human and Animal Food plans.

In order for livestock feed, and then human food, to be safe, it is important for the industry to be careful in the processes used to make them and diligent about meeting regulations, Rosentrater said.

Ethanol producers, as well as beverage distillers, need to be sure to meet the defined legal definitions for co-products published by the Association of America Feed Control Officials. If co-products do not fall within any established definition, a new definition may be needed.

For example, with the increasing popularity of oil removal technologies, the industry, including the DGTC, worked to establish a legal definition for distillers oil that enables ethanol producers to sell it legally, Rosentrater said.

Technology continues to evolve in removing fractionate compounds from the grain or the coproduct stream, including fiber, proteins or other nutrients, as well as new fermentation products from corn other than ethanol. Likewise, the new fractionated products must be proven safe for their intended use by either the AAFA definition process, the Food Additive Petition process or the Generally Regarded as Safe determination with voluntary notification, all of which can be lengthy and require extensive documentation.

Rosentrater said that companies may choose which path to take, most follow the official AAFCO process to establish the legal identity and get a published definition by AAFCO.

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DTN WEEKLY DDG SPOT PRICES

CURRENT PREVIOUS
COMPANY STATE 4/15/2016 4/8/2016 CHANGE
Bartlett and Company, Kansas City, MO (816-753-6300)
Missouri Dry $130 $130 $0
Modified $63 $63 $0
CHS, Minneapolis, MN (800-769-1066)
Illinois Dry $123 $120 $3
Indiana Dry $118 $115 $3
Iowa Dry $112 $110 $2
Michigan Dry $121 $118 $3
Minnesota Dry $110 $105 $5
North Dakota Dry $110 $110 $0
New York Dry $123 $120 $3
South Dakota Dry $110 $110 $0
MGP Ingredients, Atchison, KS (800-255-0302 Ext. 5253)
Kansas Dry $125 $125 $0
POET Nutrition, Sioux Falls, SD (888-327-8799)
Indiana Dry $112 $116 -$4
Iowa Dry $110 $111 -$1
Michigan Dry $109 $110 -$1
Minnesota Dry $106 $110 -$4
Missouri Dry $128 $129 -$1
Ohio Dry $114 $118 -$4
South Dakota Dry $114 $115 -$1
United BioEnergy, Wichita, KS (316-616-3521)
Kansas Dry $127 $127 $0
Wet $50 $50 $0
Illinois Dry $130 $133 -$3
Nebraska Dry $127 $127 $0
Wet $50 $50 $0
U.S. Commodities, Minneapolis, MN (888-293-1640)
Illinois Dry $123 $117 $6
Indiana Dry $117 $115 $2
Iowa Dry $112 $110 $2
Michigan Dry $120 $118 $2
Minnesota Dry $110 $105 $5
Nebraska Dry $120 $120 $0
New York Dry $125 $125 $0
North Dakota Dry $120 $115 $5
Ohio Dry $118 $118 $0
South Dakota Dry $110 $110 $0
Wisconsin Dry $115 $115 $0
Valero Energy Corp., San Antonio, TX (402-727-5300)
Indiana Dry $113 $108 $5
Iowa Dry $110 $110 $0
Minnesota Dry $107 $107 $0
Nebraska Dry $120 $120 $0
Ohio Dry $118 $115 $3
South Dakota Dry $105 $105 $0
Western Milling, Goshen, California (559-302-1074)
California Dry $178 $178 $0
*Prices listed per ton.
Weekly Average $116 $116 $0
The weekly average prices above reflect only those companies DTN
collects spot prices from. States include: Missouri, Iowa, Nebraska,
Kansas, Illinois, Minnesota, North Dakota, South Dakota, Michigan,
Wisconsin and Indiana. Prices for Pennsylvania, New York and
California are not included in the averages.

*The spot prices gathered by DTN are only intended to reflect general market trends and may vary. Please contact individual plant or merchandiser for exact prices.

If you would be willing to take a weekly phone call and have your distiller grains spot prices listed in this feature, please contact Cheryl Anderson at (308) 224-1527 or (800) 369-7875, or e-mail cheryl.anderson@dtn.com.

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VALUE OF DDG VS. CORN & SOYBEAN MEAL
Settlement Price: Quote Date Bushel Short Ton
Corn 4/14/2016 $3.7400 $133.57
Soybean Meal 4/14/2016 $290.10
DDG Weekly Average Spot Price $116.00
DDG Value Relative to: 4/15 4/8 4/1
Corn 86.84% 89.85% 93.33%
Soybean Meal 39.99% 43.48% 43.33%
Cost Per Unit of Protein:
DDG $4.64 $4.64 $4.72
Soybean Meal $6.11 $5.62 $5.73
Notes:
Corn and soybean prices taken from DTN Market Quotes. DDG
price represents the average spot price from Midwest
companies collected on Thursday afternoons. Soybean meal
cost per unit of protein is cost per ton divided by 47.5.
DDG cost per unit of protein is cost per ton divided by 25.

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USDA MARKET NEWS/DISTILLER GRAINS PRICES

USDA WEEKLY DISTILLERS GRAINS SUMMARY (Apr 8, 2016)

Dried Modified Wet
FOB PLANT PRICES PER TON
Iowa 112.00-123.00 55.00-60.00 35.00-40.00
Minnesota 110.00-120.00 55.00 35.00-40.00
Nebraska 120.00-140.00 56.00-70.00 45.00-54.00
South Dakota 108.00-126.50 59.00-65.50 35.00-43.00
Wisconsin 115.00-125.00 50.00-60.00 NQ
Eastern Corn Belt 110.00-133.00 60.00-63.00 NQ
Kansas 130.00-153.00 NQ 45.00-54.00
Northern Missouri 128.00-135.00 NQ 41.00-53.00
DELIVERED PRICES PER TON
CIF NOLA 133.00-140.00
Pacific Northwest 160.00-166.00
California 160.00-170.00
Texas Border (metric ton) 170.00-187.00
Lethbridge AB 140.00
Chicago 125.00-135.00

Dried Distillers Grain: 10% Moisture

Modified Wet Distillers: 50-55% Moisture

Wet Distillers Grains: 65-70% Moisture

CALIFORNIA WHOLESALE FEEDSTUFF PRICES (Tue Apr 12, 2016)

Distillers Dry Grains

  Rail to California Points          170.00-172.00    dn 2.00-8.00
  FOB Truck to California Points     174.00-180.00    up 1.00-dn 11.00

PACIFIC NORTHWEST WEEKLY FEEDSTUFFS (Tue Apr 12, 2016)

Offers for Distillers Dried Grains delivered by rail to feed mills in the Pacific Northwest were steady to 2.00 lower from 168.00-180.00. Offers for distillers dried grains trans-loaded onto trucks and delivered to Willamette Valley dairies were also steady to 2.00 lower from 186.00-195.00.

*All prices quoted per ton unless otherwise noted.

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NASS/USDA MONTHLY CO-PRODUCTS PRODUCTION

Dry and Wet Mill, Co-products and Products Produced - United States

January 2016 - February 2016

April 1, 2016

Highlights:

Dry mill co-product production of distillers dried grains with solubles (DDGS) was 1.80 million tons during February 2016, down 4 percent from January 2016 but up 11 percent from February 2015. Distillers wet grains (DWG) 65 percent or more moisture was 1.25 million tons in February 2016, down 5 percent from January 2016 and down 2 percent from February 2015.

Wet mill corn gluten feed production was 312.0 thousand tons during February 2016, down 3 percent from January 2016 but up 10 percent from February 2015. Wet corn gluten feed 40 to 60 percent moisture was 277.4 thousand tons in February 2016, down 5 percent from January 2016 but up 1 percent from February 2015.

Co-products and Products Jan 2015 Dec 2015 Jan 2016
Dry Mill tons
Condensed distillers solubles (CDS-syrup) 128,0271 133,919 122,291
Corn oil 95,268 124,541 123,806
Distillers dried grains (DDG) 405,025 383,131 367,436
Distillers dried grains with solubles (DDGS) 1,622,467 1,869,722 1,795,472
Modified distillers wet grains (DWG) <65% moisture 1,268,244 1,311,155 1,247,751
Modified distillers wet grains (DWG) 40-64% moisture 418,698 449,256 401,370
Wet Mill
Corn germ meal 48,546 63,787 65,123
Corn gluten feed 283,990 321,956 312,012
Corn gluten meal 80,955 87,266 83,643
Corn oil 41,020 445,976 46,490
Wet corn gluten feed 40-60% moisture 274,763 291,882 277,434

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DDG LINKS/RESOURCES

National Organizations:

Distillers Grains Technology Council (www.distillersgrains.org)

Renewable Fuels Association (www.ethanolrfa.org)

U.S. Grains Council (www.grains.org)

National Corn Growers Association (www.ngfa.org)

American Feed Industry Association (www.afia.org)

Government/Regulatory:

National Grains and Feed Association (www.ngfa.org)

Association of American Feed Control Officials (www.aafco.org)

USDA Animal Feed Safety System (http://1.usa.gov/…)

USDA Food Safety Modernization Act (http://1.usa.gov/…)

University Websites:

Corn Processing Coproducts Manual, Nebraska Corn Board and Nebraska Corn Board and the University of Nebraska-Lincoln Institute of Agriculture and Natural Resources Agricultural Research Division Cooperative Extension Division (http://bit.ly/…)

University of Minnesota Biofuels Coproducts in Animal Feed (www.biofuelscoproducts.umn.edu)

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DDG CONFERENCES

*Distillers Grains Technology Council Inc.'s 20th Annual Distillers Grains Symposium

The Distillers Grains Technology Council will hold its 20th Annual Distillers Grains Symposium on May 18-19, 2016, at the Hyatt Regency at The Arch in St. Louis, Missouri. For information, contact the DGTC office at (515) 294-4019 or (800) 759-3448, or check the DGTC website (http://www.distillersgrains.org).

(If you are sponsoring or know of any event, conference or workshop on distillers grains, and would like to list it in the DTN Weekly Distillers Grains Update, please contact Cheryl Anderson (see contact info below).

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We welcome any comments/suggestions for this feature. Please let us know what information is valuable to you that we could include in the Distillers Grains Weekly Update. Please feel free to contact Cheryl Anderson at (402) 364-2183, or e-mail cheryl.anderson@dtn.com.

(CZ/AG)

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