China's Next Steps - 4

The DDGS Soap Opera

A barge on the Mississippi River is being prepped to load distillers dried grains onto an export ship. Ethanol and grain experts say the price of corn and DDGS is heavily influenced by the volume of DDGS being exported to China. (DTN photo by Chris Clayton)

OMAHA (DTN) -- The tumultuous trade relationship between the United States and China, when it comes to distillers dried grains with solubles, continues to play out like an intriguing love story.

There is a spark, yet China has not been ready to fully commit.

The trade battle over distillers grains highlights another area in the U.S.-China relationship where American agriculture filled a demand in China only to see leaders in that country seek to rein in imports of DDGS to the detriment of U.S. ethanol producers.

In this fourth story in a five-part series, DTN continues to look at China's influence on U.S. farmers who have become more reliant on China as an export market.

China is the largest single buyer of DDGS from the U.S.; when China stopped or dramatically slowed down importing DDGS, it led to serious financial issues for U.S. ethanol producers. DDGS are an important part of American ethanol plants' profits picture and help offset times of low ethanol prices and/or high corn prices that cause profit margins to tumble.

In the latest episode of the continuing drama, China accuses U.S. producers of dumping product on the Chinese market. U.S. producers suspect price manipulation, but are eager to regain and expand that market.

The long-term market potential has both sides staying in the game.

"It's just so hard to guesstimate and strategize with China," said Ed Hubbard, general counsel for the Renewable Fuels Association. "They are just all over the place. You have to think this is to negotiate better prices. When you see things like actions threatened, something sinister seems to be involved."

China initiated anti-dumping and countervailing duties investigations against the U.S. in January in another of a long line of Chinese actions on DDGS since 2010. The investigation focuses on subsidies from more than 42 U.S. programs alleged to have increased DDGS exports and harmed Chinese industries. Some of the programs in question no longer exist.

SUSPICIOUS MOTIVATIONS

Geoff Cooper, senior vice president of the RFA, said there are reasons to continue to be suspicious about China's motivations.

The DDGS-corn price spread compared to China's share of the U.S. export market reveals an interesting pattern.

When China accounts for one-third or less of the export market in recent years, he said, DDGS prices generally have fallen below corn. Conversely, when China accounts for one-third or more of the export market, DDGS prices generally are higher than corn.

China accounted for 40% to 60% of total U.S. DDGS exports in late 2013 through late 2014. At that time, DDGS was priced as much as $40 to $80 per ton higher than corn. The same pattern occurred in the spring and summer of 2015, Cooper said.

When China's share of the U.S. DDGS export market collapsed in the fall of 2014 and again during the past several months, he said DDGS values relative to corn fell dramatically.

Since 2011, DDGS prices have averaged 118% the price of corn in months when more than 200,000 metric tons was shipped to China, and just 95% in months when less than 200,000 metric tons was shipped.

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"When China is 'all in', DDGS prices are 130% to 140% the price of corn," Cooper said. "When they are out of the market, DDGS prices are 85% to 95% the price of corn. So, based on that, you could say U.S. producers are losing $30 to $40 a ton on DDGS when China is out of the market, which equates to about 10 to 12 cents per gallon in net margins for the ethanol producer."

NERVOUS TRADERS

Joel Karlin, contributing DTN market analyst and commodity manager for Western Milling in Goshen, California, said with a bearish outlook for global grain and import substitutes such as DDGS, barley, sorghum and cassava, he said it will take at least 18 months for China to go through its massive stockpiles.

There has been speculation by some traders in the industry that China's actions are an attempt to force Chinese buyers to purchase domestic corn to reduce the stockpile, much of which is rumored to be in poor condition.

"Demand for U.S. DDGS may return once China's reserves are gone," he said.

Karlin said there are indications China is still buying DDGS from the U.S. to some degree. Some shipments of U.S. DDGS may have arrived in China recently with other deliveries possible in April/May and August/September shipments, he said.

Increased volatility with China makes it difficult to hold larger position limits, Karlin said, or the amount of tonnage a trader can hold unpriced or unhedged.

DDGS exports to China peaked at an all-time record of 967,529 mt in June 2015. It dropped dramatically to just 218,961 mt by January 2016, as talk of the investigation began to bubble.

U.S. exports of DDGS set a new record of 12.56 million metric tons in 2015. That was an 11% increase from 2014 and more than double the amount exported in 2009.

In 2015, 34% of all DDGS produced in the U.S. were exported with China accounting for 50% of it. Mexico was a distant second at 13%.

Trade volatility creates higher risk for traders, according to Andy Lindsay, merchandiser at POET Nutrition in Sioux Falls, South Dakota. However, it can also present marketing opportunities.

"When China was in the market taking 900,000 mt per month and distillers were 140% to 150% the value of corn, the opportunity to sell forward was there," he said.

However, Rickey Trice, merchandiser for United Bio Energy Ingredients in Wichita, Kansas, said volatility creates problems with logistics and timeframes to move product.

RFA's Hubbard said ethanol industry groups will continue to try to build support in China. This week an ethanol contingency is scheduled to make a trip to Beijing.

"We see China as a possible lottery pick," Hubbard said. "We are trying to maintain conversations with them on a variety of issues. China is such a huge market to us. It is hard to find an individual market that on its own stacks up."

TRADE CHALLENGES

This is how the China DDGS drama has played out in the past five years:

-- In December 2010, China's four ethanol producers opened an anti-dumping investigation into imports of DDGS claiming they cannot produce competitively.

-- On June 29, 2013, China announced it was withdrawing the anti-dumping investigation. While DDGS exports to China did not immediately increase, cash prices jumped $3 to $5 per ton the next day.

-- On Dec. 21, 2013, China began to reject shiploads of U.S. corn found to contain the MIR 162 biotech trait, more commonly known as Agrisure Viptera produced by Syngenta Ag. Concern mounted it was a matter of time before DDGS shipments with the trait would be rejected.

-- On Jan. 3, 2014, China rejected about 2,000 tons of DDGS right before Christmas 2013. Exports of DDGS came to a screeching halt and prices plummeted.

-- On Jan. 10, 2014, China began accepting shipments of U.S. DDGS previously in quarantine. Some DDGS price increases followed. China's small amount of renewed DDGS buying and a glut of DDGS on the U.S. market hindered market recovery.

-- On June 13, 2014, rumors circulated China would stop issuing permits for DDGS imports from the U.S. Prices dropped between $10 and $45 per ton in just one week.

-- On Aug. 1, 2014, China demanded all imports of DDGS be accompanied by an official letter of certification from the USDA that shipments contained no trace of the MIR 162 trait.

-- On Jan. 2, 2015, rumors that China had finally approved the MIR 162 trait began to circulate and the country was again purchasing DDGS.

-- Another crash in the market occurred in late April 2015 on fears China may again restrict DDGS imports because of phytosanitary requirements. The uncertainty caused a small dip in prices to about $174 per ton.

-- On June 19, 2015, China canceled two shipments of DDGS and considered canceling more. Prices plummeted by as much as $30 in about 10 days in some locations.

-- On Aug. 21, 2015, China announced it would require importers to register information regarding shipments of DDGS beginning Sept. 1, 2015.

Todd Neeley can be reached at todd.neeley@DTN.com

Follow him on Twitter @ToddNeeleyDTN

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

Follow her on Twitter @CherylADTN

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Editor's Note: This is the fourth of five articles looking at the growing influence of China on American agriculture. Friday's article will focus on the short-term and long-term outlooks for trade in other major U.S. ag commodities.

(ES/CC/SK)

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