A twin boost from elevated prices of soymeal and a quirk of Chinese import levies is driving prices of distillers' grains to record premia above corn.
Distillers' dried grains, or DDGs, are selling for March in US Gulf export market at $325 a tonne, the highest in the spot market in nearly a year, according to the US Grains Council.
The increase contrasts with a sharp drop, of nearly one-quarter, in corn export prices over the last 12 months to $220.17 a tonne for March.
The dynamics have turned a feed ingredient regarded initially as a little-regarded byproduct of making corn from ethanol, sold originally to livestock farmers at bargain prices, into a key part of biofuel production margins.
The relative resilience in prices of DDGs reflects in part its status as a substitute protein source in feed to soymeal.
"It is not the greatest protein source in the world," at 20-25%, compared with levels above 40% for soymeal, said Jerry Gidel, chief feed grains analyst at Chicago-based Rice Dairy.
"But it is certainly not a bad one, and worth considering in these kind of markets," which have in the last two years seen spot soymeal futures make only fleeting forays below $400 a short ton ($441 a tonne).
"Given its high nutritional value and often competitive pricing, feeding of DDG can sometimes result in significant cost savings for livestock producers," the International Grains Council said, flagging its use in particular by dairy and beef farms, which account for as much as 85% of consumption.
Demand is being further boosted by Chinese buyers, who use it largely as an alternative to corn, in hog and poultry feed, rather than for ruminants, thanks to pricing benefits afforded by a relatively low import taxation rate.
DDGs, while subject to a 5% import tariff, are exempt from the 13% VAT applied to both corn and soymeal buy-ins, and are not regulated either by a tariff rate quota system.
"Even for Chinese buyers who can get import quota for corn, it is given only in small amounts, meaning a lot of buyers have to band together to get a cargo's worth," IGC economist Nathan Kemp told Agrimoney.com.
Indeed, an extra advantage of DDGs is that it is backhauled to Asia in shipping containers empty after being used to carry exports to the US, so cutting transport costs.
"I have tried and failed to find out how much is carried in containers, but I'll bet it is over 90%," Mr Gidel said.
Furthermore, "being in containers mean you can easily get it to the small guy away from port," he said, adding that it may be an advantage in bypassing China's restrictions on imports of crops containing traces of genetically modified varieties.
China on Friday issued a reminder of these by estimating at 887,000 tonnes it rejections of corn since November.
"It is that much more difficult to test DDGs in containers which may be scattered all over the place than a single boat in the docks," Mr Gidel said.
The IGC said: "While China's authorities have rejected a few cargoes due to the presence of an unauthorised GM trait, there has been relatively little disruption to DDG trade, with customs data showing an acceleration of imports in January."
Exports of DDGs from the US, by far the biggest producer and exporter, to China reached 2.20m tonnes in the September-to-December period, up 325% year on year, and more than shipments to the rest of the world put together.
However, while this is all good news for ethanol plants – for which the grains offer not just a financial lift but a political benefit, in boosting their case as suppliers to the food chain as well as the biofuels industry – there is a risk that they might try to exploit their unexpected DDG windfall a bit too much.
"Almost all US ethanol producers are now extracting non-food grade maize oil, mostly for use in biodiesel production," from corn residues left over after making ethanol, the IGC said.
However, the oil extraction process "changes the feeding characteristics" of these leftovers, cutting the energy content in the resultant DDGs.
"While studies have shown that low-oil DDG remains a useful ingredient, some buyers have expressed concerns that its lower fat content makes it potentially less desirable for feeding monogastrics, such as hogs and poultry."