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US ethanol margins' notably negative', as DDGs underperform


Returns for US ethanol producers are “notably negative”, the G20-backed Amis said, highlighting the lag in price gains of byproduct distillers’ grains with those of corn, the most commonly used feedstock.


Amis, which is supported by the G20 and eight other countries, said that last month “ethanol and DDGs [distillers’ grains] receipts increased sharply”, with ethanol prices rising 14.6% month on month to $1.49 per gallon, taking them above year-ago levels.


Prices of DDGs, a high protein feed ingredient made as a byproduct of ethanol manufacture, rose by 10.2% to $137.00 per tonne, at measured by an average of prices in Iowa, Nebraska and the eastern Corn Belt.


However, such headway was insufficient to make up for the extent of the jump in values of corn, which Amis pegged at $167.71 a tonne in the region, up 16.7% month on month.


‘Notably negative returns’

“The cost of maize more than offset those gains,” in DDG and ethanol values, “resulting in returns to ethanol production remaining notably negative”, Amis said.


Ethanol producers were last month running at a loss of $0.19 per gallon – more than double the May loss of $0.09 per gallon. In June last year, they were making $0.04 per gallon of ethanol manufactured.


However, while values of corn were 22% higher last month than in June 2018, the gain in ethanol prices was a more modest 8.4%.


Prices of DDGs stood 9.3% lower than a year before.


‘Poor margins’

The Amis comments chime with those of broker Benson Quinn Commodities which said overnight that “margins in the [ethanol] space remain poor, as higher corn values combine with weaker demand for both ethanol and DDGs to limit profitability”.


Official US ethanol data on Wednesday showed the country’s stocks of the biofuel soaring by 1.2m barrels last week to 22.84m barrels.


“This was the highest weekly build since January 2017,” said Terry Reilly at Futures International.


Benson Quinn Commodities said that inventories were “s record large for the period with stocks up 3.95% over year ago levels”.


Export pricing

As for export markets, the US Grains Council reported a narrowing premium of DDGs over corn at Gulf ports, where the grain itself was at priced at $201.1 per tonne last week on an FOB basis - up 24% in two months, and at the highest on data going back two years.


DDGs were priced at $222.0 per tonne at Gulf ports, up 12.1% over two months, and the highest only since March.


The US Grains Council reported the price ratio of DDGs to cash corn at production plants at 88% - ie meaning that DDGs were at a discount.


The two-year average figure is 107%, meaning DDGs typically hold a small premium.


‘Modest buying interest’

The council, which promotes US grain exports, said that “on the [US] export market, merchandisers report modest buying interest from South East Asia”, although there were “several confirmed sales”.


“Merchandisers note mostly quiet interest from Vietnam,” a key market for DDGs, but where the swine herd is suffering an outbreak of African swine fever, raising worries over feed demand.


Still, there had been “a recent uptick in inquiries for July and August delivery”, the council said, noting that “buyers in Indonesia have also made several inquiries for July/August shipment”.


Pressure from soymeal

One key pressure on values of DDGs has been the relatively weak performance of soymeal, a rival high protein feed ingredient, and values of which have not attracted the same degree of fervour as those in grains.


Soymeal futures gained 2.3% over the first half of 2019, a performance in line with that of soybeans, but well behind the 12.1% gain in corn prices.


“African swine fever in China, large US hog supplies and rising soybean prices are weighing on soymeal demand,” Rabobank said.


“US feed demand may rise again, in case China calls for large US pork importers, but so far this has not happened,” the bank said.


Indeed, soybean crush margins in June “collapsed by 50%”, while crush volumes, as measured by data from industry group Nopa, have “shown consecutive surprise declines”.

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