As fall approached, the prospects for a record large corn harvest solidified, resulting in lower corn and ethanol coproduct feed prices. As shown in Figure 1, the price for dried distillers grains plus solubles (DDGS) in South Dakota declined from $206.75/ton to $198.20/ton (as is basis, or moisture included) from August 2 to September 27. Wet distillers grain plus solubles (WDGS) prices dropped from $73.40/ton to $65.40/ton (as is basis). Modified distillers grains plus solubles (MDGS) decreased from $76.00/ton to $65.50/ton (as is basis) during this time period. The price ethanol plants bid for corn during those two months fell from $5.49/bu to $4.50/bu (as is basis). Both corn prices and distillers grain prices are well below year-ago levels as this year's national average corn yield rebounded from 123.4 bu/acre last year to the upper 150's this year.
As cattle feeders evaluate purchases of corn and ethanol coproduct feeds, it is necessary to compare prices on a dry matter (DM) basis because the moisture contents of the feeds vary by product. On average, DDGS is 90% DM while WDGS is 35% DM. MWDG generally has a DM content of 50%. Thus, the as is DDGS price of $198.20/ton translates to $220.22/ton on a DM basis. The $65.40/ton as is price for WDGS is $186.86/ton on a DM basis. MDGS has a DM price of $199.40/ton when the as is price is $65.50/ton. So, on a DM ton basis, WDGS is lowest in price and DDGS has the highest price. This is typical and reflects both the area's production of distillers grains as well as the demand for the products. Ethanol plants in the western Corn Belt states typically don't dry distillers grain to 10% moisture (DDGS) as much as they do in other parts of the country because nearby cattle feedyards can feed the wetter coproducts and it results in an energy savings from drying the feeds less. On the demand side, most MDGS and nearly all WDGS would be fed to cattle. While cattle feedyards also can feed DDGS, they have to compete with the pork and poultry industries, as well as the export market for DDGS. The feeding systems in pork and poultry buildings don't handle the wet coproducts as well (flexible auger tubes) and optimum dietary inclusion levels are usually lower for hogs and poultry compared to cattle. International exports tend to favor DDGS over WDGS and MDGS because it results in transportation of less water.
Note only do cattle feeders compare the prices of the various coproducts to each other on a DM basis, but they also have to compare it to corn prices to create a minimum cost ration. One way to do that is to divide the DM prices above by the DM price of corn (in dollars per ton units). (Since corn is about 15% moisture, it is necessary to adjust corn to DM prices to compare equivalently to the DM coproduct prices.) Doing this results in the price ratios presented in Figure 2. The broken lines show the coproduct prices as a percentage of the corn price in 2013, while the solid lines show the five-year averages.
As shown in Figure 2, seasonally coproduct prices tend to increase relative to corn prices in the fall during harvest. This occurs even as the prices for both corn and coproducts usually decrease in the fall, and results from corn prices dropping more than coproduct prices. As suggested in Figure 1, this fall corn prices are also dropping faster than coproduct prices. Confirmed in Figure 2, coproduct prices relative to corn prices are not only higher than the five-year averages, but they are increasing more than the seasonal averages increase during this time of year. By the end of September, coproduct prices as a percentage of corn prices (DM basis) were over 100%, meaning that coproduct prices were higher on a DM basis than corn prices. Only two months earlier, coproduct prices were 85-90% of corn prices. This 15 percentage point increase in the price ratio typically extends through the end of the fourth quarter of the year.
So, will coproduct prices continue to increase relative to corn prices or was the seasonal increase in the price ratio realized earlier than usual this year? It is most likely that the seasonal increase in the relative price ratio occurred earlier this year. When coproduct prices trade higher than corn prices, the quantity demanded from cattle feeders and other buyers declines. While it is possible for cattle feeders to feed coproducts that are higher priced than corn – due to cattle performance improvements resulting from being fed coproducts – generally it becomes economically infeasible beyond about 110% of corn price. Further, cattle feeders will have access to much larger corn supplies in the weeks ahead as fall corn harvest ramps up. As a result, coproduct inclusion levels in feedyard rations will likely decrease (until coproduct prices decline relative to corn prices) and may even be eliminated for some new fall placements.
At this point, there is little incentive for cattle feeders to lock in coproduct prices at 100-110% of corn prices – assuming that they can purchase corn in the cash market. With the glut of corn harvest yet to come, corn basis levels will likely weaken, presenting an even better corn buying opportunity in the weeks ahead. The one caveat to this is that grain farmers may be unwilling sellers of corn at these price levels that are more than $2/bu lower than a year ago. Further, lower priced corn should improve ethanol plant processing margins and increase production of both fuel and coproduct feeds. As supplies of coproduct feeds increases, prices will eventually decline. So, for now, cattle feeders will likely feed more corn and fewer coproducts.
Source: Darrell Mark
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