April 01, 2008
by Arvin Donley
The U.S. Department of Agriculture (USDA) is forecasting a record $101 billion in agricultural exports from the United States in 2008. Included in that forecast is an anticipated surge in the export of dried distillers grains and solubles (DDGS), an ethanol byproduct that continues to gain global market share as an animal feed product.
Since the U.S. Grains Council (USGC) began working on DDGS export marketing in 2002, the value of DDGS exports has increased nearly 500% from $76 million (770,589 tonnes) to approximately $400 million (2.1 million tonnes) in 2007.
"In 2006, the Council’s Board of Directors made DDGS export promotion its top priority worldwide," said Daniel Keefe, manager of International Operations-DDGS for the USGC. "We have now completed DDGS export marketing programs in 10 countries."
Keefe, who spoke about DDGS in February at the 79th annual Grain and Elevator Processing Society (GEAPS) Exchange in Omaha, Nebraska, U.S., said between January 2007 and October 2007 alone, exports rose more than 83% compared to the January-November period in 2006.
Among the U.S.’s biggest DDGS customers are:
• Mexico, which imported 367,386 tonnes in 2006, a 186%
increase over 2005;
• Canada, which imported 270,176 tonnes in 2007, a 141% increase over 2006;
• The European Union (E.U.), which imported 247,706 tonnes in 2007, an 11% increase over 2006;
• Taiwan, which imported 120,295 tonnes in 2007, a 46% increase over 2006.
In addition to these more established markets, the USGC has made inroads in countries such as Morocco, which imported 54,000 tonnes in 2007 and is described by the USGC as having the potential to bring in 200,000 to 600,000 tonnes in the near future, and Egypt, which imported 32,200 tonnes in 2007 after importing just 6,400 tonnes in 2006. There’s also a promising export outlook for Iraq, where the USGC has focused on rebuilding the poultry industry by strengthening the country’s poultry associations.
But Keefe said the bulk of the unmet future demand lies in China and India, mainly because of the potential to transport DDGS in large shipping containers that are being returned from the U.S., which is the largest importer of containerized goods from these two countries.
A 2007 study by Informa Economics on transporting DDGS to Asia compared various supply chain systems and the relative costs to the major Asian destinations. The study, which was commissioned by the USGC, found that the least costly system would involve loading the DDGS from an ethanol plant into a rail car heading for the west coast, where it would be loaded onto an ocean vessel.
"The total cost in this scenario (was) as low as $105 per tonne when it was delivered all the way to the destination port in a container and where one small- or medium-sized feed mill could buy it directly from the DDGS exporter," said Keefe, noting that many U.S. ethanol plants are located along major rail lines leading to the west coast. "When you compare this to loading it on a truck or rail, then to a barge, and then to bulk ship to the same Asian destination, you almost always come up with a higher cost and lower net back price to the ethanol plant."
Another Asian country that could significantly increase its DDGS imports in the near future is Japan, which currently imports 100,000 tonnes of DDGS but has the potential to import more than 2 million tonnes, according to Keefe.
DOMESTIC DDGS DEMAND Since DDGS is a byproduct of ethanol, predicting future DDGS output requires looking at U.S. ethanol production projections.
"It seems that most of the forecasters anticipate between 14 and 16 billion gallons of ethanol to be in production by the year 2015," Keefe said. "The bulk of that jump in production is expected to occur in the next three to four years."
Pro Exporter, which provides economic research and analysis to agribusiness firms, forecasts DDGS production in the U.S. to reach about 18 million tonnes in the 2007-08 crop year, and then jump to about 25 million tonnes for 2008-09, with about 10% of that figure going to exports.
"There are two views on the potential of future DDGS exports," Keefe said. "One view is that exports will climb along with DDGS production over the next eight years and another view is that they will flatten out at about 4 to 5 million tonnes. I subscribe to the former.
"The main reason that I am more inclined to think that DDGS exports will increase with production is that there are freight costs to Asia that are actually lower than some of the U.S. domestic feed market delivery freight costs, and therefore these make DDGS very attractive in some of our export markets in Asia, including, in the near future, China and India."
Another projection from USDA shows feed demand for DDGS in the U.S. rising dramatically from about 15 million tonnes in 2006-07 to more than 35 million tonnes in 2009-10, then remaining at around 35 million tonnes through 2016. It also assumes exports at around 4 to 5 million tonnes.
Keefe described the USDA numbers as "a rather ambitious view of how much DDGS can be absorbed by the U.S. market."
Keefe noted that DDGS commonly replaces a big percentage of corn (maize) in many animal diets. He said most companies that trade DDGS for domestic or export have used corn prices as a guide to hedge their DDGS positions due to the close price relationship.
"Therefore, if we assume the close relationship with DDGS and corn in animal feed, we should assume similar consumption patterns," he said. "In the case of corn, USDA is projecting a growth in export demand looking forward to 2015, so why would they not predict similar growth in DDGS exports for the same underlying reasons?"
SOYBEAN MEAL COMPARISON To try to find another major processed vegetable protein source used for animal feed to base future DDGS export projections on, Keefe looked at soybean meal.
Compared to DDGS, soybean meal has higher protein content, is slightly denser and is digested more easily, but it has less fat value.
He noted that soy processors are producing about 40 million tonnes of soybean meal and exporting 7 to 8 million tonnes, which is already higher, according to some analysts, than the amount of DDGS that will be exported assuming the same 40 million-tonne production number.
Soybean meal has fierce competition from South American exporters, often discounting it as much as $60 per tonne below U.S. gulf values. This is not true for corn exports and corn substitute ingredients, however.
DDGS compares favorably in that it has been successfully pelleted to reduce the stowage factor, has a high fat value, has lower import duties in many countries than soybean meal, and has certain freight efficiencies to markets such as China, India, Mexico and Canada.
Taking all of this into consideration, Keefe said he believes DDGS exports will be very competitive with soybean meal exports in the coming years.
"USDA is projecting steady growth in the world soybean crush. Most of the growth is occurring in importing countries like China," Keefe said. "If this is true, and DDGS is able to be imported at a lower import duty than soybean meal, fats or soybeans, then you should logically conclude that DDGS will take a share of that projected demand growth for proteins and fat. If you assume conservatively that DDGS could capture even 10% of that demand, it would be about 24 million tonnes of additional global demand."
EXPORT BARRIERS Although more DDGS is on the export market than ever before, there are numerous obstacles that must be overcome, Keefe said. They include:
• Demand for DDGS is keeping up with supply, so stocks are low and premiums remain relative to corn;
• With more ethanol being produced using GM corn, the biotechnology issue remains a major barrier to trade in Europe and several other markets.
• Complaints from importers that the quality of DDGS varies significantly from supplier to supplier;
• High bulk freight prices;
• Because it is a relatively new feed product, some buyers know little about it or how to use it;
• Storage issues, including that a separate, flat storage space is needed for DDGS.
Keefe said the USGC has responded to some of these concerns with a massive educational campaign that has included the organization of an International DDGS Conference in October 2007; commissioning a transportation study; producing a DDGS User Manual (found at www.grains.org); and conducting in-country feeding trials with potential buyers. WG