Economists examine DDGS price risk for ethanol profitability

By Susanne Retka Schill | March 13, 2015

In the current tight ethanol margin environment, strong distillers grains markets have partially offset some of the pressures of the energy market. University of Illinois economists Scott Irwin and Darrel Good examine the key factors influencing distillers dried grains with solubles (DDGS) prices and a potential downside risk in a recent FarmDoc Daily post, “Ethanol Production Profits: the Risk from Lower Prices of Distillers Grains.”

Describing their economic models used to examine price relationships between DDGS, corn and soybean prices and the seasonality, the economists report, “We are moving from a period when prices of DDGS tend to be higher than can be explained by corn and soybean meal prices alone to a period when prices tend to be much lower than can be explained by corn and soybean meal prices. This suggests that over the next few months the ratio of DDGS and corn prices could decline measurably from the current high ratio. With corn prices unchanged, the model estimates point to a decline of about $22.00 per ton in the price of DDGS by June. With prices of other components of ethanol profitability unchanged, that reduction would lower net returns by about 6 cents per gallon of ethanol produced.”

In the analysis, the economists examine the ratio of DDGS relative to corn, which has varied over time and climbed dramatically in the past couple of years. Using an economic model built around a representative Iowa ethanol plant, the economists chart the ratio over the past eight years, finding it ranged for 0.67 to 1.48 and averaged 0.91 from January 2007 through March 2015. The ratio has been well above the long-term average since August 2013, with the exception the recent export trade disruption.

The economists also discuss the seasonality of domestic demand, influenced by the winter demand for DDGS as a forage replacement for beef cows off pasture. They describe the development and adjustments made to a regression model that examines the relationship of corn and soybean meal prices to weekly DDGS prices from 2007 through 2015. “The price of DDGS tends to be $19.92 per ton lower in June than in December,” they found. “The seasonal effect is generally positive in the winter months and negative from April through October.”

While the model has room for improvement in explaining the prices of DDGS, the economists said, “The current model provides valuable new insights as to the seasonal effects on prices of DDGS and those estimated seasonal effects are especially pertinent to the current situation.”