The Disconnect Between DDGS Price and Value
For most people, price and value mean the same thing. But from a nutritionist or livestock and poultry producer point of view, they are very different. In fact, this disconnect between price and value of distillers dried grains with solubles is one of the primary reasons why DDGS has become the most popular alternative ingredient in animal feeds at a time of record high corn and soybean meal prices.
When it comes to marketing DDGS, our current system treats DDGS like all other commodities. When negotiating price and contracts, marketers usually provide guarantees for minimum protein/fat and maximum moisture and fiber. These trading specifications mean very little, however, when it comes to determining the actual value DDGS provides in animal feeds. Nutritionists determine value not only on purchase price, but also on the concentration of energy as well as digestible amino acids (protein) and phosphorus, dietary inclusion rate and the displacement of more expensive ingredients. The DDGS disconnect is that value is based on energy and digestible nutrient content, and not pro/fat.
Since DDGS is used primarily as an energy source in animal feeds, it follows the market price of corn—the primary grain energy source in animal feeds— more closely than soybean meal price, even though DDGS is moderately high in protein. Numerous research studies have shown that the energy value of wet distillers grains provides 120 to 150 percent of the energy value of corn for beef feedlot cattle, approximately the same energy value as corn for swine, and about 85 percent of the energy value of corn for poultry. When we also take into account that protein (amino acids) and phosphorus (the other two most expensive components of animal feeds) are three times more concentrated in DDGS compared to corn, it is surprising that DDGS has been priced at 75 to 85 percent of the value of corn for much of the past couple of years. Livestock and poultry producers are getting an excellent value for the price they pay for DDGS.
But this is not the end of the story. Variation in energy and digestible nutrient content among DDGS sources also creates additional value opportunities for those who feed DDGS. Depending on prices of competing ingredients, such as corn, soybean meal and inorganic phosphate supplements, there can be as much as a $60 per ton difference in feeding value between a high-value DDGS source vs. a lower-value DDGS source, even though both sources are priced the same. This means that nutritionists have the opportunity to capture this extra value by knowing the source and accurately estimating the energy value and digestible nutrient content. Since no DDGS value standards exist, marketers are unable to capture part of this value difference under the current pricing mechanisms used.
Value of distillers coproducts is also determined by the animal species because of the different abilities of their digestive systems to utilize nutrients. For example, typical DDGS containing 10 percent crude fat will always be a higher value in ruminant diets than in swine and poultry because of ruminants’ ability to extract more energy from the fiber fraction and their ability to use the nitrogen in the protein to make customized microbial protein to meet the animal’s needs. Pigs and poultry must rely on the digestible portion of lysine and other essential amino acids. Extracting a portion of the oil from DDGS makes good economic sense for ethanol plants, but it changes the value of DDGS for different species. Our preliminary research results indicate that the impact of oil removal on energy value for swine is about half of the reduction in energy value for poultry. This creates even greater value differences among animal species than we’ve experienced in the past.
As ethanol plants evaluate the economics and ethanol production efficiency advantages of separating other components such as fiber or phosphorus, some of those components may have minimal value and use in some segments of the food animal industry. We will likely see market differentiation where only some segments of the food animal industry will use the new coproducts, while other segments will either not use them or only minimally, depending on price. Therefore, as coproducts continue to evolve in the ethanol industry, it will be increasingly difficult for marketers to use traditional pro/fat guarantees and pricing mechanisms because of the growing disconnect between price vs. value. One last thought to chew on: Will the net value of the parts be greater than the whole?
Author: Dr. Jerry Shurson
Professor, Department of Animal Science
University of Minnesota