SD sees strong corn basis, distillers grains prices move up

By Susanne Retka Schill | June 21, 2012

The expected seasonal decline in distillers grains prices isn’t happening this year, said Darrell Mark, adjunct professor of economics at South Dakota State University, with one of the biggest reasons being the slowdown in ethanol production due to tight corn supplies, high corn prices, and poor ethanol crush margins. In particular, the corn basis has been unusually strong this year.

“Typically in South Dakota we see a negative basis,” Mark said. “We’re used to seeing on average 25 cents under at this time of year. Ethanol plants in eastern South Dakota have been buying grain with a basis of around 30 cents over July futures.” 

Cash corn prices follow futures market fluctuations, with basis being the difference between the nearby future price and the local cash market. When supplies are adequate, basis generally accounts for transportation costs. When corn is in demand, the basis strengthens, even to the point of moving positive this year as corn buyers try to coax grain out of farmers’ bins.

Mark said that in recent days he’s seen evidence that ethanol producers have bought much of their corn needs through July. “I’ve noticed basis weakening the last few days,” he said. Plus, some are starting to switch their bids to follow September futures. But with bumper corn crop projections being tempered over weather concerns, the basis on some September-based bids has been as high as 90 cents over. However, much of the difference between the July and September basis bids reflects the sharp inverse between the two futures contracts.

The impact of the strong basis, tight corn supplies and tight ethanol margins is showing up in distillers grains pricing. "The average price for dried distillers grains plus solubles (DDGS) in South Dakota increased about $3 per ton during each week of May although it did moderate some in the first two weeks of June,” Mark said. “While domestic demand from the cattle industry is not substantially deviating from normal seasonal trends, several other supply and demand factors have driven the price increases in recent weeks and are likely to continue through the summer months.

"With high corn prices, ethanol producers have struggled to maintain margins, and are finding incentive to run at reduced capacity and shut down plants for longer periods of time for maintenance, etc.," Mark said. "Doing so can lessen their losses, but it does reduce the amount of distillers grain produced as well. Thus, with lower supply of distillers grains, prices tend to rise, as have been seen throughout 2012."

Mark points out that this price increase presents an important logistical concern for cattle feeders when it comes to securing physical supply of distillers grains. "With extended plant shutdowns and lower market supply, cattle feeders need to be certain that they can obtain the product they need for their rations," he said. Mark encourages livestock producers to discuss this issue with their current distillers grain suppliers and understand their plant production schedule. He also suggests they purchase product from two or more plants to help offset risk associated with losing distillers grain from one particular plant.

Similarly, Mark advises ethanol producers to proactively communicate with their feed customers. “For the ethanol producer marketing this coproduct, be very transparent about what you’re doing and if you are planning a shutdown.” For those who operate multiple plants or have sister plants, making arrangements for alternate suppliers during a shutdown can go far in maintaining good customer relations.

In his analysis for SDSU’s iGrow.org, where his regular market analyses are broadcast and posted, Mark went on to describe how the dynamics of the soybean meal market fit into current market dynamics. "While soybean meal and distillers grains are not one-for-one substitutes from a nutritional standpoint, many livestock rations can be adjusted to some degree to replace some high priced soybean meal with distillers grains," he said. "Doing so increases the demand for distillers grains and increases prices, as have been observed in the last couple of months." He points to a drop in South American soybean production due to drought conditions as one of the primary drivers to the sharp increase in soybean meal prices (more than $100 per ton since January).

Export demand is another factor supporting distillers grain prices, Mark said. While export demand for distillers grains could remain for some time, he expects the impact of the high old crop corn prices and soybean meal prices to lessen by early fall as U.S. corn and soybean supplies become available.

"With the prospects for a record large corn crop and lower prices, ethanol production is likely to increase this fall as margins improve, thus increasing distillers grain production," he said. "And, once U.S. soybean supplies are available to compensate for reduced South American supplies, meal prices will moderate to some degree as well."