Distillers Grain Price Relationships and Export Developments
AgMRC Renewable Energy and Climate Change Newsletter
By Dr. Robert Wisner, University Professor
Emeritus, Iowa State University
Production of distillers grains and solubles (DGS), the major co-product of the corn-starch ethanol industry, has expanded very rapidly in the last six years with the explosive growth in corn processing for ethanol (Figure 1). Note: in this article we refer to distillers grains and solubles as DGS if it contains non-dried, partially dried, or a mixture of dried and non-or-partially dried distillers grain and solubles. If the product is only dried distillers grain and solubles, we refer to it as DDGS. The U.S. livestock and poultry industry required a time lag in order to develop systems for efficiently transporting, handling, and feeding this product. Feeding of DGS is now widespread in the U.S., especially in the beef cattle and dairy industries. In the last few years, DDGS exports also have grown rapidly as foreign livestock and poultry producers became familiar with its potential cost savings and ways of effectively using it as a replacement for corn and soybean meal. Although the rate of expansion in ethanol production has slowed substantially from the rapid growth of the last six years, further growth is expected in the next few years and continued growth in the markets for DGS will be important for profitable ethanol production. Early projections show a 3 to 4 percent increase for 2010-11.
Evolving DGS Markets
Tightening corn supplies have accompanied the rapid increase in corn processing for ethanol. That in turn has been accompanied by rising and increasingly volatile corn and soybean meal prices. Livestock and poultry producers have been on the alert for any alternative ingredients that may lower their costs. In the early stages of the explosive growth in ethanol production, DDGS prices were quite low and began to attract the attention of the livestock industry, especially large milk producing operations. In the last three to five years, DDGS feeding has rapidly expanded in the rest of the U.S. livestock sector. Future trends in its use will be important to the entire livestock, ethanol, grain and feed sectors. For profitable ethanol production, strong and expanding markets for DGS are important. Profitable ethanol production also is important for grain farmers as well as crop input and marketing firms. Additionally, availability and cost of DGS is of major importance to both domestic and foreign livestock and poultry sectors. Within the last 15 months, China has emerged as a new and rapidly growing DGS market as its livestock, poultry, and aquaculture industries respond to growing consumer demand for meat, dairy, and poultry products. It appears likely to be a significant influence on DDGS pricing.
Composition of Distillers Grains and Solubles
In the ethanol-DGS production process, the starch portion of the corn kernel is converted to ethanol and CO2. This part of the kernel accounts for about 70% of the weight of corn. The products that remain are called distillers grain and solubles. Distillers grains include the fiber and protein portion of the corn kernel as well as some other nutrients. Solubles are materials dissolved in liquid that remains at the end of the ethanol production stream. These can be separated out and used for livestock feed, or dried and incorporated with the distillers grains to produce dried distillers grains and solubles (DDGS). At least three different types of distillers grains are marketed in the U.S. Where ethanol plants are located close to feedlots, a portion of the distillers grains and solubles typically is sold as wet distillers grains and solubles (WDGS) or partially dried DGS that is labeled as modified DGS (MDGS), and is moved directly to cattle feedlots. Wet and modified distillers grains have limited storage life, since they contains 70-75% and 50-55% moisture, respectively(1). Marketing of wet or modified DGS reduces ethanol production costs and energy used in the biorefinery. For beef cattle feeding, it also has feed conversion advantages over dry DDG. Users located long distances from the plants need to purchase dried distillers grain and solubles (DDGS) because of limited storability of the wet and modified versions. When distillers grains is exported, it is dried and sold as DDGS.
DDGS is a medium-protein feed ingredient that replaces corn, soybean meal, and other sources of phosphorus and calcium. Its percentages of fiber, protein, oil, and other nutrients are concentrated to almost three times the percentages found in corn. That’s because these ingredients are not processed into ethanol but are left in the DDGS. High quality corn is important for the ethanol process since mycotoxins or other low-quality foreign substances also are concentrated nearly three-fold vs. corn on a tonnage basis. The quality of DDGS can vary some from one ethanol plant to another, depending on drying temperature and other management factors.
Percentage replacements of corn and soybean meal in rations vary with the livestock or poultry species it is used for. DDGS is best suited for feeding to ruminant animals (cattle, sheep, goats, etc.) The digestive system of these animals allows them to convert DGS fiber into energy while at the same time using the protein and other nutrients. Use of DDGS in hog and poultry rations is somewhat more limited, in part because of its fiber content. When DDGS is fed to these species, supplementation of some amino acids also is needed. Pork producers report that feeding high levels of DDGS during the feeding period can cause soft bellies that in turn cause problems in bacon production. DDGS from ethanol plants that remove corn oil has a higher protein and lower oil content than the typical DDGS, thus somewhat altering its nutritional content and making it more suitable for swine.
Replacement ratios in substituting DDGS for corn and soybean meal vary with the species of animal or bird being fed. Estimated replacement ratios also vary slightly among recent feeding research trials. For typical beef cattle feeding operations in the U.S., one pound of DDGS (dry matter basis) is estimated to replace about 1.1 pounds of corn(2). Very little soybean meal (SBM) is used in typical U.S. beef cattle feeding programs, so for this species, DDGS is mainly a substitute for corn. For dairy cattle, recent research indicates one pound of DDGS replaces about 0.6 pounds each of corn and SBM(3). For hogs, one pound of DDGS replaces about 0.8 pounds of corn and 0.2 pounds of SBM(4). When DDGS is fed to poultry, the replacement ratios appear to be about 0.6 for both corn and SBM. In addition, recommended maximum DDGS percentages of the ration for swine and poultry are considerably lower than for cattle because of differences in their digestive systems(5). Recent research indicates DGS can be fed successfully to beef cattle at very high levels, of over 50% of the ration.
Because of the substitution ratios that vary by species, aggregate replacement of corn and SBM by DDGS depends on the market share being fed to the various species. Aggregate current national data on shares by species in the U.S. is not available from government sources, but indications from the ethanol industry are that beef cattle are the largest market for DGS by a considerable margin, followed by its use for dairy cows, hogs, and poultry in that order.
For DDGS that is exported, less information is available on percentage shares of use by species but on average, significantly less is used for beef than in the U.S. and a relatively higher percentage is believed to be used for poultry and hogs. Thus, DDGS exports are believed to replace relatively more SBM and relatively less corn on a percentage basis than in the U.S.
Price relationships vs. corn and soybean meal
Figure 2 shows the marketing year DDGS prices at Lawrenceburg, Indiana as percentages of the U.S. average farm price of corn since 1980. As ethanol and DGS production has expanded, DDGS prices have trended upward relative to corn. The upward trend shows the market impact as the U.S. livestock sector discovered the value of DGS as a replacement for corn.
Figure 3 shows daily corn and DDGS prices at western Iowa ethanol plants from October 2006 through late 2009. DDGS prices have a strong tendency to follow trends in corn prices, but not in an exact one-to-one relationship. Also, for long periods of time, DDGS prices have been below those of corn. With the DGS-corn substitution ratios noted above that indicate one pound of DGS replaces more than one pound of corn in cattle feeding, this has been an important source of cost saving for beef cattle feeders. For other livestock and poultry, potential cost savings vary, depending on the price relationships between both corn and soybean meal.
Figure 4 shows daily DDGS prices as a percentage of corn prices in western Iowa over this same period. Note the strong seasonal tendency for DDGS prices to move above corn prices, mainly in the late fall and winter months. The emergence of cold weather increases the length of time DGS can be stored, thus extending its potential market to smaller livestock producing operations where utilization of truck-load delivery of DGS would not be feasible in warm weather because of storability issues. Also during this period when pastures are not available, many beef cow-calf producers use DGS to supplement feeding of roughages. As indicated in Figure 4, during the seasonal high price periods, DDGS prices have been 100 to 110 percent of corn prices. This price premium over corn indicates that livestock feeders were bidding most if not all of the value of DDGS into its prices.
Figure 5 shows the relationship of DDGS prices at Lawrenceburg, Indiana to Soybean meal at Decatur, Illinois since the 1990-91 September-August marketing year. In contrast to the DDGS/corn price ratio, over this period, DDGS prices have trended strongly downward as a percentage of Soybean meal prices as the supply increased. In 1990-91, DDGS was priced at about 75% of the price of SBM. By 2009-10, it had declined to less than 40% of the value of SBM. Its actual value in livestock and poultry feeding depends on the species being fed to as well as the cost of synthetic amino acids and other factors that can vary over time.
Distillers Grain Exports by Destination
Along with U.S. livestock and poultry feeders, their counter-parts in some foreign countries have begun to take advantage of potential feed cost savings from DDGS. Currently, it appears that about ¾ of the U.S. DGS supply is used domestically, with the remainder exported. Initially, the largest export markets for DDGS were the nearest ones, namely Mexico and Canada. However, other significant DDGS export markets have begun to emerge as shown in Figure 6. Figure 6 is based on U.S. Census of Manufacturing export data. The Census reports these data as brewers grains and distillers grains exports. Thus, the data include a small amount of other by-product feeds from the fermentation industry, although most of the exports are DDGS. The most significant of these emerging markets is China, which during the last 15 months has become the largest foreign buyer of U.S. DDGS. China’s consumer demand for more animal, poultry and aquaculture products is growing rapidly. It is generally expected that the Chinese market will increase further in the years ahead, thus becoming a potential influence on DDGS prices and availability for other users.
Summary & Conclusions
The explosive expansion in the U.S. corn-starch ethanol industry in the last few years has generated significant changes in livestock rations as the U.S. animal and poultry feeding sector sought feed cost savings by substituting DDGS for corn. DDGS is especially well suited for ruminants, mainly beef and dairy cattle. For beef feeding, it substitutes primarily for corn, while in dairy rations as well as in swine and poultry feeding, it substitutes for both corn and soybean meal. The increasing DDGS price as a percentage of corn prices and decreasing percentage of soybean meal prices suggests that the strongest source of demand for DDGS is as a corn replacement.
Initially, the major demand for DDGS was in domestic feed markets. However, in the last few years livestock and poultry producers in several foreign countries, especially Mexico and Canada, have discovered the potential cost savings from DDGS. In the last 15 months, China has emerged as the largest foreign market for DDGS. China’s very large imports of soybeans and rapidly growing livestock-poultry-aquaculture sector imply that significant further growth in its demand for DDGS may occur in the next few years.
Distillers grains prices show a significant seasonal pattern in relation to corn prices. Increasing demand for DDGS during late fall and winter months has tended to increase the price of DDGS as a percentage of corn prices during that part of the year.
1 USDA Agriculture Market News Service, Iowa Ethanol Report
2 For example, see Tjardes, K., and C. Wright. 2002. “Feeding Corn Distiller’s Co-Products to Beef Cattle.” Extension Extra 2036, August 2002, College of Agriculture & Biological Sciences and USDA Cooperative Extension Service, South Dakota State University and Klopfenstein, T. J., G.E. Erickson, and V.R. Bremer, 2008. “Board-Invited Review: Use of Distillers By-Products in the Beef Cattle Feeding Industry,” Journal of Animal Science, first published on December 21, 2007, as doi: 10.2527/jas.2007-0550.
3 See Anderson, J.L., D.J. Schingoethe, K.F. Kalscheur, and A.R. Hippen. 2006. “Evaluation of Dried and Wet Distillers Grains Included at Two Concentrations in the Diets of Lactating Dairy Cows,” Journal of Dairy Science. J. Dairy Sci. 89:3133–3142.
4 See Shurson, G.C., M.J. Spiehs, J.A. Wilson, and M.H. Whitney. 2003. “Value and use of ‘new generation’ distlller’s dried grains with solubles in swine diets.” Presented at the 19th International Alltech Conf., Lexington, KY. May 13, 2003. Conference Proceedings for Swine
5 See Berger, Larry L. and Darrel L. Good. “Distillers Dried Grains Plus Solubles Utilization by Livestock and Poultry,” Chapter 6 in Corn-Based Ethanol in Illinois and the U.S.: A Report from the Department of Agricultural and Consumer Economics, University of Illinois, November 2007 as well as Lumpkins, B.S., A.B. Batal, and N.M. Dale. 2004. “Evaluation of Distillers Dried Grains with Solubles as a Feed Ingredient for Broilers,” Poultry Science. 83:1891-1896.