Tuesday, August 14, 2012

China’s Market for Distillers Dried Grains - USDA ERS Outlook Report

2012 USDA ERS Outlook Report  - "China’s Market for Distillers Dried Grains and the Key Influences on Its Longer Run Potential"  

Summary of Conclusions

China’s robust demand for feed ingredients makes the country an important market for U.S. Distillers Dried Grains (DDGS) exports, but the volume of U.S. DDGS exported to China in the future is highly uncertain. A key constraint on future growth may be prospects for slower expansion in the supply of U.S. DDGS during the coming decade, as growth in the volume of corn-based ethanol produced is expected to slow. According to the latest USDA baseline projections to 2021, total U.S. corn used for ethanol is forecast to increase from 128 mmt in 2010/11 to 139 mmt in 2021/22, compared with growth of 112 mmt between 2000/01 and 2010/11 (USDA/OCE, 2012). This moderation of growth reflects slower expected increases in blended gasoline consumption in the United States and constraints in the market for ethanol blends above 10 percent (E10), including approved E15 and E85 blends (USDA/OCE, 2012). Based on this projected level of ethanol output, U.S. DDGS supplies will likely expand, but at a much more subdued rate than in recent years.

It is possible that the volume of U.S. DDGS available for export will decline if U.S. domestic use of DDGS increases in the future. DDGS has become an important component of U.S. livestock rations, and domestic feed use is unlikely to fall substantially from an estimated 29 mmt in 2010/11.[18] The projected increase in U.S. meat consumption and exports over the next decade could also result in further increases in domestic demand for DDGS (USDA/OCE, 2012). Therefore, it is possible U.S. domestic use of DDGS could expand faster than production, but this will depend, in part, on the relative availability and prices for corn and soybean meal.

U.S. DDGS supply constraints aside, relative prices and transportation costs will likely have the biggest influence on the destination of U.S. DDGS exports in the future. High transportation costs of DDGS and integration of feed and livestock sectors in the North American Free Trade Association region favor nearby markets—such as Canada and Mexico—over Asian markets.[19] On the other hand, high feed prices and robust domestic demand in other countries could push DDGS export sales toward other growth destinations in Asia besides China, such as South Korea, Vietnam, and Thailand.

Use of imported DDGS in China is a relatively new phenomenon and limited to a few relatively small feed mills in coastal provinces. The cost advantage depends in large part on trends in U.S. and China corn prices including tariffs and taxes. If China’s corn prices continue rising, feed mills and livestock producers will face continued pressure to find cheaper feed ingredients like DDGS. In the United States, DDGS and corn prices tend to be closely related, so a decline in U.S. corn prices relative to Chinese corn prices would tend to make both U.S. corn and DDGS more price-competitive in China.

Chinese policy treatment of DDGS is uncertain as officials balance the priority of expanding feed supplies against domestic corn-processing industry interests. Favorable trade treatment of DDGS is an important factor that spurred the import of DDGS. However, the antidumping investigation against U.S. DDGS reflects the competing interests of livestock producers and domestic suppliers of DDGS (China Corn Net, 2011). DDGS imports affect only a relatively small number of alcohol producers in China, but industry sources indicate that policymakers and industry members are averse to imports gaining a dominant share of any industry (Nongcai Baodian, 2011).[20] The antidumping investigation was terminated in 2012, suggesting that concerns about feed costs prevailed over alcohol industry interests. At the same time, Chinese officials have sharply reduced subsidies for domestic fuel ethanol and implemented other policies to constrain growth in domestic alcohol production that would restrict domestic supplies of DDGS and other co-products that compete with imported DDGS.

China’s feed demand is expected to expand rapidly over the next 10 years. USDA’s baseline projections to 2021 project that feed and residual use of corn will expand from 124 mmt to 172 mmt and soybean meal consumption will rise from 43 mmt to 73 mmt. This expansion in feed use is driven by a livestock sector shifting from backyard to commercial production, which will likely utilize more corn and soybean meal and fewer inputs such as household and processing waste, crop by-products, vines, tubers, and other forages.

Feed demand in China will remain robust, but future DDGS sales to China depend on the economic value of U.S. supplies compared with alternative raw materials including domestic and imported corn. DDGS from the United States are one of many sources of raw materials supporting China’s growing commercial feed production (imports of DDGS were equivalent to roughly 2 percent of feed output during 2010). In an environment of rising costs, Chinese feed mills will continue to seek out cost-minimizing raw materials. If DDGS sales to China are restricted by rising prices or other factors, Chinese demand will shift to other raw materials: corn, wheat, other grains, oilseed meals, and other milling and processing co-products. The emergence of China’s DDGS imports is a reminder that feed supplies come from diverse sources, and demand is price-sensitive.


[18] DDGS appears to have substituted for direct use of corn and soybean meal by livestock producers following the expansion of ethanol use of corn. See Hoffman and Baker (2011).

[19] Some have claimed that as transport cost becomes a major consideration, it will favor importing feed nutrients in the form of DDGS rather than corn because the density is magnified by three times in the former. Supply constraints aside, the substitution of DDGS for corn depends on many factors and further research is needed to answer this question. Handling advantages for corn could partly offset gains from nutrient concentration in DDGS.

[20] The soybean industry is dominated by imports, and commentators warn that rising imports of DDGS and other commodities could lead to a similar reliance on imports.

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