Since late last summer, corn prices have fallen dramatically, but distillers grain prices have not.
"While corn prices at South Dakota ethanol plants have dropped $1.50 per bushel since August 2, dried distillers grains plus solubles (DDGS) prices have actually increased by $1.05 per ton," said Darrell Mark, Adjunct Professor of Economics at South Dakota State University.
Mark added that prices for modified distillers grains plus solubles (MDGS) and wet distillers grains plus solubles (WDGS) have only declined by $13.50 per ton and $6 per ton, respectively.
"The result is that distillers grain prices have increased dramatically relative to corn prices in recent months," he said.
During the week of Christmas, DDGS prices were trading at 138 percent of the corn price in South Dakota, while MDGS and WDGS were priced at 114-115 percent of the corn price (on a dry matter basis). Typically, the price ratio would be around 85-90 percent.
Mark explained that the distillers grain to corn price ratio increases when supplies (production) of distillers grains decreases or demand for distillers grains increases.
"The current increase in the distillers grain to corn price ratio is driven by demand increases, not supply decreases. In fact, good ethanol processing margins in the last two months have led to increases in ethanol production, and consequently distillers grain production," he said.
Since mid-November, estimated distillers grain production has averaged about 12 percent higher than a year ago.
What's driving demand?
Two sources are driving the increase in distillers grain demand.
"First, soybean meal prices have increased almost $55 per ton since harvest, driving up the cost of protein for poultry and swine feed rations. As a result, these industries look for other protein sources like distillers grains to substitute for soybean meal, thereby increasing demand for distillers grains," Mark said.
He added that the second is the fact that export demand for distillers grains has increased substantially, particularly to China.
"Note that both the poultry/swine feeding demand and export demand would be primarily for DDGS (not the wetter MDGS and WDGS products), which has seen the largest price increase relative to corn," he said.
So where does this leave the cattle industry?
With the large drop in corn prices and high distillers grain to corn price ratio, Mark said that cattle feeders have shifted to feeding more corn and less distillers grains.
"A year ago, it might have been common for distillers grains to comprise 30-35 percent of cattle rations (on a dry matter basis). Anecdotal evidence would suggest that feeders have now reduced distillers grains inclusion levels to 10-20 percent of their ration (dry matter basis). Some cattle feeders may not be feeding any distillers grains," he said.
He added that even though distillers grain prices are above the corn price, they can still be profitably used in cattle feeding rations, provided the right inclusion level is used and cattle performance improves enough relative to a corn-only ration.
While research has demonstrated that cattle performance increases are typically largest when distillers grain inclusion levels are 30-35 percent of the ration (dry matter basis), Mark said that it is possible for performance gains to offset higher distillers grain prices at lower inclusion levels.
"Still, it is important to rely on an individual's experience using distillers grains to generate cattle performance improvements, even though numerous university feeding trials have replicated the performance increases," he said.
