Provided by South Dakota State University
Distillers grain prices reached record high prices this summer due to both supply and demand factors that have largely resulted from the drought, says Darrell Mark, adjunct professor of economics at South Dakota State University during a recent iGrow Radio Network interview.
"The widespread drought has significantly lowered corn production for 2012, which has driven corn prices to record high levels," Mark said. "As an input to ethanol production, these high corn prices have generated deeply negative margins for ethanol plants and have caused many to reduce production or shut down altogether. This reduced ethanol production correspondingly lowers distillers grain production because ethanol fuel and distillers grains are produced in fixed proportions. Thus, supply of ethanol coproduct feeds has declined this summer."
He adds that on the demand side, livestock producers have bid up prices for distillers grains as they try to substitute it for drought-scorched pastures, record high hay and corn prices and limited availability of most feedstuffs.
"Interestingly, the slight pullback in South Dakota distillers grain prices in the last three weeks is likely due to the availability of silage that was cut in large quantities due to the drought," he said.
Mark says the outlook for distillers grain prices going ahead will be highly dependent on the corn market.
"That, of course, is quite uncertain and highly volatile and will remain so until final yield estimates are available," he said. "Some early yield estimates across the Corn Belt have sounded disappointing, but some have been better than expected too."
USDA's September crop production report only reduced national yield by 0.6 bushels per acre from its previous forecast.
"This was seen as somewhat bearish to the market," said Mark, "but it might be the type of weakness to use to price two or three months of feed needs. Then see what harvest yields are before making more purchases."
Mark points out that even at current price levels, there is some demand destruction occurring, which increases the potential for lower prices. It would take additional large reductions in corn production to spur the market much higher, he adds.
"Any decision to contract distillers grains now, at near record prices would be done with the belief that prices could move still higher," he said. "While that could certainly happen, usually there is more downside possibility when prices of a commodity are at near record high prices. Still, if current prices offer an acceptable feeding margin, locking in distillers grain prices could be prudent risk management for some producers."
For more information on this topic and to hear the iGrow Radio Network interview with Mark, visit iGrow.org.