US DDG Exports to China in Doubt

OMAHA (DTN) -- The U.S. ethanol and livestock industries are awaiting the next move in a long line of China's attempts to manipulate trade of dried distillers grains. But even if recent rumors are true, many in the industry feel that the reports are merely another attempt by China to control the market, and there has been no immediate reaction in DDG prices.

Reports that China is halting imports of U.S. DDG have been circulating for several weeks. Some news sources reported that Chinese DDG buyers have stopped their purchases, fearing rumors that the government is considering launching another antidumping probe against the U.S.

Melissa George Kessler, director of communications for the U.S. Grains Council, told DTN Wednesday, "We are aware of the reports and are monitoring the situation in D.C. and Beijing along with the team we worked with on the last antidumping case."

China is the largest importer of U.S. DDG and has imported nearly five times more DDG from the U.S. than from any other country. According to statistics from the U.S. Department of Agriculture's Foreign Agricultural Service, China has purchased more than 4.9 million metric tons of U.S. DDG so far in 2015 at a value of nearly $1.3 billion. The next largest importer of U.S. DDG is Mexico, which has purchased about 1 million metric tons at a value of about $232 million. The rest of the top five DDG importers are Vietnam with about 339,051 mt, South Korea with 330,638 mt, and Canada with 304,767 mt.

But while China is a vital market for ethanol producers, trade with that country has been both frustrating and volatile in recent years.

RECENT TRADE HISTORY

Fears of another antidumping probe are well-founded, with memories still fresh from China's antidumping probe announced on Dec. 28, 2010. Four Chinese ethanol producers claim the U.S. allegedly dumped its DDG into Chinese markets cheaper than they could produce it domestically. Chinese importers immediately suspended all purchases of U.S. DDG and the Grains Council coordinated an industry-wide registration process for U.S. companies to respond to the allegations.

While initially the probe did not have a dramatic effect on prices, coming years would bring more trade disruptions with China that had a huge effect on the market.

Most of 2014 was spent in trade disruptions with China, with great volatility in prices as a result. In late 2013, news surfaced that the Chinese government had begun rejecting shipments of U.S. corn after shipments were found to contain the Agrisure Viptera (MIR 162) biotech trait produced by Syngenta Ag. Traders' fears of rejection of DDG shipments soon materialized when DDG shipments were rejected by Chinese authorities right before Christmas and China announced its intentions to test all imports of U.S. DDGS for the presence of MIR 162.

Exports of DDG to China came to an immediate halt, leaving a glut in U.S. supplies that sent prices of DDG plummeting as much as $70 in three days. The continued cease in trade and DDG glut kept prices falling to the lowest levels in nearly two years.

In June 2014, China dropped another bombshell on the industry, announcing it would stop issuing permits for U.S.-produced DDG. This again wreaked havoc on the market and sent DDG prices on an unprecedented downward spiral. Merchandisers reported prices plummeting as much as $45 in one week. In late June, DDG prices reached the lowest level since December 2010 to an average of $125 per ton, a far cry from the high of nearly $300 average reached in July 2012.

In August, yet another announcement shocked the industry, as China demanded that all DDG shipments arriving in Chinese ports be accompanied by an official letter of certification that it contained no trace of MIR 162. Since the U.S. has no such certification and tests for the trait are largely unreliable, the U.S. refused to meet China's demand and DDG trade with China came to a standstill. This caused another nosedive in prices, as spot prices in some markets fell as low as $100 per ton in mid-August and by October fell to a five-year low of just $97 per ton.

By mid-December, rumors that China would approve the MIR 162 trait began to circulate, and on Dec. 22, 2014, after a year or trade disruptions, China announced it had formally granted approval of imports of corn and DDG with the trait. Prices of DDG responded immediately, rising as the announcement prompted trade once again and purchasing began to resume.

In May 2015, reports surfaced that China might be considering restricting imports of DDG, milo and barley, as well as instituting stricter testing for phytosanitary requirements such as pests and pathogens. While the news was not confirmed, the rumors caused prices to DDG to fall slightly in the following days.

Throughout the many trade disruptions, many in the industry believe that China's moves were intended to manipulate the market in order to sell off their huge surplus of domestic corn. The attempts were reported to be especially urgent, as much of China's surplus corn was rumored to be of poor quality.

As a result of all the startling moves by China in recent years, many U.S. traders grew somewhat weary of the dependability of Chinese buyers. While trade with China is vital of the bottom line of many ethanol producers, history has left the industry wondering when the next shoe will drop.

PRICES UNAFFECTED BY RUMORS

Merchandisers told DTN that they have heard the rumors, but have not seen markets react.

Traders at U.S. Commodities told DTN they have heard the same reports, but have not seen any effect on DDG trade in the nearby or out forward.

Other merchandisers commented that China's lowered purchasing has already been priced into the market, so they are not overly concerned unless rejections actually materialize.

Trade with China has already fallen considerably, and with DDG values already low, price levels don't have a lot of room to fall any further, according to Andy Lindsay, territory sales manager at POET Nutrition in Sioux Falls, South Dakota.

"We've already got (China) out of the balance equation," Lindsay said. "We're already roughly 80% the value of corn and it appears we've pretty much bottomed out. For today's market and today's prices, I don't think (DDG prices) are bearish."

In the meantime, good domestic demand has balanced out the lack of export demand and has kept prices from falling further.

Other merchandisers felt the rumors are another ploy by China to manipulate DDG prices. There was some belief that U.S. DDG exporters will not be overly anxious to sell China product until there is confirmation there will not be an anti-dumping lawsuit against the U.S. concerning the country's history.

Many in the industry feel the rumors have not materialized yet, since there has been no effect yet on prices. In fact, while prices traditionally plummet after a move by China, the DTN weekly DDG spot price average actually rose $1 per ton in the past week, From $119 per ton last week to $120 per ton this week.

Some feel that the threats from China stem from the country's anger in recent days over the U.S. conducting more patrols in the South China Sea and China's claims that a U.S. warship illegally entered Chinese territory.

Cheryl Anderson can be reached at cheryl.anderson@dtn.com.

(AG/SK)

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