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Ethanol and Distiller Grain Price Trends Over Time

Ethanol and Distiller Grain Price Trends Over Time
Closeup of grain in hand.

This article was first published by the Nebraska Cattleman magazine.

Introduction

Distillers grains represent a valuable co-product of grain based ethanol production and are produced in one of three forms: 1) dry (DDG) at 10% moisture, 2) modified wet (MWDG) at 50-55% moisture, and 3) wet (WDG) at 65-70% moisture. Cattle operations have used distiller grains as a source of energy and protein in growing and feeding cattle but need to make choices about which type of distiller to feed. Often this choice is some combination of price, transportation, nutrition, storage, and past experience. Understanding price movements between the three distiller grains and corn can help make more informed purchasing decisions. Further, since distiller grains are difficult to hedge compared to corn, understanding these often sudden or inconsistent movements can help understand the tradeoffs between feeding distillers and steam flaked corn.

I assess the distiller grains market in Nebraska using weekly FOD bid level prices for DDG, MWDG, and WDG from ethanol plants reported by USDA Agricultural Marketing Service (USDA-AMS). Using these data from 2012-2019, this I show two main findings: 1) how distiller grain prices relate to corn over time and 2) the spreads between distiller grains. I focus on the distiller grains market post 2012 since this in 2012 ethanol plants started aggressively extracting distillers fundamentally changing the underlying product.  

Distiller Grains Relationship to Corn

Producers have the option to feed corn, distiller grains, hay, and other feedstuffs to cattle. Comparing the price ratio of distiller grains to corn shows the relative premium and discounts. These premiums and discounts should be interpreted in the context of how feed type impacts cattle daily gains and feed conversions. Paying a premium for a higher quality product is not a poor decision unless the premium is more than the value it returns. Figure 1 panel (a) plots the ratio of DDG, MWDG, and WDG to corn in Nebraska from 2012 to 2019 on a dry matter basis. Values greater than one indicate that the distiller grain is more expensive relative to corn. Table 1 panel (a) summarizes the findings from this graph

DDG was priced more than corn 65% of the weeks at an average 8.7% premium. MWDG was priced more than corn 51% of the weeks at a 1% discount. WDG was priced more than corn 62% of the weeks at a 4% premium. Thus, on average producers will pay a higher premium for DDG relative to corn. This is largely because DDG has more uses, can be transported easily, can be exported, and is used in a variety of animal feeds. Given that MWDG is priced about the same to corn on a dry matter basis, the decision between feeding corn and MWDG could be based largely on the relative daily gains and conversions of these two feed types. Paying a premium for WDG is likely to occur given that wet distillers have better energy.

The average premiums vary throughout the year. Across all three distiller grains, premiums over corn stay constant throughout the first quarter (Q1) but decline slightly in March. DDG is has the highest premium relative to corn in Q1 since corn has more uses directly after harvest. There is a steep and rapid decline in the second quarter (Q2). MWDG and WDG are priced at a relative discount. All premiums rise in the third quarter (Q3) and continue to rise in the fourth quarter (Q4). WDG are become priced at a high premium relative to corn.

Price Spreads Between Distiller Grains

Historical price spreads (i.e. difference) between distiller grains should be consistent where premiums or discounts reflect the difference in nutritional content, cost of drying, and other non-market characteristics such as handling and storage. Figure 1 panel (b) plots the price spreads (DDG-MWDG, DDG-WDG, and MWDG-WDG). Further, price spreads are separated into three different parts (seasonality, trend, and unexplained) to determine the factors driving the premium and discounts. Seasonality reflects whether if at certain times of the year price spreads are wider or thinner. Trends reflect general movements over time, and unexplained is the contribution of additional factors other than seasonality and trend. Table 1 panel (b) summarizes this graph and the three components.

DDG was priced more than MWDG 94% of the weeks at a 9.8% premium. The spread declined from 2012 to the middle of 2016 and since then has increased. Seasonality occurs but is generally inconsistent across years and accounts for 13.4% of the premium. There is a large portion of the data explained by movements in the trend of the premium (~60.7%). DDG was priced more than WDG 59% of the weeks at a 4.5% premium. The trend slightly increased from 2012 to 2017, declined rapidly from 2017 to the beginning of 2019 and has risen rapidly since the beginning of 2019. There is a lot of variation in the spread month to month. For example, the seasonality explained anywhere from 8.4% to 56.2% of the variation in premiums. MWDG was priced more than WDG 26% of the weeks at a 5.2% discount. The trend slightly increased from 2012 to 2017, declined rapidly from 2017 to the beginning of 2019 and has risen rapidly since the beginning of 2019. There is a lot of variation in the spread month to month and a large amount of portion of the data which cannot be explained and is attributed to other factors (~ 27.4% to 58.9% between 2012 and 2019).

Summary

From 2012 to 2019 there have been significant short and long term relationships in the Nebraska distiller grains market. In summary, distiller grains are generally priced at a premium to corn reflecting the added benefit to feeding and DDG are generally more expensive given they have more uses. However, since price risk in grains such as corn can be perfectly hedged, consideration should be given on how to manage cattle feed price risk if distiller grains are used.

Table 1. Summary Statistics for Distiller Price and Price Spreads
Probability of Paying Premium Avg. Premium (Discount) Direction [Range] of Premium Over Corn by Quarter
Q1 Q2 Q3 Q4
Prices
DDG 65% 8.7% → [16.9, 12.5] ↓ [15.2, 0.0] ↑ [-2.4, 6.3] ↑ [3.2, 18.5]
MWDG 51% -1.0% → [5.6, 2.9] ↓ [-5.3, -7.4] ↑ [-10.3, -3.8] ↑[-5.2, 5.4]
WDG 62% 4.0% →[12.2, 8.7] ↓ [9.0, -3.9] ↑ [-8.1, 0.1] ↑ [6.3, 10.1]
Probability of Paying Premium Avg. Premium (Discount) Components of Price Spread, Average [Range]
Season Trend Unexplained
Price Spreads
DDG-MWDG 94% 9.8% 13.4 [0, 26.5] 60.7 [51.9, 71.9] 25.9 [19.7, 33.2]
DDG-WDG 59% 4.5% 29.6 [8.4, 56.2] 29.4 [21.4, 37.1] 41.0 [21.2, 54.6]
MWDG-WDG 26% -5.2% 25.4 [2.3, 43.6] 40.2 [29.0, 49.8] 34.4 [27.4, 58.9]
Elliott Dennis

Assistant Professor of Livestock Marketing and Risk Management
Department of Agricultural Economics
elliott.dennis@unl.edu