China’s tariffs on U.S. imports of ethanol byproduct leave hole in market

Source: By Russell Hubbard, Omaha World Herald • Posted: Friday, April 14, 2017

Concerns over an expensive trade spat with China have come true and crushed U.S. shipments of a cattle feed that is one of the top exports of Nebraska and Iowa.

The product is called dried distillers grains — the fat, protein and fiber that is left over after the starch is removed and corn is distilled into ethanol. Nebraska and Iowa, as the nation’s top two ethanol producers, churn out mountains of the stuff that is prized by cattle feeders worldwide because it keeps and ships well and heifers, steers and other livestock lap it up with gusto.

But the largest buyer — China — has dried up. Exports to the world’s second-largest economy by gross domestic product fell 70 percent from September 2016 through February, according to the U.S. Grains Council, an industry trade group.

The reason: the kind of international trade tiff that erupts from time to time over many types of commodities. In this case, China last year started objecting to imports of the U.S. grains, saying they were being sold below the cost of production, a violation under international trade law called dumping.

The Chinese Commerce Ministry, in a bid to protect domestic producers of the cattle feed who are benefiting from a record Chinese corn crop, in January imposed tariffs as high as 54 percent on U.S. imports, saying they are so cheap because of U.S. government subsidies. The U.S. ethanol industry calls the claims bogus.

“It is all false,” said Todd Becker, chief executive of Omaha-based ethanol producer Green Plains, the second-largest in the world. “They have some strange policies in place right now, but the fact is, China is now closed off to U.S. dried distillers grains at this point.”

The upshot is that U.S. producers such as Green Plains — the company has annual production capacity of 1.5 billion gallons of ethanol and 4 million tons of distillers grains — are scrambling to replace the business. Other major ethanol producers among the 25 in Nebraska and 42 in Iowa include Koch Industries, Cargill and ADM.

And they are a little jittery. China’s U.S. imports for the 2016 crop year were 1.84 million tons, almost double that of the next largest buyer, Mexico. And just four years ago, China’s U.S. purchases topped 6 million tons.

So far, the industry is putting on a brave face. The U.S. Grains Council says exports of the cattle feed to the rest of the world have more than made up for the China loss, with recent shipments up 3 percent from a year earlier.

“The rest of the world has taken what China has not,” said Mike Dwyer, chief economist at U.S. Grains, speaking Thursday at the Nebraska Ethanol Board’s annual conference in Omaha, where attendees included Gov. Pete Ricketts and the China situation was a hot topic.

The stanched flow of the grains — they look like any ground grain-meal product and are said to taste somewhat like a johnnycake — started before the administration of President Donald Trump, who has been critical of China’s trade policies and vowed that the United States isn’t going to take it anymore.

But Ricketts told the conference attendees at the La Vista Conference Center that the appointment of Iowa Gov. Terry Branstad as ambassador to China leads him to believe that the trade dispute will be ironed out — Branstad is an outspoken advocate for all things ethanol.

“China is one of those trading partners you have to work at,” said Ricketts, who last year conducted his administration’s second trade mission to the Asian nation touting Nebraska’s output.

But for now, the cattle feed known as DDGs in the biz are verboten in China, and that has caused a secondary effect. With China out of the market, there is a surplus, and in the textbook supply-and-demand scenario, that means producers are getting rock-bottom prices. Nebraska and Iowa plants have been quoting spot prices in recent weeks of $100 per ton, down 13 percent from a year ago and 40 percent from April 2015.

“You can watch the steep price drop when China stops buying,” said John Campbell, an investment banker at Omaha’s Ocean Park Advisors, who specializes in ag commodities. “China is critical to demand, and now those DDGs wind up back into the domestic market.”

The rise of DDGs as animal feed — the United States produced about 4 million tons in 2008 and now is surpassing 12 million — coincides with that of ethanol. Production of the motor fuel and motor fuel additive — derided by some as low in energy content, bad for small engines and an ersatz answer in search of a question — was spurred by federal law last decade requiring the blending of certain amounts with clear gasoline. That has amounted to about 14 billion gallons a year in recent years that has wound up in U.S. gas tanks, mostly as part of the 10 percent blend known as E10.

Most ethanol is shipped via freight train to blending terminals around the country. One of the major haulers, Texas-based BNSF Railway, says volumes began jumping after 2010, when it became economical to group ethanol tankers into unit trains, the industry term for those of about 100 cars or more all hauling the same commodity.

“BNSF has seen an increase in the movement of ethanol in unit trains over time driven by market demand and customer investments,” said John Miller, the railroad’s vice president for ag products. “In 2010, we were moving approximately 45 percent of our ethanol shipments in unit trains. That number increased to 68 percent by the end of 2016.”

And it is all slated to grow, as getting more ethanol in the U.S. gas tanks — the Environmental Protection Agency wants 15 billion gallons of corn-based ethanol blended this year — will require higher concentrations, such as E15.

And with the enhanced ethanol production will probably come more of the cattle feed in search of additional customers.