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CME: DDGS Prices Hold Value

by 5m Editor
16 May 2008, at 12:24pm

US - CME's Daily Livestock Report for 15th May 2008.

The sterling tale of government efficiency that is Mandatory Price Reporting entered another chapter today as AMS published the final rule for the re-authorization of the Livestock Mandatory Reporting Act of 1999.

That act expired on September 30 2005. It took Congress over a year to actually re-authorize the program (October 2006)and then has taken USDA another 17 months to get the rules written and pushed through the GAO and other agencies. So, after all of that we will again have a “mandatory” Mandatory Price Reporting system on July 15 and it expires again on September 30, 2010. Sounds like a well-oiled machine doesn’t it? Let’s hope this doesn’t repeat itself in 2 years!

To our knowledge, all steer, heifer and hog packers have kept reporting the same data even when it was not legally mandatory to do so. That’s especially important for traders of CME Lean Hogs since the Lean- Hog Index is computed from these data.

The only substantive changes to the law during the reauthrorization process were a few tweaks to the swine reporting system. The definition of a packer was changes to include companies that slaughter 200,000 head of boars/sows per year in order to capture a larger percentage of cull sow prices. The reporting deadline for prior day slaughter data (which are the actual inputs for the CME Lean Hog Index) was delayed until 9:00 a.m. to give packers more time to make sure data was accurate and to spread both packer and USDA labor over a longer time period. USDA was also authorized to begin publishing distributions of barrow and gilt prices. The high, low and average prices have left some market participants still wondering about where in that range lays the bulk of prices paid. We are confident that these distributions will be heavily skewed to the upper end of the distribution — definitely not a normal distribution within any day.

A side-benefit of the reauthorization is that USDA has once again begun to collect scanner-based retail price data for meat and poultry. In addition, they plan to gather the data from the two-plus years that the data has not been collected and published in order to insure a continuous time series. Kudos on this one — we will now have enough historical data to do some meaningful comparisons with the old BLS-based data.

Some had postulated a couple of years ago that rising ethanol production would flood the countryside with DDGS making it very low-priced or even free.
While there are places (e.g. In close proximity to several ethanol plants) where that is true, the pricing force of substitution has proven itself formidable once again. DDGS prices have moved in close relationship with corn prices since late 2006 and have settled generally in a range of 80% to 100% of the price of corn. That’s not bad if you are feeding cattle but anything over about 90% is too high for DDGS to enter into least-cost formulations for pigs. The graph at left shows the relationships and the three time periods since mid-2006 when DDGS were a competitive feed ingredient for pigs. High corn prices hurt ethanol producers but also add to distilleries’ bottom line by driving up DDGS values!

E-Livestock Volume 5/15/08 5/14/08 5/08/08
LE (E-Live Cattle): 11,132 17,544 24,321
GF (E-Feeder Cattle): 347 823 848
HE (E-Lean Hogs): 18,375 16,908 18,393

5m Editor