China’s rejection of shipments of U.S. dried distillers grains has caused an upheaval in the market, sending DDG prices plummeting.
The trouble began when China rejected as many as 10 shiploads of U.S. corn in mid-December because it contained a genetically engineered variety that is not yet approved in that country. The shipments contained corn from an unapproved variety, MIR 162, more commonly known as Agrisure Viptera, which is produced by Syngenta Ag.
Traders worried that U.S. DDG shipments would be the next to be rejected by China. Their fears soon materialized when about 2,000 tons of DDG was rejected by Chinese authorities right before Christmas. Furthermore, the General Administration of Quality Supervision, Inspection, and Quarantine, China’s inspection agency, announced its intention to test all imports of U.S. DDG for the presence of MIR 162, said Randy Gordon, president of the National Grain and Feed Association.
The news quickly spread, and although some DDG shipments were able to be re-routed to other destinations, exports of DDG to China came screeching to a halt, according to Jason Charles, domestic export trader for Land O’Lakes Purina Feed LLC in Minneapolis. China is the largest market for U.S. DDG.
“When the DDG shipments were rejected, it caused a lot of panic,” he said. All of a sudden everybody had to find a home for everything they had on the ocean, in New Orleans and being produced.”
That chain of events resulted in a glut of product on the market. Also contributing to excess supply was the unfortunate timing, because some plants had excess product built up over the holidays.
“No commercial suppliers will send anything to China for fear it will be rejected, causing a domestic stockpile,” Charles said. “It’s supply versus demand. Demand went to hell, but supply keeps trucking along.”
In any case, the Chinese rejections caused prices of DDG to immediately begin a steep decline. Charles said, on Christmas Eve, DDG was trading at about $270 per ton. On Dec. 27, DDG fell to $200 a ton.
“Distillers fell $70 in three days,” he said. “We knew it was coming. Did we think it would happen in this type of atmosphere overnight? No, but it did.”
The DTN Weekly DDG Spot Price Average fell $30 per ton in the past two weeks, from $218 on Dec. 20 to $189 on Jan. 2.
CHINA’S APPROVAL PROCESS BEHIND SCHEDULE
NGFA President Gordon said NGFA is partnering very closely with the North America Grain Export Association, who has been taking the lead in discussions with both the U.S. and Chinese government in trying to resolve the issue.
China’s approval process had already begun once the MIR162 trait was approved in the U.S. in April of 2010, Gordon explained.
“Typically the Chinese regulatory system is such that they begin regulatory consideration of biotech traits only after the country of export has approved it for use domestically,” he said. “In the past, their approval has taken about two years.”
According to a NFGA statement, Syngenta issued a one-page letter for its stakeholders on Dec. 17, 2013, confirming it had not yet received import approval for MIR162, despite submitting the dossier for the trait to the Chinese Ministry of Agriculture in March 2010 and maintaining that China had all the information requested at that point.
While Syngenta projected that China would authorize the MIR162 trait for import by the end of the first quarter of 2012, that approval still has not happened.
“China’s process has slipped in recent years for a variety of reasons, including some changes in the Chinese government,” Gordon said. “They have not been keeping up with that two-year time period in this case and in a few others as well.”
The North American Export Grain Association indicated that Syngenta’s MIR162 is the only U.S. corn or soybean event that does not have sufficient approvals in place to comply with the Chinese government’s requirements for imported corn, soybeans and derived products. Furthermore, a statement by the NGFA said, “China’s zero tolerance for the presence of unauthorized biotech traits in import shipments has caused some U.S. domestic buyers who supply grains to exporters to notify producers that they will not be accepting corn with the Agrisure Viptera trait until the situation with China is resolved.”
Gordon said the NGFA did ask U.S. Ag Secretary Tom Vilsack to bring up the matter in discussions with China at the mid-December U.S.-China Joint Commission on Commerce and Trade to see if he could help move the process forward. While Vilsack focused on a new pilot program to be put in place for the approval of biotech traits, that didn’t address the immediate situation, Gordon said.
The U.S. has had no indicated from China when the approval might happen, he said.
“This obviously has created a risk in the marketplace that has affected the DDG market, and potentially the corn market as well,” Gordon said. For DDG exporters, the risk of rejection and the cost associated with that are very high, he added.
MOTIVATION SPECULATION
If China’s move is all about money, as many traders believe, rejecting U.S. DDG is not likely to hurt China’s domestic livestock industry.
“They can turn to soybean meal, cottonseed meal, canola meal or their own domestic distillers,” Charles said. “At the end of the day, we need them more than they need us.”
DTN Analyst Todd Hultman agreed that China’s move could have to do with issues other than the MIR162 trait.
“This is probably politically motivated, as others have suggested, given that China started rejecting corn in early December, shortly after the U.S. flew two bombers into China’s newly declared zone of air defense,” he said. “From a practical standpoint, China needs to import corn and DDGs. Eventually, they are going to have to accept MIR162 if they want U.S. corn, and so it does not seem likely that this will still be an issue in a few months.”
Charles said he is not sure the price declines have bottomed out quite yet.
“We probably could see prices fall another $25 a ton,” he said.
In any case, getting the MIR162 variety approved in China is not likely to happen in the near future, nor without a great deal of effort
Joel Karlin, contributing DTN market analyst and commodity manager for Western Milling in Goshen, Calif., said, “This will not be a quick fix. There is a large contingent of the Chinese population that is leery of GMO foods.”
He added that besides the Chinese government evidently heeding citizens’ fears, China has also had a record crop of its own, thereby decreasing the need for imports.
Until the rejections occurred, China had been the largest importer of U.S. DDG, followed by Mexico, Canada, Japan and Vietnam. Of the 8.3 million metric tons of DDG the U.S. sold in exports to other countries in 2012, China purchased almost 2.2 million metric tons of DDG at a value of nearly $617 million. Between January 2013 and October 2013, China purchased about 3.3 million metric tons of DDG worth slightly more than $1 billion.
