Wednesday, December 29, 2010

U.S. DDGS Antidumping Investigation

A bag of DDGS from a Chinese ethanol company in a Jilin Province feed mill

China announced an antidumping investigation against distillers dried grain with solubles (DDGS), a feed ingredient imported from the United States. DDGS is a byproduct of the production process for making ethanol. Chinese feed mills began importing DDGS from the U.S. in significant quantities in September 2009. Chinese customs statistics show that imports during the 12 months ending in October this year totaled about 3 million metric tons (mmt).

(To put this number in perspective, China's imports of corn were about 1.5 mmt during that period and imports of soybeans were about 50 mmt. China uses roughly 70 mmt of corn for feed each year.)

The interest in importing DDGS is reflected by the many queries posted on Chinese electronic discussion boards seeking information about DDGS and how to import it. According to Chinese web sites, DDGS is a byproduct of the fermentation process that produces ethanol and carbon dioxide from starch. It is high in protein, fat, fiber, amino acids, and vitamin B. There is also a product called distillers' dried grain (DDG) from a simpler production process that does not add soluble materials and has lower energy and nutrient content than DDGS.

Nutritional value of US DDGS: crude protein content 26% or higher, crude fat 10% or higher, .85% lysine, .75% phosphorus. It can replace high-protein ingredients like soy meal, fish meal, and additives. It also has an "unknown" factor that promotes animal growth. It can compose up to 30% of feed for livestock, poultry, and aquaproducts, and it can be fed directly to ruminant animals.

Some distilleries in northern China and Anhui Province produce DDGS or DDG. These include processors of drinking and pharmaceutical alcohol as well as a handful of factories making fuel ethanol. Chinese web sites point out that protein and fat content of U.S. DDGS is more predictable than that of Chinese DDGS which is made from a wide variety of raw materials. One post says the most important advantage of U.S. DDGS is its lower mycotoxin content. The golden-brown color of U.S. DDGS is preferred to the dark-brown and highly variable color of domestic DDGS. Moreover, a post on says, "the price for the US product is not high...contract terms are flexible, quantities available are large." Chinese DDGS mostly is produced in northern China and is costly or impossible to ship to southern China.

The investigation of U.S. DDGS appears to be another "tit-for-tat" trade action in which China chooses an important U.S. export to retaliate against some U.S. trade action. The Bloomberg story links the DDGS antidumping to the U.S. complaint to the WTO against imports of Chinese wind-energy equipment. The Wall Street Journal article draws similarities to the antidumping move against U.S. chicken earlier in 2010 which was linked to a U.S. limit on tire imports.

This move toward limiting U.S. DDGS appears calculated as a retaliatory measure, not a protection of Chinese farmers or industry. Reducing DDGS imports helps virtually no one in China (except a handful of ethanol-producing companies who get supplementary income from selling DDG/DDGS as a byproduct). It's hard to see how Chinese farmers are hurt by imports of U.S. DDGS. Chinese corn prices have risen about 20% in the last year. Chinese officials have in recent years moved to limit domestic fuel ethanol production (and consequently DDGS output) due to pressure on limited grain supplies. Limiting imports of DDGS will hurt feed mills, contribute to upward pressure on livestock producer feed costs and help boost meat prices even higher.

According to market reports over the past year, rising Chinese corn prices were the motivating factor for the import of DDGS. Corn is in short supply in China and reducing DDGS imports will tighten the supply of feed raw materials even more.

The only major benefit of moving to limit DDGS imports appears to be to launch a trade skirmish by undermining one of the success stories in U.S. agricultural exports to China.

Agricultural trade conflicts like this will become more common as the Chinese government tries to ratchet grain and oilseed prices upward year after year. Ever-rising domestic grain, oilseed and meat prices combined with an appreciating Chinese currency will push Chinese agricultural commodity prices above international prices, making it more attractive to import agricultural commodities and products made from them. Then, whenever China wants to throw up a protective barrier it can point to low grain and oilseed prices in the U.S., blame the low prices on U.S. farm subsidies (this was the case with chicken), and then announce an antidumping action.

This strategy of linking low agricultural prices to subsidies may work until the world discovers that China is now itself one of the world's leading farm subsidizers.

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