Tuesday, January 11, 2011

What Prompted DDGS Antidumping?

On December 28, China announced an antidumping investigation against imports of U.S. distillers dried grains with solubles (DDGS), the by-product of ethanol production which is used as an animal feed ingredient. An earlier post is here.

A January 10 article on the yumi.com.cn site offers some speculation on what may have prompted the investigation of DDGS.

The article describes how burgeoning demand for protein among Chinese feed mills prompted the imports. U.S. DDGS has better quality and lower price than domestic DDGS. DDGS imports are not subject to quotas nor limitations on GMO content, so compared with corn, “import problems are relatively easy to solve, the purchase method is relatively convenient.”

The article emphasizes competition between imported and domestic DDGS. The author points to a declining trend in Chinese DDGS prices during 2010 that coincided with the imports. He claims that the declining income from the DDGS byproduct combined with high corn prices has squeezed profits for Chinese alcohol producers.

China's DDGS is produced mainly in the north, and transporting it to feed mills in the south is costly and inconvenient. According to recent reports, “Southern feed companies have stopped buying northern DDGS”. Low-cost imported DDGS “pounded” domestic alcohol companies, squeezing their market share.

"With the volume of imports rising, many domestic feed companies have developed a degree of dependence (依赖性 yi lai xing) on imported DDGS." The author warns that this could repeat the experience of the soybean industry if not brought under control.

The article raises the possibility that DDGS imports could actually contribute to price inflation. If domestic alcohol producers lose income from DDGS, he suggests that they might have to raise prices on their primary products.

Apparently, the author hasn't considered that possibility that limiting the supply of raw materials to feed mills will raise the cost of feed and hence raise the cost of meat.

The author worries about the effect of DDGS on "food safety." There is no way of knowing whether U.S. DDGS contains a type of genetically modified corn that is not one of the 11 types approved for import to China. If an unapproved type of GM corn is fed to livestock or poultry, "it could affect human health."

Finally, the article concludes that the DDGS investigation will "control" and "stabilize" the domestic price of DDGS, preventing financial losses. If the investigation fails to reduce the volume of imports, domestic companies may end up in a new "predicament."

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