Weak pork margins, high feed costs weigh on US DDGS demand

Weak US pork demand and elevated feed costs are squeezing livestock margins and adding pressure to the dried distillers' grains with solubles market, as livestock producers resist expensive feed ingredients while expectations for animal-sector expansion remain limited.

DDGS demand has been subdued for several weeks despite tighter nearby supply from ethanol plant maintenance and harvest-related logistics.

One broker described the broader feed environment as expensive across the board. "Everything is pricey. corn, SBM, DDGS, CGF, everything," the broker said.

The pressure is particularly significant for livestock producers already facing weaker forward margins. "Animal sectors are mostly losing money out forward too," the broker said, adding that producers remained lightly covered on feed, but reluctant to pay higher basis levels. "There will not be any animal expansions, that is for sure. Might see some reductions."

Reduced livestock numbers would affect feed consumption, including DDGS, particularly if weaker pork economics discourage hog expansion. DDGS has also struggled to attract additional inclusion because of its elevated relative value. A trader estimated FOB DDGS at about 120% of soybean meal on a protein-relative-value basis, with DDGS similarly expensive relative to corn.

The pressure comes as the US pork market itself faces weak demand. Market participants said domestic pork buying has remained sluggish for much of the year, with buyers working through inventories accumulated earlier at higher prices.

"People bought too much product at high prices at the beginning of the year," said a pork trader.

Competition from chicken has added pressure, while lower-than-expected hog slaughter has done little to support pork values because demand remains weak.

Platts, part of S&P Global Energy, assessed frozen boneless pork loin EXW US Midwest at $1.20/pound Sept. 30, down from $1.36/lb in early August. Some packers were offering about $1.28/lb late in September, but traders described those levels as a "fishing expedition," with tradable values remaining closer to $1.20/lb.

S&P Global Energy CERA analyst Lacey Williams expects domestic pork demand and prices to remain under pressure for the remainder of the year, aside from some seasonal holiday buying. "There is not expected to be much, if any, further upside movement in loins through the end of the year," Williams said.

The combination leaves the pork and DDGS markets increasingly connected through difficult livestock economics. High corn, soybean meal, DDGS, and transportation costs are raising the cost of feeding animals, while weak pork demand is restricting producer margins and incentives to expand.

Even livestock producers who still need feed coverage have been reluctant to chase DDGS. Another DDGS trader said tighter soybean meal had helped keep DDGS in feed rations, but the rapid increase in corn had left end users "shell shocked," with many purchasing feed hand-to-mouth.

DDGS supply could loosen as ethanol plant maintenance ends and harvest progresses, potentially providing some relief to feed costs, the trader said. But with pork demand weak and livestock margins under pressure, any reduction in animal numbers could also translate into lower feed requirements, adding another demand-side challenge for DDGS even as its supply picture improves.

Platts assessed CIF New Orleans dried distillers' grains with soluble barges for the October shipment period at $259/short ton Sept. 30, the Chicago DDGS truck market for the October delivery period was assessed at $218/st, and the Southern California rail market for the October delivery period was assessed at $269/st.