Not All DDGS Are Created Equal: Nutrient-Profile-Based Pricing to Incentivize Quality
Jacinto F. Fabiosa
November 2008 [08-WP 481]
Fabiosa, J.F. 2008. "Not All DDGS Are Created Equal: Nutrient-Profile-Based Pricing to Incentivize Quality." Working paper 08-WP 481. Center for Agricultural and Rural Development, Iowa State University.
This study finds that distillers dried grains with solubles (DDGS) is a dominant feed ingredient in hog finishing rations, despite variability in the product's nutritional content. The optimal inclusion rate has remained at the maximum allowable limit of 20%, suggesting that when a particular DDGS product has low nutrient content, feed compounders simply supplement with corn and soymeal, whatever deficits in nutrients are created as a result.
The study examines DDGS products from 40 different ethanol plants and finds that, relative to the DDGS product with the lowest feed ration cost, the optimal feed ration costs of DDGS products from the other 39 ethanol plants are $0.002 to $0.42 more per cwt of feed. The implied price discount from this cost differential ranges from a low of 0.10% to a high of 25.55%. For an ethanol plant with 50 million gallons in capacity, this price discount amounts to revenue losses of $0.03 million to $6.27 million per year.
The study also found that feed compounders generate $7.51 per ton more in DDGS feed cost savings when they eliminate inter-plant variability and face only intra-plant sources of variability. By including nutritional content variability information in the pricing of DDGS, proper price signals are communicated to ethanol plants so that they can make their own assessments on quality control initiatives to reduce variability in their DDGS products. When the market does not reward better DDGS quality or penalize low product quality, stakeholders do not have any incentive to improve product quality.
Keywords: biofuel, DDGS, DDGS quality, hog feeder-finisher, optimal feed ration, stochastic LP.