China Starts Probe of US Feed Dumping (ADM, VLO, PEIX)

In the international diplomatic game of tit-for-tat, the Chinese ministry of commerce has said it will begin an investigation into US dumping of livestock feed on China’s farm market. Earlier this month, the US asked the World Trade Organization to investigate China’s support for its domestic wind-turbine manufacturers.

At issue for the Chinese is the sale of what are known as distiller’s dried grains, or DDGs, which are a by-product of corn ethanol production. US ethanol producers are expected to produce about 44 million metric tons of DDGs in the 2009-2010 crop year (September through August). That number is expected to top 45 million metric tons in the 2010-2011 crop year.

Major US producers of corn ethanol include Archer Daniels Midland Co. (NYSE: ADM), Valero Energy Corp. (NYSE: VLO), Pacific Ethanol, Inc. (NASDAQ: PEIX), and privately held POET. While DDGs are not separately identified in the public companies’ quarterly filings, POET notes that it produces about 1.6 billion gallons of ethanol and 9 billion pounds (about 4 million metric tons) of DDGs annually.

China’s ethanol producers also want to sell their DDGs, and it is their concerns that are presumably driving this latest investigation. China cannot produce enough livestock feed on its own, and has been importing corn, soybeans, and DDGs, according to Bloomberg.  The Chinese are expected to import some 3 million metric tons of DDGs this year.

That amount of DDGs is hardly the stuff of an international trade war. Of course if the US simply said we’ll stop shipping the stuff to China, the ethanol producers would put up a mighty squawk. Not for the 3 million tons, but for the potential that China would import more of the DDG in the future.

US complaints about wind turbines, Chinese complaints about SUVs and US duties on steel pipe imports, and even US complaints about dumping of Chinese-made wax candles are just so much noise. The Chinese will do little to change their way of doing business, and the US will follow much the same course. If any changes are made, they are years in the future.

As for DDGs and ethanol producers, neither ADM nor Valero would notice a halt to DDG exports to China. Of course Pacific Ethanol might feel it — the company feels it when a quarter falls between the couch cushions.

Paul Ausick