Distillers corn oil (DCO) is produced at the majority of ethanol plants today. The DCO market was relatively small prior to 2000. However, the production of DCO has increased over the years especially since 2008. The ethanol co-products market was developed beginning in 2008. Main markets for DCO are biodiesel plants, the animal feed industry, and the export market. DCO's role as a feedstock choice in the biodiesel industry has grown in the last 5 years. The US Energy Information Administration (EIA) biodiesel production report showed that approximately 1.06 billion pounds of corn oil were used to produce biodiesel in 2013. Corn oil became the second most popular feedstock choice in the biodiesel industry in 2013, surpassing the usage of canola oil.
The majority of ethanol plants have widely employed corn oil extraction technology during the last two years. As the demand from the biodiesel industry grows in the coming years, this will send economic signals to ethanol plants to implement improved technology to maximize corn oil extraction yield. Extra revenue from corn oil has become an important part of the coproduct business at the majority of U.S. ethanol plants. Corn oil revenue has been key in times of very low margin periods, most recently seen when energy prices plummeted during the fourth quarter of 2014.
Although biodiesel production is the largest market for corn oil, its use as a feed additive cannot be ignored. The most popular feed market has been the poultry feed application. Corn oil has a niche market as it is a vegetable-based energy supplement rather than an animal-based product. In addition to poultry, other livestock groups such as swine are beginning to emerge as another source of demand for DCO.
Price discovery for DCO is not very transparent in the coproduct market. DCO generally trades at a percentage of the price of soybean oil but some divergence in the grain markets has created risky issues that need to be analyzed. Perfectly competitive grains markets' price discovery process is very transparent in the market economy, but DCO's supply and demand can be manipulated and price discovery is not well understood. In contrast to the grains markets, demand for DCO can be affected just by shutting down one or two major biodiesel plants, meaning the price of DCO can be influenced by a few major players in the market. This interesting oligopsony market can be analyzed using industrial organization theory in applied economics. Oligopsony is a market in which there are only a few large buyers for a product or service. This allows the buyers to exert a great deal of control over the sellers and can effectively drive down prices.
According to our calculations using pricing information from the Jacobsen, DCO prices are more significantly correlated to yellow grease prices than soybean oil prices. Understanding the coherent pricing behavior of DCO is very important in the co-product market place. The Jacobsen presents pricing data beginning 2012. Once we have reasonable time series data available in the future, we should be able to analyze the pricing behavior using oligopsony market theory.