Market Perspectives July 6, 2012
- Published on Friday, 06 July 2012 15:48
CHICAGO BOARD OF TRADE MARKET NEWS
Outlook: USDA is expected to reduce their yield estimate in the July 11th WASDE from the current optimistic estimate of 166 bushels per acre. After the recent run up in prices, a limited decline to 155 or better is likely to be considered bearish. A decline from 155 down to 150 would probably cause prices to momentarily level-off until yields are better defined and a yield estimate below 150 bushels per acre could generate even higher prices.
The December 2012 corn contract rallied over $2.00 per bushel in the past three weeks and there will need to be further declines in crops conditions for prices to continue higher. If the December corn contract does approach $8.00, then there will probably be strong protests by many American livestock and poultry producers who will call for a temporarily suspension to the U.S. biofuel mandates.
If next Wednesday’s estimate for average U.S. corn yields declines to no more than 155 bushels per acre, and additional rains materialize, then the current December corn contract price could be set back by at least a dollar before harvest. Such a setback could occur, because a yield of 155 would give a similar stock-to-use ratio to last year when the December corn contracts closed around $5.85 per bushel.
Many traders seem to be looking almost exclusively at yields and apparently have forgotten that U.S. corn acreage is very large and that current high prices will reduce demand. If corn futures remain at or increase from current price levels, then global traders will look for other feed options, such as wheat. The crop condition for U.S. spring wheat has not declined as aggressively as corn and soybean conditions. The United States also has ample supplies of winter wheat. However, U.S. wheat reserves are not burdensome; nor is there a bumper supply of global wheat that can easily offset a shortfall in global feed-grain production.
In prior weather related markets of 1988 and 1983, corn prices peaked around the current July time period and then declined into harvest. However, one difference this year is that ending stocks are smaller than either of those historical periods.
CBOT SEPTEMBER CORN FUTURES
Current Market Values:
U.S. WEATHER/CROP PROGRESS
U.S. Drought Monitor Weather Forecast: In general, July 4 – 8, 2012 doesn’t look promising in terms of relief, though the intense heat should subside somewhat. One area that could see relief would be from the central and southern Rockies into the northern Plains, much of which is forecast to receive over an inch of rain. Totals near or above 2 inches are expected in the central Dakotas. One to perhaps 3 inches are also anticipated along and near the central Gulf Coast. Elsewhere, light rain at best is expected, with little or none forecast for the lower Northeast, the mid-Atlantic region, the upper Southeast, the Ohio Valley, much of the Mississippi Valley, and the central and southern Plains. Seasonably dry weather is expected in the West. Modest improvement is forecast for most areas that have endured the recent heat wave, but most locations from the Plains eastward are still expected to be warmer than normal. Temperatures could average over 6 degrees above normal from the mid-Atlantic region westward through the Tennessee and Ohio Valleys to near the Mississippi River.
The ensuing 5 days (July 9 – 13, 2012) bring enhanced chances for below-normal rainfall from the Tennessee and middle Mississippi Valleys northward through the Appalachians, Great Lakes, and northern Great Plains. In contrast, the odds favor above-normal rainfall along and near the southern half of the Atlantic Coast and in the southern halves of the High Plains and Rockies. Below-normal temperatures are expected to settle into the Northeast, but continued above-normal temperatures are anticipated in the southern halves of the Mississippi Valley and eastern Plains, and from the northern Plains, the central Rockies, and the desert Southwest westward to near the Pacific Coast.
Follow this link to view current U.S. and international weather patterns and the future outlook: Weather and Crop Bulletin.
U.S. EXPORTS STATISTICS
Corn: Net sales of 19,300 MT for the 2011/2012 marketing year, a marketing-year low, were down 90 percent from the previous week and 89 percent from the prior 4-week average. Increases were reported for Japan (136,500 MT, including 90,700 MT switched from unknown destinations and decreases of 3,700 MT), China (124,100 MT, including 60,000 MT switched from unknown destinations), Venezuela (22,500 MT), Colombia (13,800 MT), and Costa Rica (13,200 MT, switched from unknown destinations). Decreases were reported for unknown destinations (158,400 MT), Taiwan (96,500 MT), and South Korea (55,000 MT). Net sales of 134,200 MT for delivery in the 2012/2013 marketing year were primarily for unknown destinations (50,800 MT), Mexico (31,900 MT), and Panama (31,500 MT). Exports of 645,100 MT were down 3 percent from the previous week, but up 1 percent from the prior 4-week average. The primary destinations were China (195,400 MT), Japan (154,600 MT), Mexico (96,600 MT), South Korea (64,100 MT), Venezuela (40,000 MT), and Costa Rica (24,600 MT).
Barley: There were no sales or exports reported during the week.
Sorghum: Net sales of 24,500 MT were up noticeably from the previous week, but down 31 percent from the prior 4-week average. Increases were primarily for Mexico (17,300 MT) and unknown destinations (7,100 MT). Net sales of 5,600 MT for delivery in the 2012/2013 marketing year were for Mexico. Exports of 4,900 MT were to Mexico.
DISTILLERS DRIED GRAINS WITH SOLUBLES (DDGS)
DDGS Comments: Merchandisers report that reduced ethanol production is causing some rationing of DDGS supplies, and local customers are sticker-shocked by the high price levels. However, local DDGS prices are often only about mid 80% equivalent to corn prices. Export customers are commonly requesting prices about $20 -25/MT lower than current offering levels. As a result the exports market is expected to remain quiet for the next several weeks.
There were some expectations that the end of China’s anti-dumping investigation of U.S. DDGS would result in increased exports, but unfortunately, the end of that investigation coincided with the recent weather related run-up in U.S. corn prices. Price has now become the primary factor in determining China’s purchases of DDGS and/or corn. Chinese feed-grain buyers seem increasingly anxious to expand their sources– please see the Ukrainian discussion in Country News section.
Ethanol Comments: Consumption of ethanol has declined with the reduction of gasoline due to a slow economy. As a result ethanol production has slowed. The Associated Press quotes the spokesman for a leading ethanol producer as saying, "We are an energy company. We are well accustomed to the ups and down in the energy business, and we are a large enough, strong enough company that we can get through the downturns and benefit from the upturns." This optimistic attitude is supported by efforts to keep employees working on maintenance projects even while plants are temporarily idled. A different representative of the ethanol industry is quoted as saying, "When the market is tight, oil refineries idle plants or reduce production, and ethanol producers are simply doing the same thing."
The U.S. ethanol industry is dealing with the current high corn prices across the Midwest. However, this situation could be further complicated if there is any validation of reports that the director of the Environmental Protection Agency is considering cutting the ethanol mandate by 20 percent. Proponents of such actions may argue that since ethanol is forecast to consume 5 billion bushels of corn, then lowering the mandate by 20 percent would reduce total consumption by 1 billion bushels and that would increase the growing season’s ending stocks and reduce corn prices to more comfortable levels for consumers. While it is true that such a policy announcement could momentarily press corn prices, it is probably unrealistic to assume that reduced ethanol production will result in an equally proportioned rebuilding of corn stocks. Instead, adjustments to biofuel mandates are more likely to result in corn consumption transitioning from ethanol production to increased exports and increased domestic feed consumption. Consequently, ending stocks are unlikely to increase as much as expected, DDGS production will decline and the ethanol industry must deal with inconsistent demand.
Brazil: The Brazilian government’s supply agency, Conab, once again revised their domestic corn production estimate upward. The latest estimate is 69.48 MMT, which is up 2.5 percent from the June estimate of 67.8 percent. Reuters reports that this season’s Brazilian corn crop is more than 20 percent larger than last year’s crop. Brazilian farmers are also benefiting from the recently strong run-up in Chicago futures prices. Global buyers are watching the U.S. corn crop suffer under record heat and it is widely assumed that many are expressing a growing interest in South America’s alternative supplies.
Ukraine: ProAgro reduced estimates for Ukraine’s barley production forecast from 13.9 to 12.7 MMT, and reduced the corn production estimate from 7.3 to 6 MMT. Resulting Ukrainian exports are estimated to be corn 14 MMT, barley 1.8 MMT and wheat 4.6 MMT.
Reuters reports that the Ukrainian government intends to export 2 to 2.5 MMT of corn each year to pay off a $3 billion loan to China. The loan from China’s Eximbank will finance agricultural development projects in Ukraine. The two governments are in the process of finalizing the deal and drawing up quarantine agreements.
Ukraine’s Prime Minister Azarov reassured his customer base that there will be no repeat of the restrictive export quotas that occurred in 2010. The country has suffered from some autumn drought and a harsh winter that is likely to limit potential production. However, global customers will still be able to source their needs. Such news is particularly welcome for Asian buyers.
United States: Asia accounts for almost half the world’s corn exports and many buyers were patiently waiting on the development of a bumper U.S. crop. Unfortunately, recent high temperatures, approaching 100 degrees Fahrenheit (about 37 Celsius), were setting records across the U.S. Corn-Belt and browned crops in regions such as Southern Illinois caused the average of USDA’s visual crop condition rating to plummet. The current heat-dome is expected dissipate some this coming weekend and temperatures should return to more normal levels reports Reuters. If rains return with the cooler temperatures, then that would be beneficial for the remainder of the pollination period. Final yields will still be well below USDA’s initial estimate of 166 bushels per acre, but perhaps not as poor as some market participants feared.
OCEAN FREIGHT MARKETS AND SPREADS
OCEAN FREIGHT COMMENTS
Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Freight markets had a small rally this week. The Baltic indices were up on improved business for Capes and Panamax freight in the Atlantic. But, as usual, the physical markets did not move as much as the indices. Odd that the Cape market is lending support to Panamax freight as we still have the biggest surplus in the Capes than any other class of ship. I cannot see this rally as being sustainable. After three very quiet weeks the market is excited just to see some improvement in cargo demand.
So far this year a total of of 529 vessels, representing 44.4 million DWT have already been delivered.
Another 1,148 vessels of 93.5 million DWTare scheduled for delivery until the end of 2012.
This is about 58 percent of the current orderbook, which stands at 2,001 vessels of 161.3 million DWT that in turn represents about 25.8 percent of the current fleet.
Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China:
The charts below represent Jan.-Dec. 2010, Jan.-Dec. 2011 annual totals versus Jan.-June. year-to-date (2012) container shipments for South Korea.