2011 Market Perspectives

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CHICAGO BOARD OF TRADE MARKET NEWS


WeekInReview

 

Outlook: The corn market discussion is being dominated by the conflicting prospects of reduced yields and reduced demand due to high prices. These factors are extremely important to price activity, but it is also important to note that several key programs are set to expire on December 31, 2011. Besides ethanol tax incentives, the Supplemental Revenue Assistance (SURE) disaster aid program is also about to expire. Current prices may have deepened the public perception that grain farmers need less financial support from the U.S. Federal government. Yet, current price action demonstrates that volatility has actually intensified.

Last week, the prospect was discussed that the charging bull market could be suddenly hit by a round of profit taking. That happened after the December contract traded above $7.70. The December contract sold off 40 cents from its $7.79 high, then turned and rallied back to close the week at $7.60. Such volatility is likely to continue straight into the September 12th WASDE report.

FLonger-term, global feed grain production could expand significantly in the 2012 crop year. A substantial global acre increase and the prospect of a return to normal yields could significantly alter the financial position of U.S. feed grain producers next season — particularly if production costs unexpectedly increase after government programs have been reduced.

Seed varieties that are pest-resistant and herbicide-resistant may be losing some of their effectiveness due to natural adaptations by insects and plants. For example, a newly adapted rootworm could be evolving in the Corn Belt. If so, margins could be reduced by increased application costs at the same time that improved yields and expanded global acreage cause prices to decline. The financial outlook under such conditions would be much less certain if farm programs are significantly reduced.

 

CBOT DECEMBER CORN FUTURES


CBOTDecCornFutures

 

Current Market Values:

FuturesPricePerformance

U.S. WEATHER/CROP PROGRESS


USCropCondition

U.S. Drought Monitor Weather Forecast: The evolution and track of a developing tropical disturbance in the Gulf of Mexico will be closely monitored. This system — should it develop — could play a potentially large role in whether portions of the southern or southeastern U.S. experience much-needed drought relief over the upcoming week. Elsewhere, a slow-moving cold front will generate showers from the northern and central Plains into the Corn Belt and Northeast, with some showers spilling south into Oklahoma and Texas. Out west, monsoon showers will persist in eastern portions of the Four Corners region, while dry, increasingly warm weather prevails from the Great Basin into the northern Rockies and Northwest.  The NWS 6- to 10-day outlook for September 6–10 calls for drier-than-normal conditions from the central and northern Pacific Coast into the upper Midwest and central Corn Belt. Conversely, wetter-than-normal weather is expected from the eastern Gulf Coast into the Northeast. Below-normal temperatures across much of the eastern U.S. will contrast with warmer-than-normal weather from the Rockies to 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. EXPORT STATISTICS


 

Export_SalesAndExports

Corn: Net sales reductions of 320,900 MT resulted as increases for China (116,000 MT, switched from unknown destinations), Egypt (111,700 MT, including 47,000 MT switched from unknown destinations), Japan (90,300 MT), South Korea (62,800 MT) and Mexico (21,900 MT), were more than offset by decreases for unknown destinations (453,700 MT), Colombia (91,700 MT), Guatemala (91,600 MT), Cuba (50,000 MT), and Costa Rica (46,900 MT).  Net sales of 957,900 MT for delivery in 2011/2012 were mainly reported for unknown destinations (645,100 MT), Japan (91,400 MT), Cuba (50,000 MT), and Colombia (45,000 MT). Decreases were reported for Mexico (55,100 MT). Optional origin sales of 28,000 MT to Mexico exercised to export the commodity from other than the United States. Exports of 765,800 MT were down 7 percent from the previous week and 11 percent from the prior 4-week average. The primary destinations were Japan (145,700 MT), Egypt (125,100 MT), China (120,200 MT), South Korea (105,300 MT), Mexico (87,700 MT), and Venezuela (65,500 MT).

Barley: There were no sales reported during the week. Exports of 1,200 MT were to Canada.

Sorghum: Net sales of 200 MT were for Mexico. Net sales of 16,700 MT for delivery in 2011/12 were for unknown destinations. Exports of 20,100 MT were to Mexico.

 

USExportInspections

USDAGrainInspections

 

FOB


YellowCornFOB

WhiteCornFOB

SorghumFOB

BarleyFOB

CornGlutenFOB

 

DDGSPriceTable

 

DISTILLERS DRIED GRAINS WITH SOLUBLES (DDGS)


 

General Comments:

The DDGS market seems better in spite of the corn market coming off mid-week. There is abundant Chicago buying and California is heating up. Local consumption is firm and still provides additional resistance to prices. It was generally quieter on the international market this week with spurts of sales being made here and there, mainly due to deals found on the ocean freight side through certain ocean ship lines.

DDGS container buyers in Asia are starting to look at October numbers, though there is the occasional inquiry for LH September product. The September sailing DDGS are getting increasingly more difficult to source with truck freight to the transloader tighter. September sailing DDGS need to be loaded in the next two weeks in order to make timely shipment. Interest for DDGS is getting better than it has been in the last two weeks.

Mexico prices are up week over week due to continued disappointment in the corn crop.Border (Texas) prices are up to $8, +$5 from last week. Current levels are around $280 per MT and $5 more for OND sales.

Comments and Trades reported:

"300 MT DDGS to Hai Phong for LH Sept/FH Oct at $308 MT. (We’re) seeing bids around 304 now. 2000-3000 MT of sales made to China main ports at $295-$298”

“$230.50 traded for about 35 cars today going to Chicago area unloaders. 2,000 MT basis 35 pro-fat into Chicago container market at $251 per MT loaded ramp. Rail through UP (Union Pacific) to California at $249 per ST (274.47 MT) for September shipment today. For October the following: HCMC, $300 for 300MT, $296 for 550MT; and Tokyo, $295 for 500MT.”


Ethanol Comments:

U.S. ethanol producers not only have to deal with price volatility, but must also wrestle with Federal policy uncertainties. Making commitments is extremely difficult when policy is only known for a year; defining a production strategy is virtually impossible when current conditions could be substantially different in only three or four months.

A large percentage of farmers abandoned their normal rotations last season to replant corn. An alteration of ethanol policy could cause the planting pendulum to swing further toward soybeans that market participants expect. Strong corn prices and stagnant crude could squeeze the returns of ethanol producers. The prospect of tighter margins could increase pressure against the stock values of ethanol companies that are already having a difficult time maintaining the interest of Wall Street investors..

Initial Public Offerings (IPOs) to sell stock for companies seeking to produce ethanol from sources, such as grass and wood chips, seems to be generating increased skepticism and could indirectly reduce the credibility of corn-based ethanol.  Furthermore, bankruptcies and fines for poor risk management by select corn ethanol producers further hurts the reputation of the whole industry. Investors should be reminded that the mandate remains in place for domestically produced ethanol to replace at least 10 percent of U.S. petroleum consumption. None of the firms touting cellulosic biofuel production have turned a profit. The future of American ethanol is linked to corn-based facilities, many of which have well established relationships with respected energy and agriculture companies.

 

COUNTRY NEWS


 

Argentina: Argentina has been able to displace the United States in the Colombian corn market. According to an article in MecroPress, the United States’ market share has fallen from over 95 percent in 2007 to presently less than 20 percent. This has occurred because the U.S. government seems unable to ratify the Colombian Free Trade Agreement. As a result, Colombia placed a 15 percent duty on American corn and 6.7 percent duty on corn from Argentina.

Australia: Australia uses about 6 million metric tons (MMT) of wheat for domestic consumption and is expected to produce about 22 MMT. Late season weather is the primary factor in determining what percentages are milling quality or feed wheat. Farmers in western Australia have ample soil moisture and expect their production rates to rebound after last season’s dry conditions.

Brazil: The World Meteorological Organization reports that there is currently little chance for a La Nina weather pattern that often negatively affects South American growing regions. As a result, the odds are good that South American weather will be normal. Normal weather and expectations for increased acreage should result in expanded corn and soybean production..

China: China is the primary reason for a lawsuit waged by Syngenta against Bunge North America. Bunge says it will not accept delivery of Syngenta’s MIR162 corn variety into its facilities because the product has not been approved by China. As a result, Syngenta has filed suit to force Bunge to accept delivery..

EU: The EU is poised to produce a very good corn (maize) crop and its farmers are overjoyed as Chicago corn futures are pulling up their prices just prior to harvest. European traders report that their corn and wheat prices are just going along for the ride.

Japan: Japanese corn buyers still need to purchase 60 percent of their October-December corn needs, according to a Dow Jones story. Japanese traders have been waiting on prices to work lower; so far that technique has not been very successful. Japanese buyers would supposedly like to start pricing below $7.00.

Russia/Ukraine: Monsanto sees Ukraine as an excellent market for its premium seeds and Monsanto officials tout that they could potentially help Ukraine double its yields. Ukraine’s soils and climate put it in a position to become major competitor against U.S. and Argentinian corn production. So far, Monsanto is only supplying about 14 percent of Ukraine’s corn seeds story.

 

OCEAN FREIGHT MARKETS AND SPREADS


BulkFreightIndices

 

OCEAN FREIGHT COMMENTS

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: The Baltic Panamax freight indices in the Gulf/Atlantic pulled back a little this week and the Pacific stayed firm. Apparently most of the excitement of the last two weeks is over. All-in-all, the Panamax markets have to be described as steady and they are still trading in a narrow range. It was the Capesize freight market (iron ore and coal) that was the beneficiary of most of this week’s market increase. Panamax dry-bulk freight markets are focusing on the continuing dynamics of over vessel supply verses cargo demand.  Those who have been buyers of the freight derivatives should be a little nervous and/or should take their profits to the bank..

The biggest story in world freight markets is the financial problems COSCO has and how that may impact other vessel owners as it “renegotiates 2008 contracts and does, or does not, pay their bills. According to an article in the Wall Street Journal, COSCO chartered numerous dry-bulk and container vessels in 2008 at rates upwards of $230,000 per day. The market today is trading at closer to $15-16,000 per day. The story states that COSCO has been able to extract some concessions out-of-suppliers of 18 dry-bulk vessel leases, but does not go into details of the renegotiation. This is obviously good for COSCO, but it will affect the earnings of the vessel suppliers.

ICOSCO reportedly owns 234 ships and charters 201 additional vessels..

 

BalticPanamax

Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China:

CapesizeVessels

USAsiaMarketSpreads

 

The charts below represents total (MT) month-to-month Philippines container shipments for Jan-July 2009, Jan-July 2010, and Jan-July 2011.

2009PhilippinesContainer

2010PhilippinesContainer

2011PhilippinesContainer

 

 

INTEREST RATES

 


 

InterestRates

 

 

 

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