2011 Market Perspectives
- Category: 2011 Market Perspectives
- Published on Friday, 09 September 2011 05:00
CHICAGO BOARD OF TRADE MARKET NEWS
Outlook: USDA updated its forecasts Monday morning and reduced the average U.S. corn yield estimate by 5 bushels per acre, from 153 bushels down to 148.1 bushels. This significant drop in yields was already anticipated by market participants who had run prices up prior to the report. After the report, long traders waited for renewed buying to generate profits on their positions, but aggressive buying never materialized. As a result, a number of large fund managers decided to simultaneously take some profits. The uniform actions turned into a snowball effect.
Speculators are necessary to create effective hedging opportunities, and successful hedgers seek to understand the mindset of speculators. For most speculators, the most painful situation is to not participate in a strong rally. The second most painful situation is to have gains in an established position suddenly disappear. Since the prospect of a continued rally from $7.40 seemed moderate at best, the most appropriate action was to reduce established positions.
Traders who allow profits in long positions to erode are gambling that a major bullish surprise is contained within either the September 30 Grain Stocks Report or the October 12 WASDE. That is unlikely to be the chosen tactic of experienced traders. The strategic actions of more experience traders can trigger the indicators of traders who take their initiative more fully from technical systems. Suddenly, everyone is leaving the dance at once.
A buying opportunity is being created for corn users who failed to fully cover their needs on the last run-up in price. Those individuals are likely to start acquiring near-term needs by buying the December contact below $7.00. However, near-term buying of end-users is likely to be insufficient to fully offset speculative selling. (That could be particularly true if ethanol users decide to start lifting some of their long hedges in the December contract.)
CBOT DECEMBER CORN FUTURES
Current Market Values:
U.S. WEATHER/CROP PROGRESS
U.S. Drought Monitor Weather Forecast: The next 5 days (through September 19) show a good chance for cooler weather across all but southern Texas, the northern Rockies and across Montana and Wyoming. Precipitation is expected to be favorable across Colorado, eastern New Mexico, the central Plains (eastern Kansas and northern Oklahoma in particular) and into Missouri and the middle Mississippi Valley. Some of the coastal regions in the mid-Atlantic could also see some more in the way of the wet stuff.
The CPC 6-10 day forecast (September 20-24) is calling for a change in the short-term pattern with above-normal temperatures likely across the majority of the country except for the Southeast, which looks to be below-normal during the period. Precipitation is more of a mixed bag with most of the West, Great Plains and the lower Mississippi Valley more likely to see below-normal readings while the Northeast are forecast to be above-normal. Follow this link to view current U.S. and international weather patterns and the future outlook: Weather and Crop Bulletin
U.S. EXPORT STATISTICS
Corn: Net sales of 1,127,300 MT for the 2011/12 marketing year were mainly reported for Japan (314,500 MT, including 98,700 MT switched from unknown destinations and decreases of 3,000 MT), South Korea (265,600 MT, including 57,800 MT switched from unknown destinations and decreases of 15,000 MT), unknown destinations (133,100 MT), Egypt (124,500 MT, including 60,000 MT switched from unknown destinations) and Costa Rica (111,700 MT). Decreases were reported for Saudi Arabia (10,000 MT). Net sales of 41,100 MT for delivery in 2012/2013 were reported for Japan. Exports of 484,900 MT were primarily reported for South Korea (115,500 MT), Mexico (114,400 MT), Japan (98,700 MT), Egypt (64,500 MT), Taiwan (41,200 MT) and Canada (17,900 MT).
Barley: Net sales of 600 MT resulted as increases for Saudi Arabia (50,000 MT, switched from unknown destinations) and Taiwan (600 MT), were offset by decreases for unknown destinations (50,000 MT). Exports of 50,500 MT were reported to Saudi Arabia (50,000 MT) and Canada (500 MT).
Sorghum: Net sales reductions of 13,500 MT were reported for Mexico. Exports of 73,600 MT were mainly to Mexico.
DISTILLERS DRIED GRAINS WITH SOLUBLES (DDGS)
With this week’s USDA WASDE report, the corn market in Chicago experienced an expected slide despite bullish news from yields — but nothing out of the question, or at least more predictable than previous report reactions earlier this year. Stocks are low, demand is steady and margins are limited. There is no easy answer for our DDGS markets.
That being said, the market is hanging in there, despite all of the CBOT gyrations. Cattle and dairy demand remains good — poultry is ok, but potential credit issues are scaring the trade.
The market in Mexico feels top heavy. High prices are significantly affecting animal margins. We’ll need to see price breaks soon in order to maintain demand.
Comments and Trades reported:
“October, November, December to (the) Southwest dairy market traded at $277/MT all-in … (This would be the) equivalent of around $290/MT delivered California.”
- Customer firm bid $294/MT to Port Kelang, Malaysia for October shipment, 1,000 MT in containers. Asked for $300/MT.
- Customer bid $320/MT to Jordan for October shipment, 1,500 MT in containers. Asked for $330/MT.
- Customer bid $345/MT to Saudi Arabia for October shipment, 1,000 MT in containers. Asked for $350/MT
Future market conditions for U.S. ethanol producers could become more competitive even as tightening margins become increasingly lean. Margins are likely to tighten if/when tax credits for ethanol are eliminated. One ethanol executive told a group of Wall Street analysts that he expects the program to end in 2012. Tax credits currently give about $6 billion per year of support to ethanol blenders. Those blenders share the benefit with corn producers.
U.S. corn producers have also benefited from a strong export market for ethanol and dry distiller grains (DDG). However, the strong international demand is attracting the attention of other global ethanol producers in locations such as Thailand. Thailand’s ethanol producers are looking to convert their surplus sugar reserves into ethanol and become Asia’s primary center of ethanol trade, according to a story by Dow Jones. Thailand’s production of ethanol, derived primarily from sugar cane, will not compete against the U.S. DDG market, but new ethanol production in Argentina will be derived partly from corn.
Argentina is the world’s number two corn producer, and its corn acreage is expected to increase 10 percent this season. The prospect of abundant corn is one reason why Argentina decided to mandate a 5 percent ethanol mix into their gasoline. Argentina’s ethanol will be produced from both sugar cane and corn and will produce DDGs that can be sold competitively against the U.S. market.
Argentina: Argentina expects its corn production to increase 10 percent this season as it mandates a 5 percent ethanol mix into their gasoline. The country’s ethanol will be produced from both sugar cane and corn, and its corn ethanol production could rival U.S. DDG exports.
Brazil: The Brazilian government has been aggressive in stopping the value of the real against the dollar. Brazil is one of the world’s largest traders of dollar-denominated assets. Brazil agressively cut interest rates two weeks ago and the real has fallen 9 percent against the U.S. dollar.
China: China has doubled the amount of crude oil it consumes over the past decade and it is now more dependent on imported oil than the United States. As a result, China is now starting looking seriously at renewable solutions for its growing energy needs. There are even market rumors that China could import biofuels from Brazil.
EU: Bloomberg News reported that Monsanto and 10 other companies may win an EU court case against the French government’s ban of genetically modified corn. That could be good news for increased global corn production needs, but it could also create increased competition for U.S. producers who have benefited from European reluctance to accept GMO technology.
OCEAN FREIGHT MARKETS AND SPREADS
OCEAN FREIGHT COMMENTS
Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Freight markets turned up this week as Chinese and Korean markets returned from the summer holiday and as the Japanese look to their national holiday next week. All this added to an increase to activity this week. Demand for iron ore and coal to China picked up and supported both Cape and Panamax vessel segments.
Baltic dry-bulk Panamax indices rose to a three-month high this week. I’ve seen news reports stating that the indices have risen to 9-month highs, but I cannot see how that calculates as they were at similar levels in June of this year.
All the same, they are up to attractive levels for vessel owners and we should see good selling interest at these levels.
Pacific Panamax daily hire rates increased to $14,190/day.
But, as I have stated so many times before, it is another Friday, and world freight markets are losing their momentum as we go home for the weekend. Vessel owners are trying to be stubborn and capture all they can from the recent rally, but I cannot see were the support will come from to move things higher. I’d rather be a seller than buyer at current prices.
Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China:
The charts below represents total (MT) month-to-month hong Kong container shipments for Jan-Aug 2009, Jan-Aug 2010, and Jan-Aug 2011.