2011 Market Perspectives

Market Perspectives
October 28, 2011




Outlook: The nearby December 2011 corn contract had consolidated in a pennant (flag) type of technical chart pattern from the WASDE on October 12 through last Thursday (October 20). As explained in prior discussions, most technical traders interpret this to be a midlevel consolidation pattern. However, the consolidated flag portion of the pattern can only continue for a certain amount of time before it needs to breakout or risks being rejected. Last Friday, the December corn contract broke out to the upside. Ideally the rally would continue through Monday and Tuesday, but that was not the case. Instead, the December contract consolidated again, in just a slightly higher trading range, before again selling back off Wednesday into the prior trading range. Technically, this price action is not convincingly bullish.

Fundamentally, it seems that the recent buying by funds may simply have presented an opportunity for ethanol producers to lift their long hedges at better prices. Consequently, any speculative fund managers who had “averaged down” on losing long positions are placed in an even more challenging situation.  If they continue adding to their positions, will they be able to successfully exit at a higher prices? The answer seems to be, “probably not.”

Tame demand, corn harvest and ample global feed wheat stocks are likely to turn any attempted rally in the nearby corn contract into a spike up and back. Such price action is difficult for anyone with a large position to trade. However, the prospect of such price action and improved basis could be sufficient incentive for corn producers to sell a little more inventory before year-end.



Current Market Values:




U.S. Drought Monitor Weather Forecast: During the next 5 days (October 27-31), a slow moving cold front, with several areas of low pressure traveling along the front, will traverse across the central and eastern U.S. This will bring precipitation from the southern Plains northeastward into lower New England. The greatest 5-day totals (1 to 2 inches) are forecasted to occur from northern Texas and eastern Oklahoma into northern Arkansas, along the Ohio River, in the central Appalachians, and to coastal lower New England (NJ, Long Island, CT, RI, MA). Farther south, the track of Hurricane Rina (in the western Caribbean Sea) will be closely monitored to see what way, if any, it impacts Florida. The current 5-day outlook has tropical moisture and showers (1 to 1.5 inches) spreading over most of the state except the Panhandle. Later in the period, a weak Pacific system should bring light precipitation to the Pacific Northwest. Temperatures should average above-normal in the West and northern Plains, and subnormal in the southern Plains and the eastern third of the Nation.

The CPC 6 to10 day outlook (November 1-5) predicts a general zonal (west to east) upper-air flow over the lower 48 States. This translates to favorable odds of above-normal precipitation in the northern Rockies and Northeast, and subnormal precipitation across the southern third of the Nation from Arizona to Alabama. The temperature probability for below-normal readings is greatest from the Pacific Northwest into the central Rockies, and in the eastern Gulf and southern Atlantic States. Odds are likely for above-normal temperatures in the Southwest and upper Midwest. Follow this link to view current U.S. and international weather patterns and the future outlook: Weather and Crop Bulletin.



Corn: Net sales of 336,200 MT for the 2011/2012 marketing year were down 81 percent from the previous week and 74 percent from the prior 4-week average. Increases were reported for Japan (225,900 MT), Mexico (92,400 MT), China (60,000 MT, switched from unknown destinations), Venezuela (34,000 MT, including 20,000 MT switched from Panama), and the Dominican Republic (24,200 MT, including 3,800 MT switched from Colombia and decreases of 100 MT). Decreases were reported for unknown destinations (78,100 MT), Egypt (31,600 MT), and Panama (20,000 MT). Net sales of 25,100 MT for delivery in 2012/2013 were reported for Japan.  Optional origin cancellations for 2012/2013 were reported for Mexico (30,000 MT). Exports of 677,100 MT were primarily reported to Mexico (231,800 MT), Japan (134,800 MT), South Korea (114,500 MT), Honduras (44,800 MT), Venezuela (39,000 MT), and Taiwan (37,600 MT).

Barley: Net sales of 600 MT were reported for Japan. Exports of 500 MT were reported to Taiwan.

Sorghum: Net sales of 10,400 MT were reported for unknown destinations (9,100 MT) and Mexico (1,200 MT). Exports of 40,300 MT were mainly reported to Mexico.











General Comments: The DDGS market is still very tight, and Chicago is still the best market for many of the ethanol plants in the Midwest.  California and the Southern plains are now realizing that they need to pay up in order to obtain product. The river market is still the cheapest one out there by far – it is $5-7/MT away from diverting product from Chicago.

Harvest is moving along quickly – soybeans are 90 percent harvested and corn 60 percent harvested, with good weather ahead to allow for further progress. The DDGS market is experiencing strong demand at $220-230 ST. DWG is at high demand as well. A significant number of southern (TX, OK, KS) cattle, having moved north earlier due to drought, are in Nebraska yards creating very good feed demand. The market believes prices will remain strong going through the rest of fall and winter.

Ethanol plants are running strong again, with very good margins currently. Most plants have finished their scheduled maintenance and are back in the market place. Expectations are for significantly more DDGS availability in the nearby time period, though if different scenarios fall into place then prices may ease by mid-November.

Product from Mexico remains extremely tight and priced out of most rations in Mexico. In-country inventories are very scarce, and offers for October and November shipments are hard to find.

Comments and Trades reported:

Local Trade:

  • Several thousand tons of Chicago railcars destined for the container yards traded at $223 for November.

Trade bids/offers:

  • Offers are holding at $309-312 for Chinese ports.  Some higher offers are out there, but it looks like defensive posturing and is basically staying on the sidelines.

Ethanol Comments: USDA’s Economic Research Service reported that dried distiller grain (DDGS) is replacing more corn and soymeal in feed rations than many analysts thought. The amount of corn and meal replaced by DDGS represents almost 40 percent (pound for pound) of the corn use in ethanol production. The ethanol distilling process concentrates the protein, fat and fiber components of distiller grains. As a result, one ton of DDGS can replace more than one ton of conventional feed to obtain the equivalent protein content.

The Economic Research Service has performed some excellent analysis of the ethanol industry. Please review their research by accessing the following websites:

DDSG substitution for corn and soybean meal: http://www.ers.usda.gov/Publications/FDS/2011/09Sep/FDS11I01/FDS11I01.pdf

DDGS supply, use, and price:



Argentina: President Cristina de Kirchner was reelected in a landslide. In the meantime, Argentina’s inflationary pressures seem to have dampened investor interest in comparison to neighboring Brazil. However, the Argentinean economy grew by 8 percent in 2010 and is poised to show steady growth into the future. Like Brazil, they also have large newly discovered natural gas fields. Natural gas is a key component is the production of fertilizer and running corn driers. Due to unstable export policies, Argentina’s feed grain producers may be more open to long-term production agreements than producers in the United States, Brazil and Ukraine. If so, Argentina’s future feed grain production may far exceed industry expectations.

Australia: Australian farmers note that competition against the Black Sea region is not easy. Ukraine is a major competitor in the global barley market. Ukrainian farmers may not have the same financial resources as their Australian counterparts but they have one third of the world’s most fertile soils with excellent water retention and less need for fertilizers.

Brazil: In the past decade, Brazilian planted area has increased about 27 percent while grain production has increased over 60 percent. However, the Brazilian average corn yield of 65 bushels per acre is less than half that produced in the U.S., reports a DTN story by Alastair Stewart. By relying upon improved genetics that are specifically tailored to Brazilian growing conditions, yields are expected to continue to increase.

China: USDA secretary Tom Vilsack will visit China in mid-November to support trade relations. USDA has a strong interest in making sure that the U.S. farm sector continues to maintain record exports, a trade surplus and strong farm income with low debt to help the overall U.S. economy. China has surpassed Mexico and Canada as the United States’ number one market for agricultural commodities.

EU: The prospect of the European Union creating a stable debt solution may allow the dollar to weaken. A weaker dollar should increase the prospects of U.S. grain exports in a competitive global market. However, both EU and U.S. grain prices are currently being undercut by Black Sea production.

Russia/Ukraine: Russia has recently been aggressive in undercutting global grain prices. However, Putin is again running for president and he has warned Russian grain exporters not to sign too many export contracts. Putin intends to increase export duties if exporters sell more than 25 MMT this season.




Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: The market turned south last Friday and continued to lower every day this week. Though the market is now definitely lower, owners are doing their best to resist the change and are not being too aggressive with their offers. As usual Capes are leading the market direction. Daily hire rates for Capesize vessels have fallen two-three thousand dollars per day over the past week. Congestion in Australian iron ore ports has helped support things with 153 vessels backed up there verses a lineup of 105 vessels in late September. However, this is not as bad as the 180 vessel backup of last February, and meanwhile the congestion is slowly easing. One hundred capsize vessels were reported booked in September to load iron ore from Australia to China, according to Clarkson Research Services Ltd. That is the most since 104 vessels were hired in July 2009, though that volume is backing off in October.

Chinese steel production is a critically important factor in freight markets. Chinese steel production is showing signs of slowing due to decreased construction activity. As such, iron ore demand and prices are down. As mentioned above, ocean freight values have been partially supported by logistical backlogs at Australia ports. But if the iron ore demand picture does not improve, these backups will abate and the glut of vessels will overpower the market. Another closely watched issue is the negotiation between China with Inner-Mongolia for cooking coal supplies. As this land locked business continues to grow, it will come to displace waterborne shipments.

Delivery of new vessels is, of course, still weighing on the market. There are 250 new Capesize vessels scheduled to be delivered this year (191 have already joined the fleet); 159 Capes were delivered last year. On the Panamax side of things, 217 new vessels have been delivered thus far in 2011. That equates to 24 new Panamax vessels each month.

Finally, we cannot forget that the relative health, or lack thereof, of the world economy will largely dictate consumptive demand for all products.


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



The charts below represent total (MT) month-to-month Thailand container shipments for Jan-Sept. 2009, Jan-Sept. 2010 and Jan-Sept. 2011.







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