2011 Market Perspectives
- Category: 2011 Market Perspectives
- Published on Friday, 09 September 2011 05:00
CHICAGO BOARD OF TRADE MARKET NEWS
Outlook: USDA’s Grain Stocks Report was published this morning, and it was considered bearish because stocks were larger than what the majority of analysts had estimated. USDA’s figure for total old crop corn stocks is 1.13 billion bushels. The average analyst estimate was that stocks would remain below 1 billion bushels at 0.964 (range 0.835 to 1.050). Wheat stocks of 2.15 billion bushels were also above the average estimate of 2.035 (range 2.003 to 2.084). These two factors imply there is sufficient feed available to meet lackluster demand.
The prospect of weak feed demand is not a surprise to many market participants who are increasingly talking about the prospect that U.S. meat production, particularly beef, could experience a substantial decline in 2012. Until the recent decline in corn prices, it seemed almost certain that the U.S. consumer was destined to experience greater food inflation starting next spring. However, the recent sell-off on corn and continued negative influence of today’s Stocks Report could create an opportunity to reduce the intensity of impending food inflation if livestock and poultry producers extend long-term hedges.
The prospect of extending long-term corn coverage below $6.00 per bushel and the likelihood of strong meat prices in 2012 changes the outlook for meat producers. U.S. ethanol producers can also lock in excellent margin, assuming crude oil remains above $85 per barrel. And last but not least, Asian buyers can rebuild some of their own domestic stocks to act as food inflation buffer. This opportunity continues in-part because the long speculators, who unwisely rode their positions under water on the recent sell-off, were counting on today’s Stocks Report and renewed Chinese buying to bounce their losing positions back to the surface. At the moment, neither of those prospects is working out as hoped, and there could easily be some additional selling. However, corn prices had already sold off significantly prior to the Stocks Report, and this purchasing opportunity for corn users is not indefinite.
Today’s bearish USDA Grain Stocks Report could easily follow an opposite pattern of the bullish September WASDE that was followed by a $1.70 sell-off. In other words, any near-term exodus of length creates an important opportunity for corn users and should not be neglected.
CBOT DECEMBER CORN FUTURES
Current Market Values:
U.S. WEATHER/CROP PROGRESS
U.S. Drought Monitor Weather Forecast: During the September 28 – October 3, 2011 time period, there is an enhanced probability of precipitation limited to the Northeast, the Northwest, and the extreme Southwest, early in the period. Later, the above-normal probability of precipitation encompasses most of the West and is eliminated in the Northeast. Below normal temperatures are expected in the eastern part of the country early in the period. Later, the chances shift to near-normal. In the West and central part of the country, temperatures are expected to be above normal throughout the period.
For the ensuing 5 days (October 4 – October 8, 2011), the odds favor cooler-than-normal conditions over much of the Southeast and along the West Coast. Warmer-than-normal to normal conditions are expected across the West, through the Plains and into the Mid-Atlantic and Northeast. The odds of above-normal precipitation are limited to the West and primarily in the Northwest. Normal to below-normal precipitation is expected across the Southwest, through the center of the country and along the East 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
Corn: Net sales of 787,900 MT for the 2011/12 marketing year were mainly reported for Japan (386,700 MT, including 48,600 MT switched from unknown destinations), China (182,100 MT, including 179,400 MT switched from unknown destinations), South Korea (132,100 MT), Mexico (118,200 MT), and the Dominican Republic (37,900 MT, including 19,500 MT switched from unknown destinations and decreases of 1,200 MT). Decreases were reported for unknown destinations (147,800 MT). Net sales of 25,000 MT for delivery in 2012/2013 were reported for Venezuela. Exports of 823,100 MT were primarily reported for China (182,100 MT), South Korea (172,500 MT), Mexico (138,400 MT), Japan (138,200 MT), Egypt (65,900 MT), and Taiwan (22,800 MT).
Barley: There were no sales reported during the week. Exports of 300 MT were to Taiwan.
Sorghum: Net sales of 22,700 MT were reported for unknown destinations (13,700 MT) and Mexico (9,000 MT). Exports of 500 MT were mainly reported to Mexico.
** Updated** -
Jan/Feb/Mar : N/A (market too thin to be accurate)
DISTILLERS DRIED GRAINS WITH SOLUBLES (DDGS)
There is a strong premium for October DDGS because of what looks to be a guaranteed freight increase for container shippers starting November 1. Some carriers have announced significant tariff increases. Trade is indicating that, to a DDGS seller, this means one can pay $4-8 MT more for DDGS loading in October and still be equal on a CFR basis for DDGS loaded in FH November; this will all fall under the umbrella of November sailing sales.
This price bubble came very quickly, and it seems these premiums will carry through December sales due to the continuing freight increases. Exacerbating these new challenges is the fact that many Ethanol plants are shut down next week and the following weeks for seasonal maintenance. This lack of supply in October plus increased demand for October loadings could create a price burst for nearby DDGS trade.
The Chicago container market is still the leader, and is tight due to the downtimes at different plants (as indicated above); additionally, freight increases will be announced in October. Corn basis tightness is creating a lot of demand in the country, but cheaper soymeal is going to weigh on prices going ahead.
DDGS sales have been stuck at a red light for the past week with CBOT corn plummeting and DDGS prices remaining unexpectedly firm. The market is seeing DDGS values now around 95% of the value of corn.
The rumor about China’s anti-dumping case being postponed spurred good buying interests. However, Vietnam continues to be an aggressive buyer. Domestic values continue to show support in face of lower CBOT corn values.
Comments and Trades reported:
2500 MT was traded on nearby trucks to Chicago at $219 MT, and rail traded at $215 MT.
• CIF NOLA paper is trading at $252/MT, approximately $15/MT lower than where physical DDGS can make it to the Gulf given strong interior demand and expensive barge freight.
• Qingdao: $295/MT, 4,000MT
• Huangpu: $303/MT, 3,600MT
• HCMC: $302/MT, 600MT
• Shanghai: $298/MT, 500MT
• China: Bid/Offer spreads at $6-$7/MT
Congressional Representatives Goodlatte (R-Virginia) and Costa (D-California) are potential sponsors of legislation to reduce the federal mandate for ethanol use when corn supplies are tight. The legislation would reduce the ethanol mandate to 25 percent when the stock-to-use ratio is less than 7 percent, and reduce it by 50 percent when the ratio is be less than 5 percent. The effectiveness of such legislation is far from certain when ethanol margins are profitable, because it seems to imply that ethanol is an inferior product that will only be consumed when mandated. It is undefined if such legislation would forcefully limit corn consumption when stocks are tight and when such a cap would be removed.
Current corn prices are creating above average margins for ethanol producers. If petroleum prices remain above $85 and corn prices remain below $7.00, then ethanol is unlikely to experience demand rationing — even when the 45 cents per gallon tax credit is removed. The decline in ethanol product is the result of scheduled maintenance at some of the United States’ 209 plants — not the result of poor profitability. In fact, records have been set for exports of ethanol and co-products. Taiwan’s Feed Industry Association recently signed an agreement to buy U.S. corn and DDGS into 2013, according to DTN. These various factors seem to imply that the U.S. ethanol industry will not suffer substantially if federal support is reduced.
Argentina: Argentina expects to have five new ethanol plants up and running in the next five years, according to Reuters. The first of those plants is supposedly large enough to satisfy the national mandate for ethanol to be 5 percent of fuel consumption. The remaining plants will double the available supplies; either the mandate must be increased and/or Argentina will compete against the United States for ethanol export business.
Brazil: The CME may launch a Brazilian ethanol contract. The exchange currently trades U.S. ethanol futures reports DTN. Brazil was the world’s largest ethanol exporter and could regain the title if its sugar-based production increases to full potential. Brazil is currently the world’s second largest producer behind the United States.
China: China plants approximately the same area to corn as the United States does, but their yields are only half. A primary reason is that the Chinese government remains reluctant to plant GMO varieties due to public concerns. On the other hand, China does import various biotech varieties from foreign locations. U.S. exports’ hopes to China could diminish significantly if/when China works through these conflicting policies.
EU: The European Union is holding talks to strengthen ties with Ukraine. The EU’s production expertize with Ukraine’s large expanse of fertile soils are an attractive combination. However, EU officials are somewhat concerned about Ukraine’s political and economic standards, reported the Associated Press. Ukraine’s current ruling administration has recently imprisoned members of the prior administration for questionable reasons.
Japan: Japan and South Korea seem poised to make some large corn purchases and Minnesota Governor Dayton is visiting those two nations with a group of 24 delegates from associations such as The Minnesota Corn Growers, Minnesota Farm Bureau and the Minnesota Farmers Union reports the StarTribune.
Russia/Ukraine: Certain regions of western Russia may be attracting the attention of Chinese companies as a region to expand grain production. One example of a potential partnership is a Chinese company seeking to invest around $200 million to build a lysine producing plant with Russian grains, according to a story by Reuters.
OCEAN FREIGHT MARKETS AND SPREADS
OCEAN FREIGHT COMMENTS
Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: I am trying hard to come up with new issues and market news to discuss and not just fill space with the same thoughts. My problem is that the freight markets are not helping much in this regard. This was another week of up and down, back and forth action that is taking us nowhere meaningful. Unless, however, you consider relatively stable freight markets meaningful? All in all the market continues to steam in circles and remains in the same old price rage.
Yes, the Baltic indices were up a little this week, for all the same reasons, but mostly due to interest from buyers of the freight futures and not so much on true physical demand. Physical freight rates did not materially change. With the relative weakness in the Pacific verses the Gulf-Atlantic markets, we are seeing ships ballast from the Pacific to the U.S.Gulf. This will provide for a larger pool of vessels in the U.S. Gulf and should limit any upside potential there. On the other hand, the precipitous drop in grain prices should encourage foreign buyer demand and pricing. Will China enter the corn market next week, and will they buy 3-5 million tons this marketing year? Their true demand is unknown but the price should now be attractive.
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.