2011 Market Perspectives
- Category: 2011 Market Perspectives
- Published on Friday, 09 September 2011 05:00
CHICAGO BOARD OF TRADE MARKET NEWS
Outlook: Outside market influences are often given too much credit for movement in grain prices, but this week is not one of those occasions. The bankruptcy and mismanagement of MF Global client accounts, along with the Greek debt crisis, has sent a negative shock throughout the global commodity market system that is dependent upon honesty and professional maturity. The result of emotions and uncertainty ruling the market is the up-again, down-again see-saw pattern that has been expressed in nearby corn futures.
Volatility resulting from outside market factors (such as corruption or national debt) is different than volatility stemming from a surprise of more related factors, such as a surprise yield adjustment or sudden weather event. Market related events can result in excitement and increased market participation. However, volatility that stems from more aloof factors or corruption often causes traders to stand on the side. The exiting of positions can result in a seeming tug-of-war pattern — displayed this week in nearby corn futures. Such inconsistency can result in sluggish cash markets as farmers fold their arms and stand to the side. Many farmers recognize that the demise of the $0.45 per-gallon tax credit could momentarily weigh on corn contracts, but they also recognize that large buyers are waiting below the market and that the acreage battle in the spring of 2012 seems destined to be aggressive.
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: Over the next five days (November 2-6), it looks to be a very active weather pattern with precipitation chances over most of the United States. The greatest amounts are forecast over the Midwest, Pacific Northwest, and North Carolina. Temperatures are expected to be well below normal over the western U.S., where departures are expected to be 6-9 degrees Fahrenheit below normal. Warmer than normal temperatures are forecast over the Great Lakes, where departures are 3-6 degrees Fahrenheit above normal.
The CPC 6-10 day forecast (November 7-11) temperatures are expected to stay below normal over the western United States and above normal over the eastern part of the country with the best chances of above normal temperatures over the Ohio River Valley. Conditions are expected to remain dry over the southwest and Atlantic Coast, with the best chances of above normal precipitation over the Midwest and Pacific Northwest. 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 622,600 MT for the 2011/2012 marketing year were up 85 percent from the previous week, but down 46 percent from the prior 4-week average. Increases were reported for Japan (252,900 MT, including 112,100 MT switched from unknown destinations and decreases of 11,800 MT), Cuba (150,000 MT), South Korea (118,900 MT, including 55,000 MT switched from unknown destinations and decreases of 100 MT), China (60,000 MT, switched from unknown destinations), and El Salvador (27,600 MT, including 13,900 MT switched from unknown destinations). Decreases were reported for unknown destinations (110,000 MT). Optional origin cancellations were reported for Mexico (30,000 MT). Optional origin sales for delivery in 2012/2013 were reported for Mexico (30,000 MT). Exports of 746,900 MT were primarily to Japan (428,100 MT), Mexico (152,500 MT), Panama (34,200 MT), Canada (26,800 MT), Guatemala (23,500 MT), and El Salvador (20,600 MT).
Barley: There were no sales or exports reported during the week.
Sorghum: Net sales of 500 MT resulted as increases for Japan (19,000 MT, switched from unknown destinations) and Mexico (400 MT), were partially offset by decreases for unknown destinations (19,000 MT). Exports of 31,200 MT were reported to Japan (19,000 MT) and Mexico (12,200 MT).
DISTILLERS DRIED GRAINS WITH SOLUBLES (DDGS)
DDGS values feel a bit weaker in the nearby market. The spot market is now trading only at a slight premium to the deferred prices. At these price levels, international demand seems to be much weaker. It also seems that plants are starting to produce “name plate” amounts of product after “coming-up” slower than expected from plant shutdowns.
To compound problems, container carriers are implementing winter rotations and vessel space is becoming an issue regarding exports. In the next 3 weeks the market may expect a significant amount of capacity (container) disappearance from the market place. Furthermore, carriers are already talking about another round of GRIs in December or January. This could further the issues for overseas sales and hurt the domestic supply-demand balance in the DDGS market.
Prices are still too high to attract any demand from customers. Rather, most customers buy corn or SBM. Containers are getting tight in the Chicago area. Some ship lines have also suspended and/or cancelled their transpacific service.
DDGS also remains extremely tight in Mexico. Buyers are substituting more corn and SBM into their rations as DDGS prices are extremely high for the very limited supplies to be had.
Comments and Trades reported:
- Market still strong, ethanol margins very good, DDGS $225-230 ST, FOB Nebraska plants.
- FH Mid-bridge Laredo cars @ $305/MT (Mexico trade)
At its current rate, United States ethanol production is on pace to reach 14 billion gallons, according to a recent article by DTN. Stocks of ethanol are declining despite the strong production, in part because of growing export demand. U.S. ethanol exports totaled 640.7 million gallons from January through August of this year, well above the total ethanol exports for the full year of 2010. However, that successful growth has created some resentment among European ethanol producers. They have called for an investigation as to whether U.S. ethanol producers are receiving illegal subsidies. The demise of the Volumetric Ethanol Excise Tax Credit (VEETC credit of $0.45 per gallon) should diminish the credibility of their arguments. EU imports of U.S. ethanol have increased more than 500 percent from 2008 to 2010, according to a story by Reuters.
A different factor that ethanol produces may want to keep an eye on is the increasing cost of fertilizer. Fertilizer producers are seeking a larger piece of the pie. As a result, corn producers could be squeezed by increasing costs and volatile corn prices in 2012. If 2012 global corn acreage reaches intended levels without any adverse weather, then there could be a lot of disgruntled farmers next fall. Such a scenario would likely result in higher input prices for ethanol producers in 2013/2014. As a result, ethanol producers may want to investigate various longer-term pricing agreements.
Argentina: Argentinean farmers are in the middle of planting their corn crop. The Argentine government is seeking to sign trade agreements with China before harvest begins in March. According to Reuters, the Argentines say the negotiations are in final stages while the Chinese seem to be in no hurry. Additionally supportive to global feed grains is the fact that Argentina is also looking at China as a potential beef export market.
Australia: Australian and Indian feed wheat exporters continue to compete for Asian market share against lower priced feed wheat from the Black Sea region. Australia is in the middle of wheat harvest and competitive undercutting of feed wheat prices is a nuisance. Australia could have an abundance of feed wheat this season as yields are good, but quality may be down in Western Australia due to continued rainfall and flooding
China: China has the world’s second largest national economy (ignoring the EU as a whole) but the income of Chinese farmers is increasing more slowly than for urban residents, reports Sosland Publishing. The agricultural sector employs about 38 percent of the labor force but only produces 10 percent of GDP. Currently, 20 percent of the world’s population is being fed with only 7 percent of the world’s arable land.
Japan: The possibility that Japan’s Health Ministry will reduce restrictions against U.S. and Canadian beef is positive news for North American feed grain producers. Replacing the current restriction on cattle 20 months of age with a new 30 month age limit is expected to increase beef exports to Japan, which should support beef prices and encourage beef farmers to expand herds despite higher feed costs. Japan is making adjustments as it prepares to join The United States and eight other nations in the Asia Pacific Economic Cooperation (APEC) free-trade agreement. Japan’s farmers are concerned, but this free-trade agreement would be a win for Japanese consumers — and North America feed grain producers.
Russia/Ukraine: Russian and Ukraine are competitively underpricing each other to get business from large buyers like Egypt’s General Authority of Supply Commodities (GASC). Their competitors, such as Australia and the United States, are finding that even superior freight rates are insufficient to offset Black Sea prices.
OCEAN FREIGHT MARKETS AND SPREADS
OCEAN FREIGHT COMMENTS
Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Ocean freight markets continued their downward slide this week; some have called it a “correction”. The drop in values is being attributed to “the decline in iron ore prices” but this simply means that industrial production is slowing. So, the demand for raw materials is declining and with it freight demand. As always, the pace of Chinese demand is the key: Iron ore volumes account for close to one third of all Capesize vessel business.
As mentioned in last week’s report, delivery of new vessels is still weighing on the market. A total of 250 new Capesize vessels are scheduled to be delivered this year (191 have already joined the fleet). Last year, 159 Capes were delivered. 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. The other big item in the markets this week is, of course, the Greek debt negotiations. My personal take on this is that Greece is borrowing more money than it can possibly repay. Additionally, the Greek population will not be willing to take the sour tasting medicine necessary to resolve their financial problems. Therefore, it is not a question of if Greece will default on their debt, but rather when. Be ready for that!
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.