2011 Market Perspectives

Market Perspectives December 2, 2011


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Outlook: The December 2011 contract closed the week at $5.8650 per bushel. By coincidence, that is also the average price of all corn futures contracts through December 2012. The outlook of the December 2012 contract remaining below $6.00 corn seems unlikely prior to concrete confirmation of an abundant global corn harvest. The direction of least resistance seems to be up once March 2012 becomes the nearby corn contract, for the following reasons:

Sellers of futures recognize that another year with corn yields that are below expectations is a potentially explosive situation. On two recent occasions, 2000 to 2003 and 2005 to 2008, yields have remained at or below trend for four years in a row. While the long-run trend is moving consistently higher, yields significantly above trend are as much of an anomaly as yields significantly below trend. Historically, the odds of extremely poor or extremely favorable yields are each about 15 percent.

The fact that the coin has flipped to “tails” on the last two occasions (below trend yields) does not increase the probability that “heads” will be flipped the next time around. The odds of the coin toss always remains 50/50; the current result of heads or tails has no influence upon the proceeding flip of the coin. The odds may be slightly different for weather, but global weather patterns are fairly dynamic and change sufficiently— weather from one year normally has little to no relationship upon another. As a result, there is likely to be a hesitancy to sell at price levels that do not seem safely above perceived market value. Having said that, the following are a few reasons for the recent sell-off in corn:

Large speculative traders appear to have gotten carried away building long positions that ran the December 2011 contract up to $7.75 in August. The global trading community balked at such high prices prior to the U.S. corn harvest, production of a bumper Chinese corn crop and when Black Sea exporters offered inexpensive feed wheat. Additional pressure was applied to corn futures by economic uncertainty, a slow start to U.S. corn exports (due primarily to high prices) and the development of bearish technical charts patterns. Additionally, the bankruptcy and mismanagement of MF Global client accounts also sent negative shock-waves throughout commodity markets.

A substantial number of large speculative traders lost money during the September sell-off on their long corn positions that were placed last summer. Of course, there always seems to be a stubborn pool of traders who refuse to take a loss and “average-down” on their established positions. The recent sell-off, back below $6.00, can be attributed in part to those remaining traders eventually being forced out of their long positions.

Ethanol demand for corn is leveling off, but U.S. acreage also seems to have reached an upper limit. High price is the necessary encouragement for U.S. farmers to confront obstacles that result from consistent corn-on-corn planting. Because of increasing input costs, it will be particularly important for high prices to incentivize farmers to plant corn in the spring of 2012. Many farmers are holding on to corn stocks in anticipation that pre-planting volatility is likely to cause futures contracts to rebound this spring. That expectation seems correct. In the meantime, feedlot managers recognize that they can lock in profitable returns with sub-$6.00 corn and cattle at $120 cwt. Meanwhile, $6.00 corn is also attractive to ethanol producers, regardless of hitting the “blend wall” or the demise of the 45-cent VEETC. Government mandates, $100 crude oil and ethanol export demand combine to make ethanol production profitable with $6.00 corn.






Current Market Values:





U.S. Drought Monitor Weather Forecast: For the ensuing 5 days (December 1-5), a storm system is expected to develop and strengthen in the Southwest. This system will slowly track eastward, bringing welcome precipitation to the Southwest and eventually to the southern and central Plains. The highest 5-day precipitation totals (2 to 3 inches) are expected in Texas, northern Louisiana, and Arkansas. Meanwhile, little or no precipitation is forecast for both coasts. 5-day average temperatures should be subnormal in the Intermountain West, Rockies, and Plains, and above-normal in the eastern third of the nation.

The CPC 6-10 day outlook (December 6-10) indicates enhanced odds for above normal precipitation east of the Mississippi River (except Florida), along the western Gulf Coast, and in the extreme northern Plains. Below normal precipitation is expected in the Pacific Northwest and Great Basin, central Plains, and southern Florida. Subnormal temperatures are predicted in the western half of the nation, especially in the Southwest, with above normal readings limited to New England and southern Florida. Follow this link to view current U.S. and international weather patterns and the future outlook: Weather and Crop Bulletin.





Corn: Net sales of 280,600 MT for the 2011/2012 marketing year resulted as increases for South Korea (131,500 MT, including 117,000 MT switched from unknown destinations and decreases of 60,000 MT), Mexico (76,500 MT), Japan (71,000 MT, including 37,500 MT switched from unknown destinations), Venezuela (48,500 MT), and Guatemala (45,700 MT), were partially offset by decreases for unknown destinations (204,400 MT). Net sales of 71,600 MT for delivery in 2012/2013 were for Japan. Optional origin sales of 150,000 MT were reported for Mexico. Exports of 810,300 MT were down 17 percent from the previous week and unchanged from the prior 4-week average. The primary destinations were Japan (237,000 MT), Mexico (208,600 MT), South Korea (116,700 MT), China (60,200 MT), El Salvador (37,000 MT), and Costa Rica (32,600 MT).

Barley: There were no sales reported during the week. Exports of 700 MT were to Japan (500 MT) and Taiwan (200 MT).

Sorghum: Net sales of 4,300 MT were reported for Mexico. Exports of 17,000 MT were mainly to Mexico.

















General Comments:

The drop in the corn pricing has put pressure on ethanol plants to bring down their pricing levels on DDGS. It looks like domestic buyers have covered most of their need through the end of the year. Some large poultry feeders have re-entered the market after previously discussing cutting their inclusion rates, but this still will not be enough to lift overall pricing. Export markets have slowed and tight shipping container availability is making it difficult for producers to unload inventory and avoid storage on-site.

DDGS values have been experiencing an important correction over the past week. The increased exporting of corn and soybeans over the past couple weeks has removed a significant amount of container capacity from the market, as indicated above. DDGS values have dropped anywhere from $8-10/MT this week, and the market feels weaker moving into the months of January, February, and March.

TChina buyers are still window shopping, wanting to know the latest price updates, but with no intention to pull out their wallets to make any real purchases. Offer prices from various suppliers in a wide range shows that market discovery is still challenging. In other parts of the world, DDGS prices are finally reaching levels that are suitable to buyers, with trades being made to Korea after that country waited for the price to drop into the low $300s.

Some customers are inquiring about FEB shipments, but due to possible January GRI, some traders are building on the price structure by as much as by $4/MT to cover the expected new GRI. So far, no feedback on FEB inquiries has been reported.

Locally, the market feels weak with all demand sectors down. As indicated above, many have long positions and are mostly covered in the short term. East coast end users are excluding DDGS from their hog diets due to both price, and escalating DON levels (particularly out of Ohio), as reported by some traders.

DDGS supplies have loosened up, and we are seeing more product available for sale to Mexico. Prices have come down $20 per ton and are starting to work back into rations at low inclusion levels. The Peso-USD exchange rate is putting the crunch on the Mexican buyer right now. It has improved slightly in the past couple of days, but it is still at a very high (13.5 to 1 exchange rate as of this writing on 12/01/2011).


Comments and Trades reported:


Local Trade:

  • Several thousand tons traded in Chicago for December trucks at $228/M


Trade bids/offers:


  • Offered $295/MT Qingdao/Shanghai - countered at $292/MT for January shipment of 2,000 MT.
  • HCMC: firm offer at $308/MT - firm bid at $305/MT for January

Ethanol Comments: A piece by World Perspectives on November 29 noted that Renewable Fuels Association (RFA) President Bob Dineen laid out some of the challenges for the ethanol sector in 2012, which are mostly policy related. Those challenges include scaling the blend wall, implementing e-15 and efforts by anti-ethanol groups to modify the renewable fuel standard (RFS).

Demand and oil prices have been sufficient to provide a positive margin for all but 12 of the last 52 weeks, so far topping $2 per gallon earlier this month. Interestingly, the current strong production pace is likely to be supported by the expected December 31, 2011 expiration of the volumetric ethanol excise tax credit (VEETC). Ethanol producers are capturing the VEETC while they can. Domestic blender use of ethanol in the U.S. is now about 4 percent above last year’s use, even though there has been an overall drop in motor fuel demand of 5 percent.

Supposedly the ethanol production has been at the “blend wall” since June 2011, but demand and returns remain favorable due to factors such as excellent export demand. Net exports of ethanol in September reached 72 million gallons. Year-to-date U.S. ethanol exports reached 746 million gallons, nearly triple the 253 million gallons exported January to September 2010. It is interesting that a considerable amount of U.S. ethanol exports are being shipped to Brazil to meet their ethanol requirements. Half of Brazilian ethanol imports are estimated to come from the United States.

The European Union has opened an antidumping case against U.S. ethanol, but that is primarily tied to the VEETC. It will be somewhat ironic if the VEETC expires and opens the door for additional ethanol exports. The EU is mandated to use 165 million more gallons than it will produce this year.




Argentina: Argentina’s President Cristina de Kirchner is seeking to improve her historically difficult relations with the farm community. The objective is to improve relations by revamping the current government regulations on grain and oilseed exports. Instead of issuing periodic export permits, the government intends to set aside a portion of each crop that is sufficient to satisfy domestic demand, and then allow farmers to negotiate prices with export companies on the remaining stocks. Argentina’s “left leaning” president may be pleasantly surprised to discover than greater market access has incentivized the farm community to increase production, thereby increasing government revenues.

Brazil: A high pressure pattern seems to be reducing rain systems across southern portions of Brazil. Mato Grosso do Sul, Parana and Rio Grande are dealing with dryness. Rio Grande has actually experienced the second driest November in over a decade. Market participants are not yet anxious but they will keep one eye on weather developments.

China: China’s developing meat sector and growing appetite for corn seems to be a primary motivator for Argentina’s recent adjustment to the structure of their feed-grain marketing. China and Argentina have been working on the issuance of phytosanitary (quarantine) permits. Increased trade relations between these two nations may also partly explain the reason for China’s recent lackluster corn imports from the United States. China has sufficient domestic corn reserves until Argentine production starts hitting the market in March. China will eventually seek to rebuild their domestic feed-grain stocks.

EU: Global grain markets could experience volatile prices if current European wheat patterns are any indication of what to expect in the 2102 season. The western half of Europe from Britain down across Spain and into North Africa has ample moisture, while the eastern nations, a region of heavy feed-grain production, had their driest November in 30 years.

Japan: Japan is the world’s largest corn importer and the United States is its largest feed-grain supplier. Japanese buyers adjusted their feed rations to include more feed-wheat back when the nearby corn approached $8.00. However, U.S. corn is now priced almost $2.00 per bushel less than the August high. Since animals do not do well when rations are constantly altered, Japanese nutritionists must carefully evaluate long-run strategies.

Russia/Ukraine: Russia may increasingly satisfy Japanese feed-grain needs as they build a new deep-sea terminal on the Pacific coast that will be linked to western grain production regions by the Trans-Siberian railroad. Currently, Russia only has two ports in the Black Sea that are capable of loading big vessels. Russia’s stated objective is to double grain exports by 2020.






Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: World freight markets were a mixed bag this week. I read one market article which claimed that “the tide has turned again.” It looks to me like the tide keeps trying to rise but must always go back out again. The Capesize market rallied in price due to an increase in spot business, and is enjoying a temporary improvement in demand. With low world port congestion levels, it may be difficult to maintain the rally. However, the Panamax sector did not gain support from the Capesize market and went in the opposite direction. The Panamax sector has been weak and declining all week, especially in the Pacific. For the moment Buyers of Panamax and Handysize freight have the negotiating advantage.

From USDA records: During the week ending November 24, 35 ocean-going grain vessels were loaded in the U.S. Gulf, down 30 percent from last year. Within the next 10 days 58 vessels are expected to be loaded, 8 percent less than the same period last year.



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 Vietnam container shipments for Jan.-Nov. 2009, Jan.-Nov. 2010 and Jan.-Nov. 2011.












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