2011 Market Perspectives

Market Perspectives December 9, 2011


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Outlook: USDA’s World Agricultural Supply and Demand Estimates (WASDE) was published today. Even though 2011/12 ending stocks for corn, soybeans and wheat were all increased above the average trade forecasts; this report was more negative for soybeans and wheat that for feed grains.

The changes to U.S. domestic numbers for feed grains were rather inconsequential in today’s WASDE. Corn ending stocks were increased from 843 million bushels to 848 million bushels, as this season’s industrial usage (sweeteners) was estimated to be 5 million bushels less than forecast last month. Sorghum’s final ending stocks remained unchanged as slow exports to Mexico (due to increased feed-wheat consumption) were offset by increased domestic U.S. feeding. Barley’s supply and demand estimates remained unchanged.


Price estimates for corn and sorghum were each dropped by 30 cents, and the price of barley was narrowed and reduced by 20 cents. The price reductions were partly in response to declines in corn futures that have occurred since early November. (USDA’s reduction in price action may be somewhat premature when considering that the recent sell-off in corn futures occurred as large speculative long positions were reduced and the market has not yet entered the period of pre-planting volatility — in a season that is dependent upon the building of stocks.)


Global corn production and ending stocks were increased, due primarily to substantially larger Chinese production; up 7.3 MMT. The increase in Chinese production resulted in a new record high of 867.5 MMT of global corn. However, it would be incorrect to assume the record global production is resulting in record global ending stocks of corn. Record global corn production is being offset by strong consumption and estimated ending stocks for 2011/12 of 127.19 MMT still remain below last season’s ending stocks of 128.27 MMT, or the prior year’s of 144.08 MMT.


Also consider a different piece of the puzzle that does not seem to make too much sense: The large Chinese stocks and reports of ever increasing corn production seem to reflect a different story than is implied by the high futures prices on the Dalian Futures Exchange. Could prices on the Dalian futures exchange actually be the more accurate barometer of China’s available corn supply? After all, USDA is obtaining their production estimates from China’s National Bureau of Statistics. The success of Chinese managers is based upon expectation for improvement. Additionally, estimates are being derived from numerous small producers and tabulated by an agricultural staff that is much smaller than USDA’s staff.


Current Chinese stocks are ample, but declining U.S. feed grain prices are likely to stimulate increased purchases. (USDA kept their estimate of Chinese corn imports at 3 MMT in the current 2011/12 season, which is more than China’s combined imports for the past two seasons.) The potential for sudden increases in exports and weather uncertainty is likely to keep volatility within U.S. corn futures this spring. Please also note: The nearby March corn contract closed looking like it could be forming a technical bottom.





Current Market Values:





U.S. Drought Monitor Weather Forecast: For the ensuing 5 days (December 8-12), a storm system will track off the East Coast by late Thursday, bringing moderate to heavy precipitation to the mid-Atlantic and New England, with snow possible in parts of the central and northern Appalachians. Once this system departs, much quieter and colder weather will envelop the lower 48 States. The exceptions to this include light to moderate rain in southern Texas and most of Florida, especially the Atlantic side. A weak clipper system may bring light precipitation from the northern Rockies to the lower Great Lakes region, and a cold front will approach the West Coast late in the period.

The CPC 6-10 day outlook (December 13-17) indicates enhanced odds for above-normal precipitation in the lower and middle Mississippi, Tennessee, and Ohio Valleys, and the Great Lakes region. Subnormal precipitation is favored from the central Pacific Coast and Great Basin eastward into the northern and central Plains, and in Florida. Temperatures are expected to average below normal in the western third of the U.S. and above-normal in the eastern third of the Nation. Follow this link to view current U.S. and international weather patterns and the future outlook: Weather and Crop Bulletin.





Corn: Net sales of 695,500 MT for the 2011/2012 marketing year resulted as increases for Mexico (399,500 MT), Japan (240,800 MT, including 135,000 MT switched from unknown destinations), China (238,100 MT, including 179,500 MT switched from unknown destinations and decreases of 1,500 MT), Saudi Arabia (59,800 MT, switched from unknown destinations), Morocco (25,000 MT), and Canada (22,800 MT), were partially offset by decreases for unknown destinations (324,700 MT). Net sales of 12,500 MT for delivery in 2012/2013 were for Mexico. Optional origin sales were reported for Mexico (30,000 MT). Exports of 1,036,600 MT--a marketing-year high--were up 28 percent from the previous week and 26 percent from the prior 4-week average. The primary destinations were to Japan (318,500 MT), China (295,200 MT), Mexico (160,100 MT), South Korea (115,500 MT), Saudi Arabia (59,800 MT), and Taiwan (25,100 MT).

Barley: There were no sales reported during the week.

Sorghum: Net sales of 4,500 MT for Japan were switched from unknown destinations. Exports of 5,300 MT were reported to Japan (4,500 MT) and Mexico (800 MT).

















General Comments:

Markets are weaker as we move into the holiday season. Chicago had the furthest to fall, and indeed it did — losing more than 10 percent of value in about a week. It was a very good week for trade, with lots of interest coming in from several of the Asian markets and active interest still coming in with the decrease in prices.

prices continued to decline, leading into reports of several trades being made to Qingdao, China this week. Prices have been reported to be between $286 and $289 per MT on a C&F basis. Despite these trades, some reports indicate that the DDGS market is quiet with not much trade happening. It still feels like there is a downtrend in DDGS values, and we have not quite yet hit bottom. Chinese buying has been slow, and most seem to be waiting for others to start buying first.

Prices continue to slide and are starting to work into rations in Mexico again. However, the exchange rate is still creating headaches for the Mexican buyer.


Comments and Trades reported:


Local Trade:


  • California unit train sold at $264/MT for LH December.
  • 250 MT at $233/MT delivered Chicago ramp; basis 35 percent profat for December, traded Thursday.
  • BN rail to California for FH December, $242 per short ton.
  • 2200 MT at $234/MT delivered Chicago ramp; 35 percent profat for January, traded Wednesday.
  • 800 MT at $236/MT delivered Chicago ramp for December, traded Monday.


Trade bids/offers:


  • 300 MT DDGS to HCMC, VN at $298/MT for January shipment in containers. Current bids are now around $295/MT.
  • $289/MT DDGS to Qingdao; 1,000 MT, January.
  • $298/MT DDGS to Haiphong; 1,000 MT, January.

    Ethanol Comments: Ethanol production is unlikely to be too heavily influenced by the end of the VEETC so long as gasoline prices hold more than a 45-cent premium to ethanol. Ethanol exports are currently strong and could act as a relief valve if production exceeds the renewable fuels mandate. Declining inventories in the face of increasing production is evidence of strong domestic and export demand.

    The ethanol industry now seems to have production capacity for more than 14 billion gallons of annual production, but a story by Reuters noted that various industry experts are forecasting that growth will plateau. Of course, there is some danger that current strong margins could stimulate additional building until the industry is oversaturated. Ethanol production recently hit a record high and stocks are growing. As a result, profit margins have declined from about 40 cents a week ago to about 20 cent per gallon this week.

    As margins tighten, ethanol producers are encouraged to investigate whether current corn and gasoline contracts allow favorable margins to be hedged. Today’s WASDE report was considered negative; and while corn contracts closed lower, they bounced back nicely. Technically, the March corn contract could be forming a bottom. It would be unfortunate if ethanol producers who use feed grains do not utilize a hedging advantage when it exists.




    Argentina: November and early December were drier than normal, and concerns were raised that La Nina conditions in the Pacific Ocean could adversely affect that whole South American growing season to produce below average yields. However, precipitation has recently increased and more is expected this weekend. Argentina’s corn starts to pollinate in late December and moisture levels will be critical during the primary stages of maturity until harvest begins in March.

    Brazil: Unlike Argentina, Brazil’s climate allows it to produce two distinct corn crops. The first corn crop produces about 70 percent of total production, and is planted and harvested in harmony with Argentina’s corn crop. A second crop is produced in the northeast portion of the nation in February and is harvested from late May to July. Brazilian corn acreage is estimated by different analysts to increase from 8 percent to 10 percent. Market participants, such as the Chinese, are watching Argentina’s crop development. It is currently too early to make any accurate yield estimates.

    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: USDA’s WASDE increased the 2011/12 forecast corn production by 1 MMT. It is important for us to not forget that the EU (64 MMT) is the world’s third largest corn producer behind the U.S. (313 MMT) and China (192 MMT). EU production is well above the production of exporters, such as Argentina (29 MMT), Brazil (61 MMT) or Ukraine (21 MMT). Consequently, dry soil conditions in the eastern regions of the EU are something for the global feed grain community to monitor going into spring planting.






    Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Once again the seas were rather calm, and it was a fairly quiet week in world ocean freight markets. We did bob around a little, especially in the Pacific, but things stabilized at week’s end. A one percent move up or down in the Baltic indices really does not cause much movement in the physical rates. The Capesize market gained support from additional demand in iron ore business from west Australia to China. The smaller size vessels did not share in market uptick and therefore physical rates in the Panamax and Handymax market are mostly unchanged from last week. The 388,000 ton Valemax bulk carrier M/V Berge Everest, built by China's Bohai Shipbuilding Heavy Industry, is just one of six mega bulk ships to be delivered to Vale so far this 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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