Market Perspectives June 21, 2013

1. Chicago Board of Trade Market News

Outlook: On June 7 this report commented that the July 2013 contract was likely to trade up to the $6.70-6.90 range. That price behavior happened this week. It was also noted that such a price spike could be a selling opportunity for the remaining old crop feed grain stocks. A number of producers seemed to share that opinion, as movement did increase in the cash grain market, causing interior basis levels to weaken somewhat. It was also noted last week that there is time for a limited sell-off and corresponding rebound in corn contracts prior to USDA’s June 28 reports. Such an event may occur. We believe the spread between old crop and new crop contracts is likely to become increasingly volatile and to compress at some point.

The final price of the July 2013 contract will be heavily dependent upon USDA’s Grain Stocks report that is scheduled to be released next Friday, along with the Acreage report. Several farmers have expressed their intent to wait and see if the Grain Stocks report contains a bullish surprise before marketing the remainder of their old crop feed grains. That strategy could pay off; however, the September contract is increasingly assuming the role of the nearby contract for local elevators as the open interest in the July contract declines. Under such conditions, it could be possible for a producer to correctly call the high of the market and still receive a lower price.

2. CBOT Corn Futures

July Corn Futures

CBOT Table

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

 

U.S. Drought Monitor Weather Forecast: The NWS WPC four-day (June 21-24) Quantitative Precipitation Forecast (QPF) is showing good prospects for a nice shot of unseasonably cooler weather across the Pacific Northwest, California and Nevada. The opposite holds true, though, for the southern Rockies region, central Plains, Midwest and Northeast, where readings could soar well above normal. The precipitation outlook during this period shows the best bet for significant totals to fall in the Pacific Northwest, Northern Plains, upper Midwest, Gulf Coast and up along the southern Atlantic coast into South Carolina.The six- to 10-day outlooks (June 25-29) are calling for a real summertime pattern to emerge, with the odds well tilted toward above-normal temperatures across southern California, the Intermountain West, northern Rockies, Central and Northern Plains, the Midwest and the Northeast. The only areas seeing a greater likelihood of cooler weather are the Pacific Northwest coastal ranges and the western Gulf Coast region. Prospects for rain seem to be best in the Pacific Northwest, upper Midwest, Mid-Atlantic and Northeast. Below-normal precipitation is most likely in the Intermountain West, Wyoming and the Central Plains. Follow this link to view current U.S. and international weather patterns and the future outlook: Weather and Crop Bulletin

 

4. U.S. Export Statistics

Corn: Net sales of 133,400 MT for 2012/13 resulted as increases for Japan (132,400 MT, including 43,500 MT switched from unknown destinations), Mexico (32,600 MT), Venezuela (30,000 MT, switched from unknown destinations), Guatemala (10,400 MT, switched from unknown destinations) and El Salvador (8,500 MT, switched from unknown destinations) were partially offset by decreases for unknown destinations (72,300 MT) and Jamaica (14,500 MT). Net sales of 77,100 MT for 2013/14 were for Mexico (80,400 MT), Taiwan (4,500 MT), China (4,000 MT) and Colombia (4,000 MT). Decreases were reported for Jamaica (8,300 MT) and Panama (7,500 MT). Exports of 322,400 MT were up 39 percent from the previous week and 6 percent from the prior four-week average. The primary destinations were Mexico (118,300 MT), Japan (93,000 MT), Venezuela (48,000 MT) and Panama (30,100 MT). Optional Origin Sales: For 2012/13, outstanding optional origin sales total 65,000 MT, all South Korea. For 2013/14, outstanding optional origin sales total 100,000 MT, all Mexico.

Barley: Net sales of 700 MT resulted as increases for South Korea (900 MT) were partially offset by decreases for Japan (100 MT) and Taiwan (100 MT). Exports of 800 MT were reported to Taiwan.  

Sorghum: There were no sales or exports reported during the week. Optional Origin Sales: For 2013/14, outstanding optional origin sales total 60,000 MT, all China.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Both domestic and foreign DDGS buying have slowed down, as all market participants appear to be anxiously awaiting next Friday’s Acreage and Grain Stocks reports from USDA. If there is a near-term bullish reaction to report contents, then the most general expectation seems to be that ethanol plants could temporarily reduce their operating rates in order to stretch out corn supplies before the new crop arrives.

One merchandiser reported that Chinese buyers did secure a couple thousand metric tons for August shipment, but noted that they are cautious about booking further into the future. Domestic buyers reportedly are purchasing week by week, and the container market seems to be setting the market pace. A common consensus is that there will be no new buying frenzy for the next few months. The container demand for DDGS continues to be supported by issues with delayed shipments of soybeans and soymeal out of South America and by U.S. corn currently being so difficult to source. But these conditions will not last forever. The two major reports will be out of the way in one more week, and U.S growing conditions currently are favorable.

Ethanol Comments: Next Friday’s Grain Stocks report is probably more important for ethanol producers than the Acreage report. Market participants already are expecting a reduction in corn acreage, but far less attention has been paid to the quarterly stocks report. However, a number of ethanol plants seem to have taken prudent preemptive action by obtaining sufficient coverage to withstand a short-term reaction to any bullish surprise. A positive note is that the duration of any rally could be limited if there is no change in the currently favorable growing conditions.

Ethanol stocks for the week ending June 14 increased from 16 million barrels to 16.5 million barrels and remained well below year-ago levels of 21.2 million barrels. Weekly average production declined from 884,000 barrels per day (bpd) to 873,000 bpd as producer margins narrowed. The differential between corn and co-product processing values declined in all regions:

• Illinois differential decreased to $2.21 per bushel, which is down from $2.31 the prior week but above $1.20 last year.
• Iowa differential decreased to $1.90 per bushel, which is down from $2.06 the prior week but above $1.42 last year.
• Nebraska differential decreased to $1.95 per bushel, which is down from $2.26 the prior week but above $1.25 last year.
• South Dakota differential decreased to $2.04 per bushel, which is down from $2.07 the prior week but above $1.20 last year.

Ethanol producer margins could be squeezed further in the near term because of the current high corn prices and the return of ethanol imports. Ethanol imports returned at a rate of 65,000 bpd for the week ending June 14.

7. Country News

Japan: Since U.S. corn prices have spiked, Japan’s use of the grain in animal feed production has fallen from 43.9 percent in April 2012 to 42.0 percent in April of this year, according to Reuters. Imports of U.S. corn in April amounted to 1.03 MMT, down by 17.7 percent from a year ago. In the meantime, the Japanese have been sourcing cheaper corn from Brazil. Imports from the South American country increased from zero in April 2012 to 40.7 percent in April 2013.

Kenya: There reportedly has been an outbreak of corn necrosis in Kenya, according to WPI, and neighboring countries are worried that imports of the diseased grain may infect their local corn crops. The Tanzanian government said it is controlling imports from Kenya to ensure that this does not happen.

Russia: Russia’s winter barley harvesting campaign began 10 days ahead of schedule in the southern regions of Krasnodar and Stavropol, reports Reuters. Thus far, farmers in these regions have harvested 148,300 MT of grain from 27,700 hectares. Yields are at 5.28 MT/hectare, which is an improvement over the yield of 2.98 MT/hectare at the start of last year’s campaign. With increased offers of new crop barley flooding the market, Russian barley export prices took a tumble. Prices fell from $255/MT two weeks ago to $248/MT FOB Black Sea last week. The first cargoes are expected to arrive in Novorossiisk by the end of the month, according to analysts.

Serbia: Serbian corn plantings decreased to 1.19 million hectares, down by 7.3 percent compared to the previous season, reports Bloomberg.

South Africa: The South African government is expected to cut its corn production forecast for 2013 once again, as drought conditions earlier in the year have negatively affected crop growth. The corn crop is now expected to be 11.44 MMT, down from 11.83 MMT last year. A Reuters survey averaging the estimates of seven trading houses pegs the crop at an even lower number: 11.37 MMT.

Meanwhile, South African white corn futures have had a volatile week, according to Bloomberg. They rose the most in nearly three weeks after the rand dropped for a fifth day, but today declined the most in a week after the rand gained against the dollar and as prices fell in Chicago. The strengthening rand improves the country’s export prospects and makes imports less expensive as well

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: The Baltic indices, especially in the Capsize market, were up this week and at their highest level in six months. This was true for the indices, but I don’t see the physical market following to the same degree. We are up a little for the week on some routes. The Brazil to China Panamax and Post-Panamax freight market continues to be offered at aggressive rates.

An ocean freight news wire this week stated, “Something has to give; either rates have to come up or asset values have to drop.” I’m afraid it is the latter that is more likely to occur. According to Simpson Spence Young (SSY) figures, the dry bulk new build deliveries year-to-date totaled 389 vessels (32.3 mdwt). The breakdown on this was as follows: 56 Capesizes of 12.3 mdwt, 128 Panamaxes of 10.5 mdwt, 112 Supramaxes of 6.4 mdwt and 93 Handymaxes of 3.1 mdwt. We are still adding to the world fleet, and the impact of that ought to be obvious.

There is no significant update on the PNW grain elevator labor situation. The wheat harvest is progressing in the South and Central U.S., so we need to monitor the port situation closely.

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

The charts below represent Jan.-Dec. 2011 and 2012, annual totals versus Jan.- April. (2013) container shipments for Philippines.

10. Interest Rates