Market Perspectives July 5, 2013

1. Chicago Board of Trade Market News

Outlook: Last Friday’s bearish Acreage report caused the December corn contract to sell off about 27 cents and close at $5.11/bushel. The July 4 holiday week began with the December corn contract gapping lower to trade in a 20-cent range between $5.10-4.90/ bushel. Prices are pushed lower by favorable weather forecasts, a stronger dollar and the need for traders to reduce some of their losing long positions. On the other hand, this current price level is offering favorable pricing for end-users to extend coverage on a portion of their usage for next year.

Feed grain buyers have been offered the opportunity to lock in an average corn price below $5.25/bushel for 2014. As a result, there is a notable amount of buying each time the December contract trades below $5.00/bushel. End-users who have been buying hand-to-mouth for much of the past year seem to recognize that they are unlikely to be criticized for locking in a portion of expected usage at these price levels.

Favorable growing conditions across the U.S. Corn Belt and in other parts of the world could result in prices eventually going lower this fall, but the depth of that decline may be limited if global buyers decide to extend their coverage en masse. Furthermore, the expiring nearby July contract is currently trading above $6.80/bushel as it eventually melds with cash basis. After next Friday, the September contract, which is presently trading more than $1.50 below the July contract, becomes the nearby contract. Further, pollination has not yet occurred in most of the Corn Belt. Consequently, the outlook is that it is premature to expect U.S. corn prices to steadily decline from now into fall.

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: Conditions through July 7 favor wet weather across most of the Eastern U.S., with heavy rains forecast from the Gulf Coast to the Central Appalachians and portions of the Northeast. Some rains associated with the southwest monsoon are also likely during this time frame. Generally, less than 1.0 inches of rain is forecast across the Great Plains and Pacific Northwest.

Conditions from July 8-12 favor above-median precipitation over the Southern Rockies, portions of the Great Plains and from the central Gulf Coast across the Tennessee Valley to the Northeast. Dry conditions are likely across the Pacific Northwest and the immediate Southeast coast. Temperatures are likely to be above-normal west of the Continental Divide and across the Northeast, with below-normal temperatures favored over the center of the lower 48 states. 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 233,100 MT for 2012/13 were down 31 percent from the previous week, but up 42 percent from the prior four-week average. Increases were reported for Japan (146,600 MT, including 94,200 MT switched from unknown destinations and decreases of 2,400 MT), Venezuela (70,900 MT, including 31,900 MT switched from unknown destinations), Brazil (32,000 MT), Panama (16,100 MT) and the Dominican Republic (14,800 MT) were partially offset by decreases for unknown destinations (62,700 MT). Net sales of 81,400 MT for 2013/14 were primarily for unknown destinations (69,000 MT) and Mexico (10,800 MT). Decreases were reported for Japan (7,900 MT). Exports of 353,400 MT were up noticeably from the previous week and 33 percent from the prior four-week average. The primary destinations were Japan (240,600 MT), Mexico (60,500 MT), Venezuela (31,900 MT) and the Dominican Republic (15,800 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 to Mexico.

Barley: Net sales of 300 MT for 2013/14 were reported for the Philippines (200 MT) and Taiwan (100 MT). Exports of 1,100 MT were to Taiwan (700 MT) and the Philippines (400 MT).  

Sorghum: Net sales of 20,500 MT for 2012/13 were reported for Japan (18,300 MT) and China (2,200 MT). Net sales of 4,500 MT for 2013/14 were for China. Exports of 1,600 MT were reported to Mexico (1,400 MT) and China (200 MT). 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: Merchandisers report that buyers are seeking lower prices because of declining new crop futures contracts, particularly for the August/September time period. However, substantial price declines are not happening at the moment because the current spot price for corn remains high. That fact was made evident today as the nearby July corn contract traded up more than 5 cents, while the December closed down over 10 cents.

Both buyers and merchandisers agree that there finally seems to be some light at the end of the tunnel. In the interim, prices continue to trade sideways to a little lower. Moderate Chinese buying occurred with sales to Haiphong at $368/MT for 500 MT and to Nansha at $361/MT for 2,000 MT. There was also a sale of 100 MT to Ho Chi Minh City at $366/MT.

Ethanol Comments: According to Bloomberg this week, ethanol’s widening discount to gasoline is based on speculation that current price levels will attract ethanol imports. While imports of sugar-based ethanol from Brazil are likely to increase this summer, there is still no evidence that such imports will be large enough to cause a pronounced rebuilding of stocks, and on the contrary, ethanol imports fell back to zero for the week ending June 28. Nor were the prior week’s imports of 38,000 barrels per day (bpd) sufficient to offset the declines in domestic ethanol production that caused a further decline in total stocks.

Domestic U.S. ethanol production for the week ending June 28 was 863,000 bpd, which was a 2 percent decline from the prior week’s production of 885,000 bpd. The current U.S. production rate is similar to last year’s level of 857,000 bpd. However, the current total ethanol stocks level of 15.4 million barrels is about 24 percent less than the level seen this time last year of 20.3 million barrels. Further, the trend is down from the week-ago level of 16.3 million barrels. Stocks commonly decline going into the fall.

Supporting the notion that the sky is not falling is the fact that there was an improvement in three of the four USDA reported differentials between processing product values and corn prices:

• Illinois differential decreased to $2.13 per bushel, which is down from $2.20 the prior week but above $1.58 last year.
• Iowa differential increased to $2.04 per bushel, which is up from $1.86 the prior week and above $1.12 last year.
• Nebraska differential increased to $1.96 per bushel, which is up from $1.78 the prior week and above $1.08 last year.
• South Dakota differential increased to $2.36 per bushel, which is up from $1.98 the prior week and above $1.65 last year.

7. Country News

France: France’s southwestern corn producing regions endured unusual and persistent cold and wet weather throughout June, according to Bloomberg News. The region, which accounts for 30 percent of all French corn, has seen a 53 percent increase in average rainfall this year. As a result, the condition of corn in the Aquitaine and Midi-Pyrenees regions has deteriorated.

Further on France, 2012 farm income rose by some 9.4 percent, spurred mostly by a 20 percent jump in earnings for French grain farmers. Pretax income for growers of grains increased to an average of €72,800 from €49,300 in 2011 and €43,700 in 2010.

Nigeria: The World Bank has approved a $200 million loan for small-holder Nigerian farmers that produce sorghum and among other staples, reports Bloomberg News.

Additionally, Reuters reports that the Nigerian government is seeking to reinvest heavily into its agricultural sector in an effort to diversify the economy away from a complete reliance on oil exports. Corn and sorghum production have been rising steadily this year and foreign companies (including Cargill and Syngenta) are expected to invest heavily in Nigerian agricultural production and processing.

Russia: Russian farmers have sped up the grain harvest to try and mitigate damage from rain and hail in the Krasnodar region of southern Russia, according to Bloomberg News. Farmers harvested 8.5 MMT of grain (including 800,000 MT of barley) on July 1, compared to 4.9 MMT that time a year earlier, and the harvest is expected to be completed within the next week. Further, Russian exporter Rusagrotans has two vessels each carrying 60,000 MT of barley scheduled to leave this month destined for Saudi Arabia.

South Africa: Corn futures have gained this week due to market concerns about corn production and the country’s white corn supply, reports Bloomberg News. The price of white corn for December delivery rose by 1.1 percent to $231/MT, while yellow corn for September delivery rose 0.8 percent to $221.20/MT. South Africa’s Crop Estimates Committee indicated in a June 25 announcement that it expects corn totals to reach some 11.38 MMT, which is up from a May 23 forecast of 11.4 MMT.

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: It was not a very interesting week in world of ocean freight markets. A lack of any new supportive news caused the Baltic and Shanghai freight indices to move sideways to slightly lower for the week. All in all, the markets were mostly unchanged, but there is a softer tone to them. The biggest thing holding freight values at current levels is the vessel congestion in South America. Slow logistics always cause inefficiency in vessel utilization, as it soaks up excess freight for a period of time. The watch is still on for which vessel owners could be next to declare bankruptcy.

There is no significant news in 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. As you can see below, vessel lineups are very light in the States.

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 Vietnam.

10. Interest Rates