Market Perspectives December 13, 2013

1. Chicago Board of Trade Market News

Outlook:USDA published the December WASDE on December 10 and estimated U.S. corn ending stocks for the 2013/14 season at 1,792 million bushels. The market expectation prior the release of the report was that there would only be a slight decrease in U.S. corn ending stocks to 1,871 million bushels from the November estimate of 1,887. Even though the data showed a larger-than-expected decline in ending stocks, it was not the outcome that bearish traders were looking for. There was an instant attempt to dismiss that fact and instead look forward for an anticipated increase in yields when the final data is release in January 2014. Of course, USDA’s data could also show an increase in domestic feed usage when the quarterly stocks data is released at the same time.

Corn futures have worked lower in the second half of this week due to additional influence of bearish news stories about Chinese rejections of corn shipments and opposition to the RFS. However, corn futures seem hesitant to trade lower at the present time. That may be partly because the feed grain data in the December WASDE was not extremely bearish:

• As previously mentioned, U.S. corn ending stocks for the 2013/14 season were reduced to 1,792 million bushels, which is down from the November estimate of 1,887 million bushels. This reduction happened primarily because of increases in U.S. corn exports and ethanol production.
• Even though USDA increased their corn production estimates for both Canada and Ukraine by 1 MMT each, total global corn stocks were reduced slightly due to increased consumption in the United States, EU, Ukraine and Canada.
• USDA left their Brazilian and Argentinian corn crop assessment unchanged in the December WASDE even through there is a common expectation that some South American acreage will be shifted from corn to soybeans.
• USDA made no adjustments to U.S. production estimates of sorghum or barley in the December WASDE.

2. CBOT Corn Futures

March Corn Futures

CBOT Table

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: 

During the December 13-16 time period, the probability of precipitation is above-normal for nearly the entire eastern U.S. and in the Northwest early in the period. A below-normal chance of precipitation is expected in the rest of the West and spreads to the entire country by the end of this time period. Below-normal temperatures are expected across most of the eastern U.S. with the exception of Florida. Above-normal temperatures are expected for from the Southern Plains extending into New England. An above normal chance of precipitation is also present across areas of the West, particularly in the Southwest. Temperatures are expected to be below-normal across the country, with the exception of the East Coast during this time.

For the period of December 17-21, the odds favor normal to above-normal temperatures across the CONUS with the exception of a swath from North Dakota, through the Great Lakes and into New England. Below-normal temperatures are forecast for the previously mentioned part of the North and Northeast. Above normal-precipitation is likely across the Northern tier of the country and along the East Coast. Below-normal precipitation is expected from throughout the Southwest and into the Southern 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

Export Sales and Exports
U.S. Export Inspections
USDA Grain Inspections for Export Report

Corn: Net sales of 695,400 MT for 2013/14 were up 17 percent from the previous week, but down 26 percent from the prior four-week average. Increases were reported for Mexico (519,700 MT), Japan (201,100 MT, including 93,500 MT switched from unknown destinations and decreases of 6,000 MT), China (111,700 MT, including 54,000 MT switched from unknown destinations and decreases of 9,000 MT), Peru (63,500 MT), Venezuela (50,100 MT, including 30,000 MT switched from unknown destinations) and Guatemala (14,100 MT, including 13,300 MT switched from unknown destinations and decreases of 700 MT). Decreases were reported for unknown destinations (297,900 MT) and Colombia (13,500 MT). Net sales of 109,400 MT for 2014/15 were reported for Mexico. Exports of 977,400 MT were primarily to China (370,700 MT), Mexico (278,100 MT), Japan (93,500 MT), Peru (60,100 MT) and Venezuela (49,100 MT). 

Optional Origin Sales: For 2013/14, outstanding optional origin sales total 100,000 MT, all Mexico.

Barley: Net sales of 6,700 MT were reported for Japan (6,200 MT) and Taiwan (500 MT). Exports of 6,200 MT were to Japan. 

Sorghum: Net sales of 290,300 MT for 2013/14 were for China (231,600 MT, including 55,000 MT switched from unknown destinations), Brazil (55,000 MT) and Japan (4,600 MT, including 4,000 MT switched from unknown destinations and decreases of 8,500 MT). Decreases were reported for unknown destinations (1,000 MT). Exports of 17,900 MT were to China (13,900 MT) and Japan (4,000 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: A price break of $3-5/MT is reported to have started in the rail market. However, some of the DDGS producers were already asking higher prices for rail-loaded product than truck loaded product because it was taking longer than expected for some of the rail cars to return to plants for reloading. The key point here is that the domestic truck rates may not have quite as much downside room as the rail rates at the DDGS production facilities, where they are already being priced lower.

Naturally, domestic DDGS buyers are requesting lower prices as they consider present uncertainties regarding the Chinese market, recent increases in ethanol production and price weakness in corn futures. However, much of Chinese-related uncertainty may already be built into the present futures prices and additional downside in futures contracts may be limited, particularly if large speculators decide to buy back some of their large short positions before the end of the calendar year.

In relation to a buying strategy, one merchandiser pointed out the interesting fact that the nearby (December) DDGS prices are as much as $15 higher than January-forward prices. Therefore, purchasing a longer time period could decrease the overall cost of DDGS since the nearby product would be discounted with the deferred shipments.
The price of DDGS are generally still at a premium to the flat-price of corn, but that is partly because DDGS are increasingly being priced into feed rations as a protein source – a source that is competitive against alternative sources of protein from soybean, canola or cottonseed meal.

Ethanol Comments: The December WASDE report was not bearish for feed grains, however, an end of week sell-off did occur in corn futures because of reports that 10 U.S. senators were introducing a bill to end the corn-based portion of the Renewable Fuel Standard (RFS). This bill has little prospect of success because Senator Barbara Boxer (D-CA),chairwoman of the Senate Environment and Public Works Committee, has noted that she holds the gavel and will not allow a reversal in current RFS policy. Consequently, a sell-off in corn futures is simply an opportunity for ethanol facilities to extend their future hedge coverage.

USDA increased the estimated amount of corn used in ethanol and by-product production in the current 2013/14 crop year by 50 million bushels, from 4,900 to 4,950 million bushels. Demand for ethanol remains sufficiently strong so that even though the most recent production of 944,000 barrels per day (bpd) is 14.6 percent above the year ago level, the total U.S. ethanol stocks level of 15.4 million barrels is still 22.9 percent below prior-year’s level of 20 million barrels.

Producer margins continue to remain healthy as implied by the differentials between corn and the co-products values across the Corn Belt:

• Illinois differential is $4.50 per bushel in comparison to $4.81 the prior week and $1.71 a year ago.
• Iowa differential is $4.25 per bushel in comparison to $4.32 the prior week and $1.31 a year ago.
• Nebraska differential is $3.87 per bushel in comparison to $3.80 the prior week and $1.60 a year ago.
• South Dakota’s data was unavailable this week.

7. Country News

Argentina: Argentine farmers have planted 55.5 percent of this season’s corn crop, which is up 7.8 percentage points for the week, reports Reuters. Farmers are expected to plant 3.3 million hectares this year.

Brazil: The Brazilian office of Archer Daniels Midland Co. anticipates that in 2014 it will move 1 MMT of grain through its new port terminal in Barcarena at the mouth of the Amazon, according to Reuters. ADM eventually hopes to expand the capacity at this facility in order to move 6 MMT of grain annually and relieve some of the immense congestion that plagues Brazil’s southern ports. Currently, the grains slated for export from Barcarena come from Para and Mato Grosso via truck and barge, but there are plans for a rail line that would link the port to the landlocked grain regions in the center and west of Brazil.

China: Chinese stringency in evaluating U.S.-sourced corn for unapproved GMO strains is likely to continue into early 2014, according to Reuters. China is currently trying to curb cheap imports in order to support domestic corn prices as it stockpiles the grain in the northeastern corn belt. While the amount of imports rejected remains small at four bulk cargoes, the action has been enough to disrupt the flow of corn importation as traders scramble to redirect corn shipments to countries that will accept them.

Russia: Russia could export as much as 3 MMT of barley and 2.6 MMT of corn for the July-December 2013 time period, reports WPI. Should these totals bear out, then the export quantity for this time period will exceed that of the entire 2012/13 season.

South Africa: 86 percent of the corn planted in South Africa is now genetically modified, reports WPI. The development and planting of GM corn in South Africa has earned the country $933 million since 1998 and benefits the economy by some $100 million annually. South Africa’s success has spurred a new discussion on the safety and validity of GM crops in Africa as repeated crop failures in countries, notably Kenya, have placed South Africa in a prime position to export its surplus to the rest of the continent.

8. Ocean Freight Markets and Spread

Bulk Freight Indices for HSS

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Vessel owners and operators have received an early Christmas present from the market rally of the past two weeks. I am not convinced that this will be a gift that keeps on giving since it may be running out of steam as we head into the holiday period. However, it has provided limited relief for those who have been struggling with vessel ownership. The uptick in rates has been fueled by increased Chinese imports of iron ore and by better grain and coal exports from the U.S..

As usual, vessel owners are not jumping to fix at these higher rates but instead are trying to hold out for more.
I think that is generally considered being “greedy” or at least eternally optimistic.

The Handysize and Handymax markets continue to take no prisoners and have not looked back in many weeks.

In the world of ocean freight the new mantra seems to be that bigger is better and that is the way things are going. Smaller vessels are becoming a minority in relative percentage of the fleet total and their rate spreads are widening versus the larger cargo movements. 

Baltic Panamax Dry-Bulk Indices
Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China:
Capesize Iron Ore
U.S. Asia Market Spreads

The charts below represent January-December 2011 and January-December 2012 annual totals versus January-September 2013 year-to-date container shipments for Taiwan.

International Freight Rates for Feed Grains

10. Interest Rates

Interest Rates