Market Perspectives February 14, 2014

1. Chicago Board of Trade Market News

Week in Review

Outlook: USDA updated their world supply and demand estimates on Monday and the data was more bullish for corn than pre-report estimates. U.S. corn ending stocks for the current 2013/14 season declined from the January estimate of 1.631 billion bushels down to 1.481 billion bushels. The average taken from pre-report estimates figured that U.S. corn ending stocks would decline to 1.606 billion bushels. This decline happened primarily because USDA increased their estimate for U.S. corn exports by 150 million bushels. This increase in U.S. corn exports is forecast to occur because Argentina’s corn exports were reduced by 1 MMT, due to poor weather in January, and because of increased global feed use from nations such as Mexico, South Korea, Canada, the EU and Egypt. The final result is that the stocks-to-use ratio for U.S. corn declined from 12.4 percent to 11.1 percent. 

USDA reduced global corn ending stocks to 157.3 MMT and this resulted in a modest decline in the global corn stocks-to-use ratio to 16.7 percent. Global supplies are sufficient enough that there is presently no cause for a sudden sharp rally in corn – so long as no additional threat evolves to challenge future global feed grain production. There was already a steady increase in futures contracts as speculators reduced their large short position prior to the release of Monday’s report. As a result, corn futures now seem stuck in a sideways trading pattern and are likely to remain there until a new catalyst emerges.

In the near-term, the market’s attention will focus on the U.S. export sales pace for corn, South American weather, and the condition of U.S. winter wheat as it comes out of dormancy. Any of these factors could have a limited impact on corn contract prices. Shortly thereafter, the market’s attention will further encompass weather developments in the U.S. Corn Belt and the results of USDA’s Prospective Plantings and Grain Stocks report, which will be published on March 28th. These latter factors could have a larger impact on corn contract prices.

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 period of February 14-17, a departing Atlantic Coast storm should drop moderate to heavy precipitation on the Northeast, while unsettled weather in the Northwest should bring heavy precipitation (4-12 inches) from the Cascades southward into northern California. Unfortunately, it appears as though the southern half of California will miss out on the precipitation. Decent precipitation should also fall on Idaho and the western parts of Montana and Wyoming. Light snows are expected for the northern Plains into the Great Lakes region and Ohio Valley. Dry weather is forecast for the southwestern quarter of the Nation. Much above-normal temperatures should envelop the western half of the U.S. while subnormal readings are expected in the northeastern quarter of the country.

For the ensuing five-day period, February 18-22, the odds favor above-median precipitation across the northern half of the Nation, with the greatest probabilities in the Northwest and Great Lakes region. Below-median precipitation is favored across the southern third of the U.S., especially in the Southwest and Southeast. Above-median temperatures are likely east of the Rockies, while the odds for sub-median readings are probable in the Far West. 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 1,269,800 MT for 2013/14 were down 25 percent from the previous week, but up 1 percent from the prior four-week average. Increases were reported for unknown destinations (421,900 MT), Colombia (233,800 MT, including 65,000 MT switched from unknown destinations and decreases of 4,400 MT), South Korea (233,500 MT), Mexico (144,200 MT) and Japan (109,700 MT, including 42,500 MT switched from unknown destinations). Decreases were reported for China (228,000 MT) and the United Kingdom (1,600 MT). Net sales of 71,100 MT for 2014/15 were reported for unknown destinations (50,800 MT) and Japan (20,300 MT). Exports of 952,500 MT were up 28 percent from the previous week and 18 percent from the prior four-week average. The primary destinations were Mexico (221,000 MT), Japan (209,100 MT), South Korea (178,300 MT), Colombia (115,700 MT) and Saudi Arabia (69,800 MT). Optional Origin Sales: For 2013/14, outstanding optional origin sales total 55,000 MT, all South Korea. Export Adjustments: Accumulated exports to China were adjusted down 58,100 MT for week ending October 24, 2013. Accumulated exports to China were adjusted down 59,003 MT for week ending October 31, 2013. Accumulated exports to China were adjusted down 59,302 MT for week ending November 14, 2013. South Korea is the new destination for these shipments and is included in this week’s report.

Barley: Net sales of 6,000 MT for 2013/14 were reported for South Korea. There were no exports reported during the week.

Sorghum: Net sales of 4,200 MT for 2013/14 were down 97 percent from the previous week and from the prior four-week average. Increases reported for China (4,600 MT) and Japan (2,700 MT, including 3,000 MT switched from unknown destinations), were partially offset by decreases for unknown destinations (3,100 MT). Exports of 61,900 MT were reported to China (59,100 MT) and Japan (2,700 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: This season’s severe winter weather continues to cause problems within the DDGS market. Merchandisers report that winter storms have disrupted railroad logistics for both hopper cars and ethanol cars. The disruption has even forced some ethanol plants to temporarily stop production and delay delivery by rail. Of course, this situation is influencing prices, and domestic markets have firms by $5-10 per MT in most locations for truck rates, while local prices at some facilities prices have advanced up to $25 per MT in the spot market. The result is that February DDGS prices are presently trading higher than in the March forward time period.

Domestic buyers of DDGS are struggling to meet their needs what with the winter weather, just as foreign buyers are showing increased interest in purchasing again. Vietnamese buyers were particularly active in making pricing inquiries this past week. However, Vietnamese buyers hoped to obtain pre-Chinese New Year holiday price levels, which is no longer the case. Some of these buyers were surprised by export price levels that were $35-40 per MT higher that previously reported, as delays from winter weather have rippled through the entire logistical system.

Unforeseen factors, such as the recent winter storms, are a nuisance for everyone. Many market participants are increasingly monitoring factors such as uncertainty in the Argentine soy complex and the prospect of returning Chinese demand for DDGS, both of which could impact future DDGS prices. The most successful DDGS buyers in the present dynamic conditions seem to be those who maintain active dialogs with the merchandisers and work to create extended pricing strategies.

Ethanol Comments: This week the differential between corn and co-product processing values improved across the Corn Belt. The differentials are not profit margins but they can be used as somewhat of an indicator of the relative financial health of the industry. The differentials for the week ending February 14, 2014 are as follows:

• Illinois differential is $4.40 per bushel, in comparison to $3.43 the prior week and $1.81 a year ago.
• Iowa differential is $2.74 per bushel, in comparison to $2.60 the prior week and $1.62 a year ago.
• Nebraska differential is $2.66 per bushel, in comparison to $2.60 the prior week and $1.93 a year ago.
• South Dakota differential is $2.89 per bushel, in comparison to $2.75 the prior week and $1.92 a year ago.

Significant improvements have happened in a relatively short amount of time: Recall how difficult a year 2012 was for ethanol producers, as drought drove corn prices to $8.00 per bushel and the industry suffered through a period of consistent losses – and not all producers survived. Margins did not become black again until early 2013, but by the end of the year the financial health of many producers had recovered. Halfway through the first quarter of 2014, it appears that margins will remain solid due to relatively low corn prices, increased demand for fuel and strong ethanol exports.

Export demand for U.S. ethanol has grown through 2013 and has been a major factor in keeping total stocks below year-ago levels. Foreign demand is growing and China has recently purchased U.S. corn-based ethanol. Of course, demand will vary from week to week and stocks will ebb and flow.

For the week ending 7 Feb 2014, total U.S. ethanol stocks increased to 17.1 million barrels, in comparison to the prior week’s level of 16.7 million barrels and the year-ago stocks level of 19.5 million barrels. Favorable margins also encouraged weekly production to increase slightly to 902,000 barrels per day (bpd), which was above the prior week’s production level of 895,000 bpd.

7. Country News

Australia: Barley output may reach 9.5 MMT this year, which is up from a December 2013 estimate of 8.6 MMT, according to Bloomberg News. Sorghum production may total 1.3 MMT in 2013/14, which is down from the December 2013 estimate of 1.6 MMT and the year ago estimate of 2 MMT. A drought in Queensland has caused prices to climb by 7.2 percent. This has the potential to be Australia's smallest sorghum crop since 2006/07.

Japan: The Ministry of Agriculture received no bids for the importation of feed barley or feed wheat in its weekly auction that closed on Wednesday, reports Reuters. The MOA had sought 120,000 MT of feed wheat and 200,000 MT of feed barley and will seek the same amounts in a tender that closes February 19.

South Africa: Yellow corn prices gained for a third day to reach their highest level this month, according to Bloomberg News. Yellow corn for July delivery rose to $203/MT, which is its highest level since January 31.

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: All of the trade is now back at work and vessel trading activity has increased, especially in the Brazil to China soybean business. This week we’ve seen numerous Panamax fixtures from Santos to China at between $38.50-$39.50/MT. So, the South American export season has truly begun. These fixtures indicate that the market is lower than it was prior to the Lunar New Year holiday period. I’ve heard that there may be as many as 75-100 Dry-Bulk vessels ballasting to South America to get in line for the business to come. This already is and will continue to put some immediate pressure on rates, but after the lineups grow and the loading delays increase, the inefficiencies will soak up a lot of capacity and we will likely see rates gradually trend upward (maybe $3.00/MT or more over the next 3 weeks?).

With some of the demand pressure coming off at the U.S. Gulf, we are seeing the Panamax rate spreads between the Gulf and South America narrow into the $10-10.50/MT range. I do not see the physical rates in the Pacific to be a strong as the Baltic index would indicate.

Capesize vessels are currently earning about $8,418 per day and Panamax vessels are getting an average daily hire rate of $10,517.

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 2013 and January-December 2012 annual totals versus January 2014 year-to-date container shipments for Japan.

South Korea 2013
South Korea 2012
South Korea 2014
International Freight Rates for Feed Grains

10. Interest Rates

Interest Rates