Market Perspectives March 7, 2014

1. Chicago Board of Trade Market News

Week in Review

Outlook:Grain farmers must juggle numerous responsibilities to keep their operations running smoothly and so they cannot continuously watch the futures market trade, but they do keep a glancing eye on conditions and are generally cognizant of price direction. The majority of farmers do not rush to sell when there are indications that prices are likely to continue moving higher. Ideally, the grain producer would like to sell as close to the high of a move as possible. Desiring to do that and actually accomplishing the task are two different things, but that does not discourage the attempt. This fact is pointed out because end-users sometimes have the incorrect assumption when sufficient stocks exist to meet demand, then a slightly higher price will instantaneously result in increased availability. However, because ample stocks exist does not mean that they are readily available. Availability is heavily influenced by perceptions of prevailing markets conditions, and the outlook is that increased strength in defining price will return to the hands of producers throughout the spring.

Next Monday USDA will release their March WASDE. U.S. corn exports so far this season have been stout and have recently occurred at levels that are above the amount that is necessary to reach USDA’s annual estimate. Consequently, there is some possibility that USDA could further increase their U.S. corn export estimate in Monday’s WASDE. Without some offsetting decline in another category on the balance sheet, an increase in U.S. corn exports would cause the estimate for the ending stocks of the current 2013/14 season to decline further. It is uncertain if USDA will do that again this month because they just increased their export estimate in the February WASDE by 150 million bushels, which caused the estimate for U.S corn ending stocks to fall from 1,631 to 1,481 million bushels. Another decline in the ending stocks estimate could paint a substantially different picture than what some market participants were touting several months ago when they pointed at the prospect of corn ending stocks being over 2 billion bushels.

2. CBOT Corn Futures

May Corn Futures

CBOT Table

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast:From March 7-10, a barrage of Pacific moisture will maintain mild, wet conditions in the Northwest, leading to possible flooding as far east as the northern Rockies. Five-day precipitation totals could reach four-to-eight inches in the Pacific Northwest and two-to-four inches in the northern Rockies—although lighter amounts will occur in rain-shadow areas east of the Cascades. Although some precipitation will graze northern California, central and southern portions of the state will experience warm, mostly dry weather. Meanwhile, a series of disturbances will result in showers across the Deep South, where five-day rainfall could reach one-to-three inches. On March 7, some snow or freezing rain may occur east of the southern Appalachians, as moisture interacts with lingering cold air. Elsewhere, cold weather will linger for several more days across the eastern half of the U.S., although a marked warming trend can be expected early next week.

The NWS outlook for March 11-15 calls for below-normal temperatures across the eastern half of the U.S., while warmer-than-normal weather will prevail in the West. Meanwhile, near-to-below-normal precipitation across the majority of the nation will contrast with wetter-than-normal conditions in southern Florida and from the Great Lakes region into the Northeast. 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 1,518,000 MT for 2013/14 were up 81 percent from the previous week and 35 percent from the prior four-week average. Increases were reported for Mexico (437,400 MT), Japan (342,400 MT, including 89,100 MT switched from unknown destinations and decreases of 1,500 MT), unknown destinations (207,100 MT), Colombia (179,400 MT), South Korea (134,300 MT, including 65,000 MT switched from China) and Taiwan (75,900 MT). Decreases were reported for China (71,500 MT), Spain (55,000 MT), and the French West Indies (9,000 MT). Net sales of 164,500 MT for 2014/15 were reported for Japan. Exports of 1,138,100 MT were up 33 percent from the previous week and 38 percent from the prior four-week average. The primary destinations were South Korea (256,700 MT), Mexico (224,300 MT), Japan (190,600 MT), Egypt (135,000 MT), and Peru (83,300 MT). Optional Origin Sales: For 2013/2014, outstanding optional origin sales total 55,000 MT, all South Korea. Export Adjustments: Accumulated exports to China were adjusted down 63,000 MT for week ending January 2, 2014. The correct destination is South Korea and is included in this week’s report.

Barley: There were no net sales or exports reported during the week.

Sorghum: Net sales reductions of 500 MT resulted as increases for China (59,400 MT, switched from unknown destinations) and Japan (5,400 MT, switched from unknown destinations), were more than offset by decreases for unknown destinations (65,400 MT). Exports of 66,400 MT were reported to China (60,900 MT) and Japan (5,500 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments:The DDGS price increases last week were in the nearby spot markets while the prices one to two months out into the future remained stationary. This week that condition has changed and DDGS prices all uniformly increased out into May. This price action seems to have occurred in part because of this week’s substantial increases in corn futures contracts. As well, there also appears to be growing recognition among DDGS merchandisers that the current increase in corn contracts is more than a just a temporary event and they can no longer offer such discounted prices into the future. Consequently, there was a uniform increase in all containerized DDGS prices this week.

Domestically, logistical problems have caused far more substantial prices increases for rail-delivered DDGS. Rail delivered rates to California and the Pacific Northwest increased by $40 per MT. Such logistical issues are proving to be painful for domestic and Mexican DDGS end-users. One of the DDGS merchandisers to Mexico reported that his clients are also dealing with late shipments.

The domestic and Mexican buyers of DDGS who bought only in the nearby spot market did well when corn prices were in decline and there were no logistical backlog issues due to extreme winter weather. However, the success of the purchasing methodology of remaining consistently in the spot market has steadily declined in the past two months. That is particularly true most recently as many ethanol facilities have been forced to slow their production rates because of backlogs with ethanol tanker cars. Available DDGS supplies must first meet contract agreements before anything becomes available for the spot market. As a result, competitive buying had driven up spot market prices.

Some of the Asian buyers of DDGS have worked with DDGS merchandisers to create extended pricing contracts. It is recognized that implementing such extended contract pricing can be uncomfortable for buyers who are judged by their ability to obtain the lowest possible price, but it often is most beneficial to the overall financial health of an operation by allowing management to know costs with greater certainty. Furthermore, extended contracts make the buyer look good when prices are increasing.

Ethanol Comments: Ethanol producers are presently receiving very favorable margins, but there is recognition among producers that a healthy export demand for corn and uncertainty regarding international factors (such as events in the Crimea and Brazilian weather) is likely to keep large speculators more interested in being buyers rather than sellers of corn contracts. As well, there is some discussion about the prospect that within the next two months China could approve the varieties of biotech corn that caused problems for U.S. exports earlier in the year. It is recognized that such a development could sustain strong U.S. corn exports throughout the crop year.

Ethanol producers have observed how low prices and a few months can result in substantial change, and it is supporting evidence of the need for both corn end-users and producers to investigate strategic pricing opportunities. Those ethanol producers who extended coverage at lower price levels are particularly benefiting from favorable returns. Most ethanol producers seem to share the consensus that farmers will market more of their old crop stocks at present price levels, but they are unlikely to fully open their bins and drive prices back down at this point in the season.

Fortunately for ethanol producers, there is evidence of good demand in the fact that there was another decline in U.S. ethanol stocks to 16.6 million barrels, which is 2.4 percent below the prior week’s stocks level of 17 million barrels and 14.2 percent below the year-ago ethanol stocks level of 19.4 million barrels. This reduction in stocks occurred despite the fact that weekly ethanol production remains consistently above the year-ago level, and the weekly production of 894,000 barrels per day (bpd) is 11 percent above the year-ago level of 805,000 bpd. However, it is down from the prior-week’s ethanol production level of 905,000 bpd. The end-result is that the differential between corn and co-product processing values implies that returns are stronger for ethanol producers across the Corn Belt. Differentials for this week ending March 7, 2014 are as follows:

• Illinois differential is $6.08 per bushel, in comparison to $5.36 the prior week and $1.86 a year ago.
• Iowa differential is $3.74 per bushel, in comparison to $3.27 the prior week and $1.65 a year ago.
• Nebraska differential is $3.47 per bushel, in comparison to $3.05 the prior week and $1.94 a year ago.
• South Dakota differential is $3.93 per bushel, in comparison to $3.67 the prior week and $1.93 a year ago.

7. Country News

Brazil: Analyst Safras & Mercado has reduced its forecast for Brazilian corn to 71.2 MMT, which is down from 75.6 MMT predicted last month, reports Reuters. This decrease comes as drought conditions continue to plague Brazil’s growing regions. Nearly 40 percent of the corn crop in Sao Paulo has been lost after enduring its hottest January on record. 

China: China will increase its budget for farm subsidies by 10 percent in 2014, according to Reuters. This resolution will increase the budget from the $261.09 billion spent on subsidies in 2013. This is being done to both increase food security and induce people to remain on farms in the face of rapid urbanization following the migration of over 200 million workers to cities, which has increased food demand while significantly cutting the food production labor force.

South Africa: Yellow corn prices fell by 1.2 percent to 209.07/MT as recent rains have alleviated concerns over grain supply, according to Bloomberg News. The South African Weather Service is reporting a 60 percent probability of rain for the period of March 8-11 in the growing regions of North West and Free State provinces.

Ukraine: Ukraine may export 18.5 MMT of corn in 2013/14, which would put it in third place behind the U.S. and Brazil, according to Bloomberg News. The Russian occupation of Crimea has apparently had little impact on Black Sea port and shipping operations.

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: As far as the Panamax trade is concerned ocean freight markets remain soft and biddable. The Capesize market however has bounced back a little and we’ll have to watch the spread relationship between the two markets. The Handymax and Supramax markets also showed some support at the end of this week. It is the Gulf /Atlantic that remains the weakest market.

The weight generated from the volume of vessels ballasting to South America keep that market soft this week. The world is concerned about Grain exports out of Ukraine but Traders have reported no major problems as of yet. The future of these shipments is of course uncertain and we will have to watch for possible swaps out of that region if difficulties develop. For those who are following the Panama Canal situation; a temporary agreement has been reached and construction work has resumed. I would now estimate the completion date to be late 2015.

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 Thailand.

Thailand 2014
Thailand 2013
Thailand 2012
International Freight Rates for Feed Grains

10. Interest Rates

Interest Rates