Market Perspectives March 21, 2014

1. Chicago Board of Trade Market News

Week in Review

Outlook:Corn contracts spent the week extending a trading range as market participants wait for important USDA reports that will be published on Monday, March 31, which is a little over a week away. However, other factors may have some near-term influence upon grain markets: A primary factor is that Chinese soybean crushers have overbooked beyond their needs and are looking to back out of some purchases. They are looking to do this just as speculators have built a substantially large long position in soybeans. Adding to the potential concerns of these speculators is the fact that there seems to be a growing consensus that USDA’s data could show a noteworthy reduction in U.S. corn planting and a similar increase in soybean acreage. This combination of factors could combine to weigh on the soy complex next week and indirectly influence the price of corn contracts. If such conditions do materialize, then that could be an opportunity for those corn end-users who have not taken advantage of earlier lower prices to extend some protective coverage into next summer.

If U.S. corn planting is around 91 million acres and the average yield ends up being close to trend, then U.S. corn ending stocks for the next 2014/15 season may not be much different than this year. Consequently, traders will not be anxious to sell at present or lower price levels at this point in time. Instead, any future intent to sell corn is more likely to be from higher price levels after there is reduced uncertainty about spring planting conditions and weather going into pollination. After all, it is generally understood throughout the feed grain industry that regardless of planting intentions, rapid planting progress can add to corn acres and delays can do the opposite. The present outlook is that end-users without even short-term coverage have the greatest price risk.

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: Little, if any, drought relief is expected from the Pacific Coast to the Great Plains, with precipitation during the upcoming monitoring period mostly confined to the Northeast and Gulf Coast. An area of low pressure will produce snow in northern New England on Thursday, while warmer conditions briefly develop in the storm’s wake from the middle Mississippi Valley to the central and southern Atlantic Coast. Toward week’s end, another disturbance will produce some additional snow across the nation’s northern tier. Over the weekend, cold air will surge into the Midwest and Northeast, while rain will develop across the South. Dry weather will persist, however, from California to the southern High Plains. In addition, unusually warm weather will continue to plague California.

The NWS outlook for March 25-29 calls for below-normal temperatures from the Plains to the East Coast, while warmer-than-normal weather will prevail in the West. Meanwhile, near- to above-normal precipitation across the majority of the U.S. will contrast with drier-than-normal conditions from southern California to the southern High 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 745,800 MT for 2013/14 were up 9 percent from the previous week, but down 20 percent from the prior four-week average. Increases were reported for Colombia (181,600 MT, including 132,800 MT switched from unknown destinations and decreases of 14,400 MT), Japan (112,900 MT, including 35,200 MT switched from unknown destinations and decreases of 15,200 MT), South Korea (110,700 MT, including 54,000 MT switched from unknown destinations and decreases of 9,200 MT), China (69,500 MT), Egypt (68,000 MT) and Mexico (44,500 MT). Decreases were reported for unknown destinations (25,500 MT), Guatemala (8,100 MT), Morocco (4,000 MT) and El Salvador (1,100 MT). Exports of 927,100 MT were up 2 percent from the previous week and from the prior four-week average. The primary destinations were Colombia (219,200 MT), Japan (185,600 MT), Mexico (147,400 MT), South Korea (117,900 MT), Saudi Arabia (92,200 MT) and Peru (33,000 MT). Optional Origin Sales: For 2013/14, outstanding optional origin sales total 55,000 MT, all South Korea.

Barley: Net sales of 13,100 MT for 2013/14 were reported for Japan (12,600 MT) and Taiwan (500 MT). Exports of 12,800 MT were reported to Japan (12,600 MT) and South Korea (200 MT).

Sorghum: Net sales of 11,400 MT resulted as increases for Hong Kong (66,000 MT, including 60,000 MT switched from China), China (60,400 MT, switched from unknown destinations) and Japan (4,400 MT, switched from unknown destinations), were partially offset by decreases for unknown destinations (119,400 MT). Exports of 200,600 MT--a marketing-year high--were up 7 percent from the previous week and up noticeably from the prior four-week average. The primary destinations were China (129,900 MT), Hong Kong (66,000 MT), Japan (4,400 MT) and Mexico (300 MT). Export Adjustments: Accumulated exports to China were adjusted down 5,250 MT for week ending February 13. The tonnage previously reported was revised.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments:Merchandisers report that foreign demand for DDGS seems to be on hold. One reason is because a number of Asian buyers already have contracts for the current time period. Some of those buyers are now fishing for prices in the October/November/December time period but their bids are below values that are obtainable with the present prices of corn futures contracts. There also seems to be some subtle inquiry from Chinese buyers about DDGS prices beyond May. DDGS merchandisers may find it easier to negotiate with buyers for this time period because of the favorable returns that facilities are receiving due to strong demand for ethanol. (Please see the discussion in today’s ethanol section).

There is presently strong incentive for facilities to increase production of ethanol, which will also cause an increase in DDGS production. Strong demand for ethanol could remain into mid-summer. As discussed last week, adverse winter weather has caused a temporary backlog in the DDGS contractual obligations. Any increase in DDGS could help meet those existing obligations more quickly. Afterward, greater amounts of DDGS could become available for purchase, which could conveniently meet returning Chinese demand for the May time period. However, an important point to consider is that U.S. corn prices could also be higher and more volatile at that time. (Please see the proceeding Outlook section of this report). Consider that DDGS prices remain approximately the same from this week and last week as corn futures contracts trade in a sideways pattern. As a result, it now appears to be an ideal time for DDGS buyers to approach merchandisers to investigate pricing prospects for the May time period.

Ethanol Comments: News sources point out the fact that this past winter was the coldest in three decades. Below a certain temperature, rail switches can freeze up and locomotives become finicky. And of course, it is not easy for one train to simply bypass another. The result is a ripple effect of delay throughout the whole rail system. Rail hubs, such as Chicago, became heavily congested. East Coast end-users of ethanol found themselves in short-supply and anxiously awaiting product that was stuck on the other side of major rail hubs in the Midwest. Transportation delays have been equally burdensome for ethanol producers who had to reduce production because of their inability to keep product moving out of their on-site storage facilities.

Weather conditions will improve now that spring has arrived and some market participants expect that improved logistics and increased production to logically cause a decline in the price of ethanol. A decline in ethanol prices does make sense, but U.S. gasoline consumption normally increases going into the summer. Increasing foreign fuel demand could also keep ethanol exports at higher-than-expected levels.

Present data indicates that it may take longer-than-expected before increased production and a rebound in U.S. ethanol stocks applies considerable pressure to prices. Consider that the latest reported ethanol production rate increased to an average weekly volume of 891,000 barrels per day (bpd), above the prior- week’s rate of 869,000 bpd. This is more than 10 percent above the production rate for the same week a year ago. In the meantime, the weekly stocks levels fell a substantial 4 percent, from 15.9 down to 15.3 million barrels for the week ending March 14. Of course, weather is a factor in this decline but presumably strong demand is also a factor since the total stocks level is 17.3 percent below the same period a year ago.

A further indicator of the strong demand is the escalating differential between corn and co-product processing values across the Corn Belt. Differentials for the week ending March 21, 2014 are as follows:

• Illinois differential is $7.89 per bushel in comparison to $5.90 the prior week and $2.10 a year ago.
• Iowa differential is $5.48 per bushel in comparison to $3.95 the prior week and $2.18 a year ago.
• Nebraska differential is $5.11 per bushel in comparison to $3.69 the prior week and $2.19 a year ago.
• South Dakota differential is $6.26 per bushel in comparison to $4.03 the prior week and $2.14 a year ago.

7. Country News

China: USDA has announced that China has made its first purchase of U.S. corn in two months, according to Reuters. Total Chinese purchases this year of U.S. corn now total some 4 MMT with 1.392 MMT having already been shipped.

Japan: The Ministry of Agriculture has announced that it received no bids in its weekly tender for the importation of feed barley and wheat, reports Reuters. It had sought 120,000 MT of feed wheat and 200,000 MT of barley and will seek the same in a tender closing on March 26.

South Africa: Yellow corn prices rose by 1.2 percent to 204.21/MT as the rand weakened against the dollar, according to Bloomberg News.

Ukraine: Continued political unrest is having a negative impact on Ukrainian small grain traders who are struggling to get financing from local banks, reports to Reuters. These traders are being forced to seek loans from larger, international trading houses. This credit crunch has the potential in a worst-case scenario to reduce Ukraine’s corn crop by 20 MMT (a third of the predicted total) as farmers are having difficulties in procuring funds to buy seed. Tensions and Russia’s effective annexation of Crimea have also caused the Ukrainian hryvnia to weaken.

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 you will see in the Capesize and Panamax freight fixtures and rate data below, things are a bit all over the place this week. We have a broad range in what has been reported for the week and this indicates that, depending on your preference, you could call the market up or down. My interpretation of the week’s action is that the market is trying to rally but still having difficulty doing so. When rates move up somehow more freight becomes available. Of course freight markets are still facing the questions regarding the pace of world economic recovery and the related Chinese demand for raw materials. Sinograin is now estimating China’s soybean imports at 66-67 MMT against USDA’s figure of 69 MMT.

 

There’s a good deal of trade talk about the possibility of Brazilian soybeans that have been cancelled by China working their way to the U.S. East Coast and Gulf. I have heard that some of this is occurring. Handymax freight on the wheat cargoes going from the U.S. Gulf to Brazil is in the $32-33/MT. range. A Panamax cargo would be a couple of dollars cheaper. Coming back up from Brazil to the U.S. Gulf or East Coast with a Panamax of soybeans should cost close to $24-26/MT.

The Canadian port of Vancouver continues to have labor and trucker problems. On the other hand, the Ukrainian grain exporting business continues without problems so far.

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 Taiwan.

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

10. Interest Rates

Interest Rates