Market Perspectives April 4, 2014

1. Chicago Board of Trade Market News

Week in Review

Outlook: USDA published important data on Monday with the release of the Grain Stocks and Prospective Plantings reports. Both of these reports were considered supportive to corn prices. The quarterly corn stocks were estimated to be 7.006 billion bushels on March 1, which was below the average pre-report estimate of 7.11 billion bushels. The intended corn plantings of 91.7 million acres was below the average pre-report estimate of 92.9 million acres.

The quarterly corn stocks estimate was particularly important because it indicated that there is no reason to reduce USDA’s feed use estimate. There are now two quarterly stocks reports in a row which indicate that domestic usage is strong. This fact strengthens the argument that corn futures contracts did not trade too high. The result is that the nearby May corn contract gained 10 cents on Monday and extended another 5 cents on Tuesday to close just above $5.07 per bushel. However, traders seemed hesitant to drive the nearby May contract above $5.10 per bushel without additional justification from fundamental factors.

Market attention will actively monitor weather in order to calculate an adequate risk premium in prices. A sudden transition to ideal weather could result in an additional 1 to 2 million acres of corn being planted. Alternatively, unfavorable conditions could have the opposite result. USDA data showed that year-over-year corn acreage reductions were not significant in the region from Minnesota, Iowa, Illinois, Indiana and over to Ohio. As a result, market participants will pay close attention to see if this corn producing region starts to receive excessive moisture; which could then cause the risk premium to increase within futures prices.

Strong export sales of U.S. corn is another factor that will be actively monitored. The present rate of sales is strong in comparison to USDA’s current total annual export estimate of 1.625 billion bushels. Because the current sales pace is basically at this level, the probabilities are good that USDA will increase the estimate for U.S. corn exports in the April 9 WASDE. However, they may not increase it as much as they could because the shipment pace has been lagging behind the sales pace, which means that there could be some cancellations of sales later in the season if the prospects are high of safely producing a large corn crop. Of course, there will be no such level of certainty until after corn pollination occurs. As well, if the prospects of producing an abundant corn crop diminish then existing export sales will be shipped out the door quickly, which encourages more aggressive buying. As an aside, China is presently not an active participant in the U.S. corn market.

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: The NWS HPC Quantitative Precipitation Forecast (QPF) calls for moderate-to-heavy precipitation accumulations (two-to-six inches) across the lower Midwest and moderate accumulations (two-to-three) in the South and Southeast. The Upper Midwest, New England, central Rockies and Pacific Northwest are forecasted to receive accumulations of less than two inches.

The 10-day outlooks call for a high probability of above-normal temperatures across the West, while below-normal temperatures are forecasted across the South, Midwest, and Eastern U.S. A high probability of above-normal precipitation is forecasted across portions of the Southeast, Mid-Atlantic, New England, northern Plains, and Pacific Northwest, while the remainder of the West, southern Plains, and western portions of the South are expected to have below-normal precipitation. 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 960,600 MT for 2013/14 were down 32 percent from the previous week and 12 percent from the prior four-week average. Increases were reported for Japan (236,500 MT, including 118,300 MT switched from unknown destinations), South Korea (184,600 MT, including 60,000 MT switched from Japan and decreases of 3,200 MT), Egypt (136,200 MT, including 60,000 MT switched from China), Guatemala (106,500 MT, including 20,700 MT switched from unknown destinations, 4,900 MT switched Nicaragua, and 1,900 MT switched from Costa Rica), Colombia (92,300 MT, including 56,900 MT switched from unknown destinations and decreases of 5,600 MT), Taiwan (73,100 MT, including 63,000 MT switched from unknown destinations), Saudi Arabia (69,000 MT, including 65,000 MT switched from China) and Mexico (60,100 MT). Decreases were reported for China (221,400 MT), Honduras (2,500 MT), and Nicaragua (1,200 MT). Net sales of 37,900 MT for 2014/15 were reported for Costa Rica. Exports of 1,425,700 MT were up 16 percent from the previous week and 36 percent from the prior four-week average. The primary destinations were Japan (324,800 MT), Egypt (261,200 MT), Mexico (207,600 MT), Colombia (163,000 MT), South Korea (123,300 MT), Taiwan (74,400 MT) and Saudi Arabia (69,000 MT). Optional Origin Sales: For 2013/14, outstanding optional origin sales total 123,000 MT, all South Korea. Export Adjustments: Accumulated exports to Venezuela were adjusted down 25,000 MT for week ending March 20, 2014. This shipment was reported twice.

Barley: Net sales of 500 MT for 2013/14 were reported for Taiwan. Net sales of 2,400 MT for 2014/15 were reported for Japan. Exports of 300 MT were reported to South Korea.

Sorghum: Net sales of 200 MT for 2013/14 resulted as increases for Japan (15,400 MT switched from unknown destinations) and China (200 MT), were partially offset by decreases for unknown destinations (15,400 MT). Exports of 77,700 MT were reported to China (61,400 MT), Japan (15,400 MT) and Mexico (900 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: The successful merchandising and global interest in DDGS was noted this past week by Secretary Tom Vilsack of the U.S. Department of Agriculture when he spoke at a container loading facility in Joliet, Illinois. Secretary Vilsack said that American biofuels need to follow the byproduct overseas, as noted by an article from agrinews.com. Efficiency from beginning to end has enabled this industry to become global within just a few years.

DDGS end-users are becoming increasingly accustomed to the routine of ethanol plants performing periodic maintenance, which a number of facilities will perform in the month of April. Merchandisers seek to work with buyers in maintaining a consistent product flow. This season has proven more challenging because of logistical issues, but as noted in the ethanol section, those difficulties are being corrected. DDGS buyers seem to recognize this fact and the result is that DDGS trading has slowed this past week as buyers are willing to momentarily step back and wait for transportation issues to improve. Buyers would also like to see some decline in prices, which did not happen this past week.

The average price of DDGS in the nearby April spot market was up by $10 or more and up about $5 per MT for the May and June time periods. Consequently, a number of DDGS buyers who have sufficient inventory for immediate needs have decided to watch corn planting conditions materialize in the United States. That tactic can pay off, but only if planting conditions are favorable. The spring planting season is a crucial period for buyers to maintain an open dialog with DDGS merchandisers.

Ethanol Comments: Ethanol futures prices had a setback this week as it became evident that logistical issues are being corrected. A primary indicator of this correction is that ethanol stocks are increasing on the East Coast, which is the United States’ largest consumption area of ethanol. Approximately 70 percent of U.S. ethanol is transported by rail and weather-related delays had rippled throughout the entire industry. Rail-lines are credited for working around the clock to correct the logistical backlogs.

Expectations for an eventual decline in the elevated spot market of ethanol was reflected in the pricing structure of ethanol futures contracts, which has more distant contracts trading at a sharp discount. A decline in the spot market is beneficial to the U.S. corn-based ethanol industry because the recent escalation in prices basically erased the premium that Brazilian ethanol held over U.S. ethanol prices, and that condition encourages the importation of Brazilian sugar-based ethanol into the United States. For the week ending March 28, imports of ethanol into the United States averaged about 11,000 barrels per day (bpd). During the same time period, improved rail flow enabled domestic ethanol production to increase to an average of 922,000 bpd, up from the prior week’s average daily production level of 885,000 bpd. Greater supplies caused total U.S. ethanol stocks to increase to 15.9 million barrels. This was an increase from the prior week’s level of 15.7 million barrels, but U.S. ethanol stocks are still 9.2 percent below the year-ago level of 17.5 million barrels.

The improved logistics and increases in production and stocks are allowing the enormously wide differential between the spot value of co-products and corn to start descending from lofty levels. The differentials for the week ending April 4, 2014 are as follows:

• Illinois differential is $6.14 per bushel, in comparison to $8.31 the prior week and $2.35 a year ago.
• Iowa differential is $5.84 per bushel, in comparison to $6.33 the prior week and $1.92 a year ago.
• Nebraska differential is $5.52 per bushel, in comparison to $5.98 the prior week and $2.39 a year ago.
• South Dakota differential is $6.47 per bushel, in comparison to $6.69 the prior week and $2.52 a year ago.

7. Country News

South Africa: South Africa has received its first shipment of imported corn in 2014, reports WPI. The South Africa Grain Information Service reports that 14,000 MT of Ukrainian yellow corn was imported, which represented the first South African corn imports since April 2012. Corn stocks are currently 37 percent lower than at this point in 2013 and stand at 675,000 MT. South Africa has exported 1.9 MMT of corn so far this year. Total corn production is estimated at 12.95 MMT, which is an 11 percent increase over the previous year and potentially the largest corn harvest since 1981’s record setting 14.4 MMT.

Russia/Ukraine: Western banks that participate in the global commodity trade have begun tightening payment procedures for grain deals made with Russia, according to Reuters. Banks are cutting down on “pre-financing” on grain deals and only provide payment once there is substantial proof that grain has been loaded onto a vessel. Similar measures were applied to grain deals made in Ukraine following its violent political turmoil. Global corn prices have increased by about 20 percent this year to over $5 per bushel in part due to fears that the supply of Ukrainian corn could be disrupted, especially if plantings decrease. As of now, grain shipments from Russian and Ukrainian ports remain undisturbed.

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: It was another soft week for world ocean freight markets. Demand is just not developing to the extent anticipated, or needed, in the eyes of vessel owners. The proverbial finger is being pointed at the slow economic growth in China and the Chinese cancellation of Brazilian soybean cargoes. We may have to wait until the U.S. wheat harvest in June-July to find additional demand for some of the excess freight. However, it will continue to be the Capes that drive overall market direction. Lower commodity prices would, of course, help build commodity demand.

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 annual totals versus January 2014 year-to-date container shipments for Hong Kong.

Hong Kong 2014
Hong Kong 2013
International Freight Rates for Feed Grains

10. Interest Rates

Interest Rates