Market Perspectives - August 1, 2014

1. Chicago Board of Trade Market News

Outlook: A standard bushel of corn weighs 56 pounds. If that bushel of corn is priced at $3.50, then it is being sold for 6 cents per pound. Six cents per pound for a crop that has been planted, tended through the growing season, harvested and cleanly removed from the cob so that only the most desirable part of the plant is presented to the final customer. That is an excellent deal for the end users.

U.S. farmers really need prices above 8 cents per pound ($4.50 per bushel) to break even financially, and this fact holds true for farmers around the globe. As noted last week, U.S. farmers may have the financial means to deal with this season’s lower prices but South American and Black Sea farmers may struggle to plant corn next year. As a result, there could be some wide swings in feed grain prices during the next two years.

Various domestic and international buyers seem to recognize that current price levels for corn are likely to be a temporary phenomenon. U.S. corn exports are right on pace to meet USDA’s estimate of 1.9 billion bushels for the current 2013/14 old-crop season, which will end on August 31, and the sales are strong for the 2014/15 new-crop season that will begin on September 1.

USDA is presently estimating that U.S. corn exports will decline in the 2014/15 new crop season to 1.7 billion bushels because of increasing competition from other global producers. However, the territorial issues that Ukraine is experiencing along with the financial issues in Argentina are likely to make the United States a much more attractive source for global buyers.

U.S. corn exports above 2 billion bushels were historically a norm and it would not take much additional buying to return exports to those levels. Signs of increased export demand will likely prompt more aggressive purchasing by domestic buyers for their feed use and ethanol production. Their knowledge that the least costly endeavor is likely purchasing and storing inexpensive corn could ignite somewhat of a race for ownership. After all, if too much grain is purchased then it can be resold, but it probably is not going to be resold at a loss. The transition through harvest of a bumper crop into that increasingly competitive buying process could take four or five months – and then the market will once again be looking at global planting intentions. 

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: From August 1-4,locally heavy showers will shift eastward across the South, eventually reaching the southern Atlantic States. Five-day rainfall totals could reach 1-3 inches from Florida into the southern mid-Atlantic region. Meanwhile, showers will linger across the central and southern Rockies in the wake of a significant rainfall event. Most of the remainder of the West will experience dry weather, except for isolated showers across the Great Basin and Intermountain region. Mostly dry weather will also prevail during the next several days from the northern Plains into the middle Mississippi Valley. Elsewhere, an ongoing heat wave in the Northwest will contrast with near- to below-normal temperatures in most other parts of the country.

The NWS outlook for August 5 – 9 calls for the likelihood of below-normal temperatures in large sections of the central and eastern U.S., as well as the central Rockies, while hotter-than-normal conditions will cover the lower Southeast, the lower Rio Grande Valley and the Far West. Meanwhile, near- to above-normal rainfall across the majority of the U.S. will contrast with the likelihood of drier-than-normal conditions in the Pacific Northwest, northern Plains, far upper Midwest and southern parts of Arizona, Texas and Florida. 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

Corn: Net sales of 173,800 MT for 2013/14 were down 40 percent from the previous week and 54 percent from the prior four-week average. Increases were reported for South Korea (136,600 MT, including 65,000 MT switched from Japan and 63,000 MT switched from China), Saudi Arabia (71,500 MT, including 65,000 MT switched from unknown destinations), Mexico (61,400 MT), Peru (60,000 MT, including 30,000 MT switched from unknown destinations), Canada (37,000 MT) and Morocco (26,600 MT). Decreases were reported for Japan (160,100 MT), China (62,500 MT), unknown destinations (60,400 MT) and Ireland (1,000 MT). Net sales of 1,093,200 MT for 2014/15 were reported primarily for Mexico (431,500 MT), unknown destinations (277,200 MT), Colombia (129,000 MT) and Costa Rica (103,200 MT). Exports of 865,500 MT were down 13 percent from the previous week and 14 percent from the prior four-week average. The primary destinations were Japan (318,400 MT), Mexico (168,900 MT), South Korea (136,600 MT), Saudi Arabia (71,500 MT), Egypt (50,800 MT), Morocco (26,700 MT) and Panama (21,000 MT). Optional Origin Sales: For 2013/14, outstanding optional origin sales total 55,000 MT, all South Korea. 

Barley: Net sales of 500 MT for 2014/15 were reported for Taiwan. There were no exports reported during the week. 

Sorghum: Net sales of 4,000 MT for 2013/14 resulted as increases for China (119,400 MT, including 115,900 MT switched from unknown destinations and decreases of 1,300 MT) and Japan (2,600 MT), were partially offset by decreases for unknown destinations (118,000 MT). Net sales of 113,000 MT for 2014/15 were reported for unknown destinations (58,000 MT) and China (55,000 MT). Exports of 233,800 MT were reported to China (225,000 MT) and Japan (8,700 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Containerized DDGS rates fell by significant amounts this week as merchandisers are forced to competitively realign their customer base since Chinese buyers are being locked out of the market to U.S. DDGS by actions taken by their own government. That is unfortunate because Chinese customers have developed a strong appreciation for DDGS, with the trade eventually accounting for more than half of the global DDGS exports. The forced alternation to their demand has resulted in some dramatic price shocks, but the market will adjust as new destinations are increasingly found.

In the search to broaden the customer base, merchandisers are presently offering DDGS at values that are substantially discounted to the price of corn. Merchandisers are seeking new clients who have a reputation of dependability. The merchandiser’s strong interest in obtaining a dependable customer base can work to the good of a buyer who is willing to establish a relationship that maintains consistent product flow. Domestic buyers seem to recognize this and a number of feedlots are reported to be showing interest in obtaining more DDGS.

Domestic buyers remain the largest consumers of DDGS and many of those experienced buyers seek to negotiate extended contracts in periods when feed prices are weak, especially because they know that prices normally do not stay at extreme highs or lows. (The outlook section at the beginning of this week’s publication discusses the topic of future changes in market conditions.) The preceding table covering DDGS prices shows that market participants anticipate higher prices in October, presumably because the customer base is expected to have stabilized by that point in time. 

Ethanol Comments: Export demand for U.S. ethanol is coming from locations such as India and the Middle East, reports a story by Dow Jones. That story basically confirms what was being indicated in EIA’s weekly data over the past couple of months. Those stable exports and weak corn prices have allowed ethanol facilities to maintain sizable production levels and favorable margins. Unfortunately, declining DDGS prices may become somewhat of an anchor on ethanol producer returns.

Even though spot corn prices continued to decline this week, the drag of weaker DDGS prices seemed to offset that benefit. The differential between the cost of corn and the co-products at ethanol facilities are the following for week-ending Friday, August 1, 2014:

  • Illinois differential is $3.41 per bushel in comparison to $3.51 the prior week and $2.26 a year ago.
  • Iowa differential is $3.26 per bushel in comparison to $3.32 the prior week and $1.86 a year ago.
  • Nebraska differential is $3.12 per bushel in comparison to $3.22 the prior week and $2.09 a year ago.
  • South Dakota differential is $3.68 per bushel in comparison to $3.67 the prior week and $1.70 a year ago.

7. Country News

Australia: Barley exports are set to hit record levels in 2014/15 as Chinese buyers turn to it in the face of expensive domestic corn, according to Reuters. Exports are expected to be around 3 MMT through the end of July and booked shipping records indicate that it could potentially outstrip the record 6.15 MMT of barley Australia shipped in the 2011/12 season. The Australian Bureau of Agricultural and Resource Economics

and Sciences estimated in June that coarse grain exports would total some 5.2 MMT this year and has predicted that barely production will fall by around 20 percent to 7.5 MMT.

Brazil: The government has given approval for ADM to begin shipping corn from their new terminal on the mouth of the Amazon, according to Reuters. The terminal is located just outside of Belem, and will have an initial annual shipping capacity of 1.5 MMT, which is expected to increase to 6 MMT by 2016. The opening of this terminal in northern Brazil is expected to reduce shipping costs by 34 percent compared to cargoes arriving from Brazil’s main port of Santos in the country’s south.

China: Drought and high temperatures have caused damage to over a million hectares of farm land in the provinces of Henan and Inner Mongolia, reports Reuters. Henan is one of China’s larger barley producing provinces, and the province’s drought is the worst seen in four decades. It has negatively impacted 900,000 hectares of crops and forced the provincial government to restrict usage for water intensive industries. Inner Mongolia has been in a state of drought since April. This has negatively impacted 150,000 hectares of farm land, 16.4 million hectares of pasture land and severely impacted the drinking water supply of 300,000 people. The drought in Inner Mongolia is believed to have caused around $37 million of damage so far.

South Africa: South Africa has raised its forecast for corn production to 14.02 MMT, which is an increase from the prior estimate of 13.9 MMT. Sorghum production estimates jumped by 9.6 percent to 255,700 MT. 

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Ocean freight markets tried to rally a little this week but ran out of fuel by week’s end.

The Capesize iron ore trade between western Australia and China moved up close to $0.25MT before settling back to be unchanged for the week. The Atlantic Panamax trade was able to stabilize for the moment but the Pacific markets continue to be quite soft.

Determining the best rates in this buyers’ market requires putting out a bid. The spot and 20-day market remains the weakest with vessel owners refusing to let go of forward tonnage for September and October unless they can get a $3.00-4.50MTt premium over nearby values.

The below rate indications are for the 30-45 day market; spot prices can be lower.

Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China:

The charts below represent January-December 2013 annual totals versus January-May 2014 container shipments for Vietnam.

10. Interest Rates