Market Perspectives - August 8, 2014

1. Chicago Board of Trade Market News

Outlook: USDA will publish the August WASDE on Tuesday August 12. There is currently a peculiar dynamic as market participants seem only partially interested in the contents of this report due to the assumption that future USDA data will be even more bearish. It seems a little presumptuous to assume that published yields are destined to get larger and larger and prices will be forced lower and lower. U.S. growing conditions have been excellent and the estimated yield for U.S. corn and other feed grains seem likely to increase in the August WASDE, but USDA will attempt to estimate yields as accurately as possible. The yield estimates will become more accurate as the season progresses, but there is no precedence for the assumption that more accurate yield estimates and higher yield estimates are one in the same.

Argentine corn sales are not expected to become fully active until the value of Argentine peso becomes more certain. In addition, corn sales out of the Black Sea region have the uncomfortable prospect of impending conflict. Nor does it look like burdensome corn crops will be produced in Ukraine and China. As a result of such uncertainties, buyers from Mexico, South Korea, Japan, Central America, and U.S. ethanol producers are chiefly watching the U.S. market and waiting on firm indications that global prices have bottomed. The outlook is that a bottom in U.S. feed grain markets will occur when bearish sentiment applies pressure to corn futures and cash prices independently remain firm. This occurrence can be an important indicator of an impending bottom in prices because negotiations and securing of product often occurs prior to any barrage of export sales announcements.  

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: From August 8-11, showery weather will gradually shift from the north-central U.S. into the Southeast. Five-day rainfall totals could reach 2-4 inches from the southwestern Corn Belt to the Carolinas. Meanwhile, mostly dry weather will prevail across the Great Lakes region and the southern Plains, although generally cool weather in the Midwest will contrast with hot conditions in the south-central U.S. Farther west, monsoon showers will be mostly confined to the northern Intermountain region, although a new surge of moisture may reach the Southwest during the next few days.

The NWS outlook for August 12-16 calls for the likelihood of below-normal temperatures from the central Plains into the Midwest and Northeast, while hotter-than-normal conditions can be expected across the northern High Plains, Deep South, and much of the West. Meanwhile, near-to-above-normal rainfall across the majority of the U.S. will contrast with the likelihood of drier-than-normal weather in southern Texas and from the Pacific Northwest to the northern 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

Corn: Net sales of 120,900 MT for 2013/14 were down 30 percent from the previous week and 66 percent from the prior four-week average. Increases were reported for Japan (185,200 MT, including 194,700 MT switched from unknown destinations and decreases of 18,600 MT), Israel (69,000 MT, including 60,000 MT switched from unknown destinations), Mexico (61,800 MT), Colombia (42,300 MT), Peru (35,200 MT, including 30,000 MT switched from unknown destinations and decreases of 6,300 MT) and Taiwan (24,600 MT). Decreases were reported for unknown destinations (287,300 MT), Egypt (68,000 MT), Costa Rica (1,700 MT) and Nicaragua (1,300 MT). Net sales of 758,700 MT for 2014/15 were reported primarily for Colombia (237,000 MT), Mexico (186,200 MT), unknown destinations (108,200 MT), Japan (98,000 MT) and Costa Rica (62,000 MT). Exports of 1,071,700 MT were up 24 percent from the previous week and 8 percent from the prior four-week average. The primary destinations were Japan (363,200 MT), Mexico (191,300 MT), South Korea (190,300 MT), Peru (96,100 MT), Israel (69,000 MT), Colombia (56,600 MT) and Panama (19,700 MT). Optional Origin Sales: For 2013/14, outstanding optional origin sales total 55,000 MT, all South Korea. 

Barley: Net sales of 400 MT for 2014/15 resulted as increases for Taiwan (500 MT). Decreases were reported for South Korea (100 MT). Exports of 400 MT were reported to Taiwan. 

Sorghum: Net sales of 2,300 MT for 2013/14 resulted as increases for China (57,300 MT, including 55,000 MT switched from unknown destinations), were partially offset by decreases for unknown destinations (55,000 MT). Exports of 120,900 MT were reported to China.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Corn futures contracts finally showed some stability this week after six weeks of decisively weak technical chart action. During this week, the sharp declines in DDGS prices also halted. Containerized DDGS prices bounced back up almost $30/MT for August and September and up about $15/MT for October.  Domestic buying was less enthusiastic and averaged up about $5/MT. There is an apparent difference in DDGS purchasing strategies as some buyers have decided to purchase prior to the publication of the August WASDE report next Tuesday, August 12, and others have decided to wait for more definitive confirmation that a bottom truly has been established in corn futures contracts. 

There seems to be almost universal certainty among market participants that USDA will increase their estimate for U.S. corn yields in next Tuesday’s report, but the prospects are less certain about corn production estimates for other global regions such as China and Ukraine. As well, unstable financial conditions in Argentina and potential conflict in the Black Sea region are additional uncertainties that are keeping global buying interest strong in the United States, essentially recognizing the country as the primary source of feed grains in the beginning of the 2014/15 season. (That topic is elaborated on in the Outlook section of today’s report.)

During the past year, there has been an increasing tendency for futures contracts to sell off sharply prior to the release of a key USDA report and then bounce back afterward as market conditions have become more bearish. Similar anticipatory behavior has been expressed prior to the release of the approaching August WASDE. It will be interesting to see if corn prices are able to maintain their downward trend after the report is published or not. DDGS buyers are encouraged to watch the reaction of both futures and cash prices after the report in order to create an effective purchasing strategy. 

Ethanol Comments: Data from the U.S. Census was published Wednesday and shows total U.S. ethanol exports for fuel and other industrial uses increased by 56 percent during the first six months of this year, reports a story by Platts. The most recent June figures were 13 percent above May levels and 76 percent above year-ago levels. The importance of this fact is the indication that recent growth in ethanol exports is not a waning development.

Export demand for ethanol has recently helped reduce ethanol stocks faster than increases in production. Continued export flow is indicated in the fact that U.S. ethanol stocks declined from 18.6 to 18.3 million barrels for the week ending August 1, while there was a lesser decline in ethanol production during that same period of 954,000 barrels per day (bpd) to 902,000 bpd.  It helps to maintain a more favorable production margin by having the percent year-over-year increase in stocks remains less than the percentage increase in production.

The end of the summer driving season and the eventual bottoming in corn prices could cause margins for ethanol producers to decline into year’s end. The differential between the cost of corn and the co-products at ethanol facilities implies that spot margins are likely to be in decline, but those margins remain well above year-ago levels across the Corn-Belt. The differentials are the following for the week ending Friday, August 8, 2014:

  • Illinois differential is $3.16 per bushel, in comparison to $3.42 the prior week and $2.41 a year ago.
  • Iowa differential is $3.17 per bushel, in comparison to $3.26 the prior week and $2.58 a year ago.
  • Nebraska differential is $3.02 per bushel, in comparison to $3.12 the prior week and $2.01 a year ago.
  • South Dakota differential is $3.31 per bushel, in comparison to $3.68 the prior week and $2.51 a year ago.

7. Country News

Brazil: Hoping to capitalize on growing tensions between Russia and the West, Brazil is actively working to increase its export levels of corn to Russia, reports Reuters. The Russian government has dispatched officials to South American embassies, including those of Brazil, Argentina and Chile, to try and make up for any shortfall that its embargo on Western food imports might cause.    

China: Chinese corn output could see its first decline in five years due to the persistent drought on the North China Plain, according to Bloomberg News. Output in what is traditionally China’s second-largest corn producing region may fall to 200 MMT down from last year’s record high 203 MMT. Corn output in other provinces, including Henan, Hebei, Shandong, Shaanxi and Inner Mongolia, is also expected to be negatively impacted. Henan province, which was the country’s fifth-largest corn producer last year, will likely see a 12.2 percent yield reduction this year. 

Russia: The Russian government has announced that its ban on Western food imports will have no impact on its own grain exports, according to Reuters. Russian grain exports are expected to be 25 MMT in the 2014/15 marketing year, which is a minor decline from the 25.4 MMT seen last year.

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting:It was another mixed week in world ocean freight markets, and it seems that they’re still steaming in circles.

The Capesize iron ore trade between West Australia and China slumped back to previous levels. Like last week, the Atlantic Panamax trade was stable but the Pacific markets continued to be soft. The spot and 20-day market remains the weakest with vessel owners refusing to let go of forward tonnage for September-November unless they can get a $4.00-5.00/MT premium over nearby values. Twenty-day Panamax rates for soybeans from the U.S. Gulf to China have been as low as $40.50/MT, but Chinese crushers have had to pay up to $45.00/MT for October shipments.

Here in China feed millers are talking about the possibility of their government placing restrictions on imports of U.S. sorghum. The feeling here is that the Chinese push back on feed grain imports is all political. But I have also heard crusher projections that China could import up to 73-74 MMT of soybeans in 2015.

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

10. Interest Rates