Market Perspectives - September 5, 2014

1. Chicago Board of Trade Market News

Outlook: The 2014/15 crop year for U.S. corn and sorghum began on September 1, and in just two years the market has transitioned from drought into a bumper crop. Consistently favorable crop conditions are causing market participants to look at the December 2014 new-crop contract and ask how low it can go. That question will be answered in part by the contents of next week’s WASDE report, which will be published on Thursday September 11.

There is already an established expectation that USDA will increase corn yields in next week’s WASDE and the only real uncertainty is by how much. The maturity of the current crop is about a week behind schedule. Some analysts estimate that average U.S. corn yields could be well above 170 bushels per acre (bu.) if weather conditions remain favorable until maturity is complete. Of course, weather is still an uncertainty and so is the final average yield of the different corn varieties. The result is that most analysts expect USDA to stair-step any increase in the forecast of final yields until they receive more concrete harvest information.

USDA estimated a national corn yield of 167.4 bu. in the August WASDE for the current 2014/15 season, which is well above the 2013/14 average of 158.8 bu. It is entirely possible that USDA could further increase their yield estimate in the September WASDE to 170 bu. next week. However, a December contract of $3.50 bu. (cash prices below $3.30 bu.) seems to already reflect such a yield. This is important to note, because open interest has been increasing at present price levels. Traders with short positions need USDA to eventually confirm their confidence that weather and the productive ability of this season’s varieties will result in further yield increases. 

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: The NWS WPC Quantitative Precipitation Forecast (QPF) calls for moderate-to-heavy rainfall accumulations (2-5 inches) across the Desert Southwest, Southern Rockies, Central Plains, Upper Midwest, Southeast and lower Mid-Atlantic regions. Late in the period, a plume of subtropical moisture is forecasted to move into the Southwest bringing potentially heavy rains. In the Far West, dry conditions are forecasted to persist across California, the Great Basin and most of the Pacific Northwest.

The 10 day outlooks call for a high probability of above-normal temperatures across the Far West, Southern Plains, South, Southeast and Mid-Atlantic while below-normal temperatures are forecasted across the Central Rockies, Northern Plains, Upper Midwest and New England. Regarding precipitation across the conterminous U.S., a high probability of above-normal precipitation is expect across the Southwest and the eastern half of the U.S. Below-normal precipitation is expected across the Pacific Northwest.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 reductions of 7,500 MT for 2013/14 were up 77 percent from the previous week, but down noticeably from the prior four-week average. Increases reported for South Korea (121,200 MT, including 57,000 MT switched from unknown destinations), Japan (84,500 MT, including 92,800 MT switched from unknown destinations and decreases of 8,300 MT), Honduras (16,500 MT) and Guatemala (13,600 MT, switched from unknown destinations), were more than offset by decreases for unknown destinations (230,100 MT), Mexico (21,400 MT), the Dominican Republic (17,700 MT) and Colombia (2,900 MT). Net sales of 525,600 MT for 2014/15 were reported primarily for unknown destinations (268,300 MT), Mexico (103,100 MT), Colombia (86,200 MT) and Guatemala (47,000 MT). Decreases were reported for Costa Rica (13,600 MT) and Honduras (10,600 MT). Exports of 1,022,600 MT were up 2 percent from the previous week and 5 percent from the prior four-week average. The primary destinations were Mexico (257,200 MT), Japan (233,700 MT), South Korea (181,100 MT), Colombia (71,800 MT), Spain (66,100 MT), Egypt (65,000 MT), the Dominican Republic (42,300 MT) and Panama (17,200 MT). Optional Origin Sales: For 2013/14, options were exercised to export 55,000 MT to South Korea from the United States. 

Barley: Net sales of 800 MT for 2014/15 were reported for Taiwan. Exports of 300 MT were reported to South Korea (200 MT) and Taiwan (100 MT). 

Sorghum: Net sales of 53,900 MT for 2013/14 were reported for China. Net sales of 58,000 MT for 2014/15 were reported for China. Exports of 217,600 MT were reported to China. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Domestic DDGS prices remained basically unchanged while the price of exported containers had an average increase of $7/MT in the nearby spot market. The opposite happened last week, as domestic DDGS prices increased by about $3/MT while international containerized prices declined by an additional $4/MT. When averaged over several weeks, the price changes that are being offered to domestic and foreign DDGS buyers are rather uniform. Of course, logistical cost is always one determinant in pricing the total cost to various destinations. There is also one other extremely important consideration – the reliability of the buyer in making payments.

DDGS merchandisers will work hard to maintain a relationship with any buyer who promptly pays for inventory. Recent events have forced some DDGS merchandisers to reposition a number of containerized cargoes that were sent to Southeast Asia. The merchandisers found no shortage of new buyers willing to assume ownership of the containerized DDGS. Merchandisers naturally want to be hospitable in building new business relationships and desire to show trust. Unfortunately, a few buyers will periodically break that trust, but DDGS merchandisers talk among themselves. Word quickly gets out about who are the truly dependable buyers and they receive a price advantage.

Ethanol Comments: Management of ethanol facilities across the Corn-Belt uniformly considered various purchasing strategies as they watched corn prices hit new lows this week. There was some talk among market participants about the weak basis at the Gulf of Mexico, but most ethanol plants are more focused upon their own local basis. They are often closer to the pulse of the market than are speculative traders in Chicago.

Ethanol facilities in the upper Corn-Belt are keeping an eye on the prospect of cooler temperatures occurring in the next two weeks in Minnesota, the Dakotas and maybe even down to northern Iowa. They are also keeping an eye on factors such as precipitation amounts and changing acreage in South America, all of which are likely to have some influence on corn prices this fall.

Ethanol facilities desire to lock in favorable margins at the most opportune time. There was an improvement in the differential between the cost of corn and the co-products for ethanol facilities in three of the four regions across the Corn-Belt for week-ending Friday, September 5, 2014:

  • Illinois differential is $3.58 per bushel in comparison to $3.41 the prior week and $3.31 a year ago.
  • Iowa differential is $3.40 per bushel in comparison to $3.32 the prior week and $2.97 a year ago.
  • Nebraska differential is $3.25 per bushel in comparison to $3.28 the prior week and $3.30 a year ago.
  • South Dakota differential is $3.91 per bushel in comparison to $3.80 the prior week and $3.19 a year ago.

 

7. Country News

Argentina: It is believed that Argentine farmers could increase corn plantings by up to 20 percent if the next elected president dismantles the country’s export quotas, reduces taxes and rolls back myriad policies that have slowed investment in agriculture, according to Reuters.

EU: It is predicted that Europe could endure its third mild and wet winter, reports Reuters.

South Africa: South African yellow corn for December delivery has has risen for the first time ina week to total $164.58/MT, according to Bloomberg News.

Ukraine: Ukraine’s grain exports in the first two months of the 2014/15 seasons have risen to 5.01 MMT, reports Reuters. This is a substantial increase over the 3.3 MMT shipped at this point last year. These shipments included 1.89 MMT of barley and 377,000 MT of corn. The agricultural ministry anticipates a total grain harvest of 63 MMT, which is similar to the amount brought in last year. It is estimated that farmers have so far harvested 35.6 MMT of grain over 9.8 million hectares, which is about 66 percent of the total area. 

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting:As we enter the last quarter of 2014, the shipping industry is anxiously asking itself if things have finally turned the corner. Rates seem to have at least stabilized and even shown some improvement over the last month. The strong carry, or Contango, in the markets certainly indicates that everyone is optimistic about what the last months of 2014 and the next year will produce. The spot market continues to be a buyers’ market but it will take considerably more money to wrestle a ship away from an owner for the Oct.-Nov.-Dec. positions. The Panamax sector is currently leading the way up. The Capesize markets are trailing the rest, but even they are showing a wide spread between the $16,918 spot market and the $24,500 Q4 market. Markets in the Pacific are showing the best recovery, but then again they suffered the most over the past quarter.

I am not thinking that ocean freight markets are going to become wildly bullish but I do think shippers and receivers are going to have to adjust to paying a bit more as we move forward. The containerized grain freight markets will likely take longer to recover and improve. This will cause the spreads between Dry-Bulk and container freight to widen in the favor of containerized grain shipments.

 

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-August 2014 container shipments for Japan.

10. Interest Rates