Market Perspectives - October 17, 2014

1. Chicago Board of Trade Market News

The prospect of ideal weather in both North and South America would presumably have more of a neutral than bearish effect on prices, since harvest is already delayed in the U.S. and corn acreage is expected to be down in South America. The likelihood that rain delays could cause some South America acreage to transition back from soybeans into corn seems limited because of the tight financial resources of farmers, particularly in Argentina. More than likely, rain delays will just result in less total planted acreage.

Export sales normally pick up as harvest reaches the halfway point during seasons of abundant production. The size of buyer volume also tends to increase as a downward trend levels off into a trading range, which appears to be the dynamic that is presently unfolding. Large export sales announcements of corn are expected to become increasingly prevalent from now until year’s end.

Speculative traders with large short position will presumably watch the preceding event materialize and increasingly decide to take profits. The action of buying back their short positions could cause basis to weaken, an event that could frustrate producers. Unfavorable basis can slow the marketing pace of U.S. farmers; they may decide to wait and see if an issue, such as South American weather, produces a limited bounce in prices to utilize as a selling opportunity.

3. U.S. Weather/Crop Progress

For the period October 17-20, after seeing a very wet pattern the past few weeks across the country’s mid-section, there should finally be some time to dry out and let the harvesting resume. The only areas showing good chances for heavier precipitation are in the coastal ranges and mountains in the Pacific Northwest, primarily from northern Oregon up into Canada. The other area expecting good rains is from the Mid-Atlantic up into New England, where 1-3 inches should bring some relief to the region. As for temperatures, most of the West, Pacific Northwest and the Great Plains states are expecting to see unseasonably warm temperatures, with readings likely running 3-6 degrees above-normal.

Looking at the 6- to 10-day time frame (October 21-25), the warm temperature trend continues into this period, and the entire western two-thirds of the country are expected to see above-normal temperatures, with the strongest likelihood falling in the High Plains and along the Rocky Front Range from Colorado and Wyoming up into Montana. The bulls-eye for cooler than normal weather is found in the Tennessee and Ohio Valleys and within the Mid-Atlantic from Georgia northward into New Jersey. A greater likelihood of above-normal precipitation over this period is confined to the Pacific Northwest, Four Corners, southern Florida and the New England coastline. However, a large area of the country from the Great Plains eastward into the Mississippi Valley, the Midwest, Ohio Valley, Tennessee Valley and the western fringes of the Mid-Atlantic can expect it to be dry, with the highest probability falling from the Great Lakes down to the Gulf Coast along the Mississippi Valley. 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 1,922,800 MT for 2014/2015 – a marketing-year high – were reported primarily for Mexico (1,071,900 MT), Japan (214,700 MT, including 148,600 MT switched from unknown destinations), Venezuela (124,000 MT, including 94,000 MT switched from unknown destinations), Colombia (118,300 MT, including 40,000 MT switched from unknown destinations), unknown destinations (91,200 MT), and Peru (68,900 MT, including 35,000 MT switched from unknown destinations and decreases of 2,600 MT). Decreases were reported for Morocco (1,000 MT). Net sales of 510,500 MT for 2015/2016 were reported for Mexico. Exports of 901,700 MT were primarily to Japan (348,200 MT), Colombia (115,800 MT), Mexico (87,400 MT), Peru (83,900 MT), and Egypt (65,500 MT).

Barley: Net sales reductions of 28,600 MT for 2014/2015 resulted as increases for South Korea (1,400 MT), were more than offset by decreases for China (30,000 MT). Exports of 600 MT were reported to Taiwan.

Sorghum: Net sales of 54,000 MT were for China (116,000 MT, including 58,000 MT switched from unknown destinations and decreases of 1,000 MT). Decreases were reported for unknown destinations (58,000 MT) and Japan (4,000 MT). Exports of 204,600 MT – a marketing-year high – were reported to China.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Domestic DDGS prices for the remainder of November were about $4/MT stronger and pricing for December onward was an additional couple of dollars higher. In contrast, containerized DDGS for the export market presented an opportunity to buy at price levels that are lower than last week. Similar to the domestic pricing structure, the greatest weakness for exported DDGS prices was in the spot market.

The favorable pricing caused interest from Asian buyers to pick up suddenly. Korean buyers just purchased 10,000 MT to Busan/Kwangyang at the $179-181/MT level. There have also been some smaller sales to buyers from Thailand in the past two weeks. The amount of inquiry from Southeast Asia has suddenly spiked.

The increased interest from buyers seemingly relates to corn price levels that existed several weeks ago. Corn futures contracts have rallied more than 30 cents per bushel from the first of October until now. Selling at those prior levels can be difficult, but some DDGS merchandisers have inventory that needs to move and will do their best to assist buyers in coming close to their pricing objectives. Those pricing opportunities will decline in number as the surplus DDGS inventory is depleted. Merchandisers seem to be particularly interested in doing business with buyers who maintain good credit ratings via on-time payments.

Ethanol Comments: There is a normal seasonal pattern for fuel consumption to peak in summer and then decline into fall. Those alternations in demand have an expected influence upon price, and recent changes in ethanol prices are no exception. Of course, the reduced demand does eventually level off and prices stabilize, often into a trading range. Near-term alterations to stocks can then have an influence if prices are in the high or low end of that trading range. 

There was a modest decline in ethanol stocks this past week down to 18.4 million barrels. That was 1.6 percent less than the prior week’s level of 18.7 million barrels. The decline in total ethanol stocks was enough to enable the annual change to fall back below 20 percent of the year-ago stocks level of 15.4 million barrels. Remaining below 20 percent of the year-ago level seems necessary for ethanol prices to go midlevel or higher within the trading range.   

Last year’s relatively tight stocks and high prices incentivized increased ethanol production. On October 18, 2013, the differential between the price of corn and the co-products ethanol and DDGS was more than a dollar above current levels across the Corn Belt. The fact that the differential has primarily leveled off at lower rates is not encouragement for increased production. Consequently, it makes sense that there was a slight decline from 901,000 barrels per day (bpd) down to an average daily rate of 885,000 bpd for week ending October 10, 2014. 

The differential for the week ending Friday, October 17, 2014 is as follows: 

  • Illinois differential is $2.29 per bushel, in comparison to $2.06 the prior week and $3.41 a year ago.
  • Iowa differential is $1.96 per bushel, in comparison to $1.94 the prior week and $3.04 a year ago.
  • Nebraska differential is $2.01 per bushel, in comparison to $1.72 the prior week and $2.93 a year ago.
  • South Dakota differential is $2.12 per bushel, in comparison to $1.97 the prior week and $3.28 a year ago.

7. Country News

Russia: The grain harvest in Siberia has hit delays due to snow, according to Bloomberg News. Snowfall totaling an inch before melting has made it difficult to get equipment into the fields and could force farmers to scale back the harvest. Siberia produced 17 percent of Russia’s 92.4 MMT grain harvest in 2013/14 and roughly 90 percent of Siberian grain has been harvested. Russia’s barely harvest is estimated to be 19.5-20 MMT and the corn harvest is estimated at 11-12.5 MMT.

South Africa: Yellow corn for December delivery fell by 1.2 percent to $178/MT, reports Bloomberg News. This fall came after five days of rising prices.

Ukraine: UkrAgroConsult has announced that Ukrainian corn exports could fall by 7 percent to 18.5 MMT in 2014/15 due to a reduced harvest and already low global corn prices, according to Reuters. Very hot late summer weather and the loss of corn acreage due to fighting in Eastern Ukraine are chiefly to blame for the reduction. Ukraine has the potential to harvest up to 25.9 MMT of corn this year, which is a decrease from the record 27 MMT it saw in 2013.

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting:In this week’s Dry-Bulk freight markets, the Panamax sector stood alone and firm. All other markets slid back and continue to look weak. This begs the question: can the Panamax sector remain firm to better if everything else is softening? Physical grain rates did not really follow the Baltic Panamax index as they actually dropped slightly this week. The U.S. PNW market is gaining in freight demand. The spot and October market remains at a discount to November-December freight. The average daily earnings for capsize vessels this week was $9,875, the lowest level since August 11. Average daily earnings for Panamax vessels now stands at $7,088/day.

There are new news stories about the potential new canal through Nicaragua. I’ve not given this project any credibility in the past but I had an interesting conversation with an official from the Panama Canal Authority and they stated that they had previously given the Nicaragua project a less than 10 percent chance of happening. They now would give it a 30 percent chance, though its completion would be at least 12-15 or more years out, if at all.

See today’s news story, which opens with the following sentence: “Nicaragua's canal will break ground in December and will be a multinational project, not an all-Chinese operation, according to a high-ranking official in Nicaragua's government.”

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 year-to-date 2014 container shipments to Taiwan.

10. Interest Rates