Market Perspectives - January 9, 2015

1. Chicago Board of Trade Market News

Week in Review

USDA will publish their last production estimates for the current 2014/15 season on Monday, January 12, 2015. Pre-report surveys indicate that most analysts expect to see modest reductions in the average yield and harvested acreage. As well, USDA will also publish quarterly grain stocks data on Monday. This data will show the amount of corn stocks on hand after the robust consumption during the last quarter of 2014.

The sizable exports and ethanol production during the past quarter gave large speculative funds the confidence to build a sizable long position in corn futures contracts when they had the opportunity to buy below or near $4.00 per bushel. The fact that their buying was being met by good commercial selling seems to imply that sales, and the resulting future demand, will remain good through the first quarter of 2015.

It is interesting how the future often tends to repeat itself; firms that have aggressively hedged basis contracts at relatively low price levels could find themselves in an uncomfortable position if the upside movement of futures outpaces cash, as previously occurred around the 2007/08 time period. Fuel to the fire could be added if they are forced to lighten up their positions if the basis widens beyond expectations, and then frustrations are heightened as the market settles back shortly thereafter as uncertainties diminish. The key point is that the profitability of feed grain traders in 2015 will likely depend upon their abilities to be anticipatory rather than reactionary.

3. U.S. Weather/Crop Progress

For the upcoming period of January 9-12, very cold weather will continue to dominate the central and eastern U.S. During the cold snap, snow showers and squalls will rage downwind of the Great Lakes. In contrast, mild, dry weather will prevail in much of the West. During the weekend, rain will develop in the western Gulf Coast region. As precipitation spreads northeastward early next week, the interaction between moisture and lingering cold air could result in snow, sleet, and freezing rain across parts of the South, East, and lower Midwest.

The NWS 10-day outlook for January 13-17 calls for the likelihood of below-normal temperatures in most areas east of a line from Texas to Wisconsin, while warmer-than-normal weather can be expected across the northern High Plains and the West. Meanwhile, below-normal precipitation will be the probable outcome across the northern half of the nation, as well as southern California and environs, but wetter-than-normal conditions will likely prevail in the southern Atlantic States and southern portions of the Rockies and 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

Export Sales
US Export inspections
USDA Inspections

Corn: Net sales of 387,600 MT for 2014/15--a marketing-year low--were down 57 percent from the previous week and 63 percent from the prior four-week average. Increases were reported for Mexico (251,300 MT), Colombia (63,400 MT), Japan (50,100 MT, switched from unknown destinations), Honduras (37,500 MT, including 17,800 MT switched from unknown destinations), Peru (27,400 MT, including 30,000 MT switched from unknown destinations and decreases of 3,000 MT) and El Salvador (22,000 MT). Decreases were reported for unknown destinations (101,800 MT). Net sales of 210,000 MT for 2015/16 were for Japan. Exports of 510,400 MT were down 24 percent from the previous week and 28 percent from the prior four-week average. The primary destinations were Colombia (118,900 MT), Japan (107,900 MT), Mexico (98,400 MT), Peru (90,400 MT), Taiwan (32,900 MT) and New Zealand (19,600 MT).Optional Origin Sales: For 2014/15, outstanding optional origin sales total 68,000 MT, all South Korea. 

Barley: There were no net sales reported during the week. Exports of 200 MT were down 69 percent from the previous week and 72 percent from the prior four-week average. The destination was Taiwan. 

Sorghum: Net sales of 182,700 MT for 2014/15 resulted as increases for China (240,700 MT, including 58,000 MT switched from unknown destinations and decreases of 1,200 MT), were partially offset by decreases for unknown destinations (58,000 MT). Exports of 172,800 MT were up noticeably from the previous week, but down 9 percent from the prior four-week average. The destination was China. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS prices traded below corn throughout much of the fourth quarter of 2014. Then in the month of December, DDGS prices started steadily increasing by greater percentages than did the price of corn in anticipation of returning Chinese demand. The price of some DDGS increased through the month of December to levels of more than 125 percent the price of local corn. DDGS prices will presumably struggle to go any higher in relation to corn without China purchasing a significant amount of containerized DDGS during the first quarter of 2015.

DDGS merchandisers report that they are receiving a good number of inquiries from Chinese buyers about potential business in the first quarter. However, the majority of DDGS merchandisers are now requiring Chinese customers to make down payments of up to 35 percent. If such requirements slow Chinese demand, then any future increase in the price of DDGS is likely to be proportionally less than an increase in the price of corn. Such a development could create a favorable opportunity for buyers from destinations such as Mexico or other Asian locations.

USDA is publishing a number of important reports on Monday and if the data is considered bullish for corn, then DDGS buyers may observe the price of corn increasing more rapidly than the price of DDGS from current price levels. In other words, DDGS prices could decline in relation to the price of corn in the next few weeks and present a buying opportunity. 

Ethanol Comments: A number of ethanol producers have skillfully hedged themselves by purchasing corn contracts at lower price levels. That is good news and it will help the associated ethanol facilities maintain favorable returns. Another favorable item is that ethanol exports throughout much of 2014 were strong and acted as a relief valve in consuming surplus stocks. Ethanol exports in November were at the highest level since December 2011. Unfortunately, there are also a few less favorable developments that have started to weigh on spot margins for the overall industry.

The price of petroleum has collapsed in the past month and there presumably has been a significant decline in recent exports as the prices of ethanol rise above gasoline. The lower price of gasoline in proportion to ethanol may also encourage domestic petroleum refineries to slow ethanol blending and instead increasingly utilize any surplus Renewable Identification Numbers (RINs) that they have acquired through time. Such factors are expected to weigh on ethanol producer margins in the near-term.

The differential between the cost of corn and the return for the co-products of ethanol and DDGS is not a producer margin, but it is an effective barometer that shows a substantial decline from year-ago levels for the week ending Friday, January 9, 2015.

  • Illinois differential is $1.67 per bushel, in comparison to $2.44 the prior week and $4.40 a year ago.
  • Iowa differential is $1.53 per bushel, in comparison to $2.14 the prior week and $3.00 a year ago.
  • Nebraska differential is $1.53 per bushel, in comparison to $2.10 the prior week and $3.06 a year ago.
  • South Dakota differential is $1.79 per bushel, in comparison to $2.15 the prior week and $3.25 a year ago.

7. Country News

Brazil: Rainfall in the top corn-producing state of Mato Grosso was slightly above average in December and the southern grain-producing states have also seen significant precipitation and localized flooding, according to Retuers. Rainfall for January is also expected to be above average.

China: Growing demand from China’s livestock feeding sector is responsible for the U.S. selling the highest amount of sorghum in 19 years, reports Bloomberg News. Sorghum sales of 584,324 MT had been reported as of December 18, 2014, with over half going to China. It is predicted that China will import 5 MMT of sorghum in the year-long period that began on October 1, 2014, which is up from the 4.16 MMT it brought in the prior year. The amount of U.S. sorghum inspected for export has doubled from last year to total 2.83 MMT.

Ukraine: Ukraine’s Agricultural Ministry is slated to meet with major grain traders on January 13 to discuss the country’s exports and domestic markets in the wake of Russia’s decision to curb grain exports, according to Reuters. One February 1, Russia is set to implement grain export duties of €35/MT in order to keep its domestic grain prices under control. Ukrainian authorities have previously stated that the country will likely increase the asking price for its grain exports in the wake of Russia’s decision.

Ukrainian grain exports totaled 19.6 MMT between July 1, 2014 and January 6, 2015. These exports included 7.61 MMT of corn and 3.63 MMT of barley, compared to 10.7 MMT of corn and 2.1 MMT of barley exported in the same time last year. Ukraine is expected to export around 33 MMT of grain this year out of a total harvest of 64 MMT. The country exported around 32 MMT of grain last year. 

8. Ocean Freight Markets and Spread

Bulk Freight

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting:Everyone probably knows well that I am not bullish on ocean freight rates for the near term, but I must admit that I keep watching the Baltic Indices and physical markets and wondering when they will finally bottom out. The dry-bulk markets have dropped daily for the past 40 days, and the overall downward trend has persisted since last September. We ought to be finding bottom soon. I cannot remember when I’ve seen the Capesize iron ore rates from Western Australia to China at $4.25/MT. Slow steaming will not alleviate the pain of current rates and therefore increased vessel layups and scrappings will have to ensue. Rates may not go back up much, but we certainly can’t go too much lower. The below soybean freight fixture from Santos Brazil to China for May shipment at just $25.00/MT provides a clear view of the market outlook. I’ve pegged the US Gulf Panamax rates to Japan at $36.50/MT, but have actually heard lower estimates. The last time we saw US Gulf to Japan or China at these levels was in February of 2008. It’s definitely a buyers’ market.

The Chinese New Year falls on February 19 this year and freight markets are hoping for a resurgence in demand once the week long holiday concludes. It may well be wishful thinking, but the market desperately needs something to spur cargo demand.

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

The charts below represent January-December 2014 annual totals versus year-to-date 2015 container shipments to Taiwan.

Taiwan 2015
Taiwan 2014
International Freight Rates

10. Interest Rates

Interest Rates