Market Perspectives - February 13, 2015

1. Chicago Board of Trade Market News

Week in Review

Outlook: USDA published the February WASDE report on Tuesday Feb 10and the data is expected to have a rather neutral influence on price because the more bullish decline in U.S. feed grain ending stocks was offset by increasing global corn stocks. The result is that corn futures contracts continue to trade sideways in a horizontal pattern. The top and bottom of that trading range will presumably be tested as prices are influenced by factors such as South American harvest, the pace of U.S. export sales, spring weather and acreage prospects in the Northern Hemisphere.

The February WASDE reduced ending stocks for U.S. corn, sorghum and barley in the current 2014/15 season. The ending stocks estimate for U.S. corn was reduced because of the expectation that greater gasoline consumption during 2015 will result in more ethanol usage. The increased ethanol production will produce more distiller grains, and that is a reason that U.S. feed consumption of corn was reduced. The final outcome of such adjustments is that U.S. corn ending stocks declined by 50 million bushels, from 1,877 to 1,827 million bushels. U.S. sorghum stocks were reduced from 32 to 27 million bushels because of strong exports while U.S. barley stocks were reduced from 82 to 77 million bushels because of reduced imports from Canada.

World corn production was increased for the 2014/15 season, but it was primarily offset by increased consumption. The increased corn trade is expected to consume the larger supplies from Ukraine and Argentina. Larger global supplies and U.S. corn ending stocks of 1827 million bushels do not warrant any price rationing. However, USDA’s data also indicates that there is no surplus to cushion any sizable shortfall in next season’s feed grain production. 

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: The NWS HPC Seven-Day Quantitative Precipitation Forecast (QPF) calls for light precipitation accumulations (generally less than one inch) across the eastern half of the country while portions of the central and southern Rockies are forecasted to receive between one and two inches of liquid accumulation. The10-day outlooks call for a high probability of above-normal temperatures across the West, while below-normal temperatures are forecasted for the eastern half of the country. A high probability of above-normal precipitation is forecasted across eastern portions of the West, Plains, South, Southeast and the Mid-Atlantic regions while below-normal precipitation is expected in the Pacific Northwest, northern California, Great Basin and the Upper Midwest. 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 1,003,100 MT for 2014/15 were up 19 percent from the previous week, but down 17 percent from the prior four-week average. Increases were reported for Mexico (427,900 MT), Japan (172,800 MT, including 42,700 MT switched from unknown destinations and decreases of 17,600 MT), Colombia (71,600 MT), South Korea (69,000 MT), Saudi Arabia (69,000 MT, including 65,000 MT switched from unknown destinations), Portugal (68,200 MT, including 62,000 MT switched from unknown destinations), Iran (66,000 MT) and the Dominican Republic (49,600 MT, including 26,500 MT switched from unknown destinations and decreases of 800 MT). Decreases were reported for unknown destinations (59,000 MT), the French West Indies (6,000 MT) and Canada (5,700 MT). Net sales of 117,700 MT for 2015/16 were reported for Mexico (81,100 MT) and Japan (36,600 MT). Exports of 618,900 MT were down 13 percent from the previous week and 9 percent from the prior four-week average. The primary destinations were Mexico (247,900 MT), Japan (91,900 MT), Saudi Arabia (69,000 MT), Portugal (68,200 MT), the Dominican Republic (49,300 MT), Guatemala (32,500 MT) and Colombia (24,400 MT). Optional Origin Sales: For 2014/15, outstanding optional origin sales total 68,000 MT, all South Korea. 

Barley: Net sales of 100 MT for 2014/15 were reported for Japan. Exports of 200 MT were reported to Japan.

Sorghum: Net sales of 332,400 MT for 2014/15 were up 49 percent from the previous week and 28 percent from the prior four-week average. Increases were for China (163,400 MT, including 58,000 MT switched from unknown destinations and decreases of 300 MT), unknown destinations (119,000 MT) and Japan (50,000 MT). Exports of 168,500 MT were up noticeably from the previous week and up 17 percent from the prior four-week average. The destination was China. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: During the past week there was a slight increase in the average price of containerized DDGS to Asia as market participants organize their business prior to the Chinese New Year, which begins on February 19. DDGS buying from Asia is expected to slow during the next two weeks because of the holiday celebrations, though some Chinese clients have expressed their interest in securing DDGS purchases through June – particularly if they can get the merchandisers to reduce their offers by an additional $10/MT. However, DDGS merchandisers do not seem anxious to accept those bids while there is congestion at U.S. West Coast ports. Labor issues at those ports are making the shipping period on contracts difficult to guarantee.

 DDGS merchandisers presently find it easy to deal with domestic clients, and that presumably is a reason that barge and rail rates to the Gulf of Mexico and New Orleans declined this past week by $2-$4/MT. The price of rail-delivered DDGS into Texas, and potentially into Mexico, did not increase. The average rate for bulk DDGS into California increased by about $3/MT.

 Several DDGS merchandisers have expressed the opinion that there is room for domestic buyers to receive more favorable price offers for DDGS, particularly if there is a momentary setback in corn futures contracts. In the meantime, DDGS merchandisers are executing the obligations that they have on their books. Remaining offers for the February to March time period seem limited in number.

 Ethanol Comments: The February WASDE seems to imply that USDA has an optimistic opinion about ethanol production prospects through the summer of 2015. The estimate for corn used in ethanol production between now and the end of August was increased by 75 million bushels, from 5,175 to 5,250 million bushels. The justification for this increase is a forecast by the Energy Information Administration (EIA) for higher gasoline consumption due to lower prices.

A rebound in petroleum prices above $70 per barrel could also cause ethanol exports to grow, which could help reduce growing U.S. ethanol stocks. Such a development would be favorable because ethanol stocks have grown sizable in comparison to a year ago. Ethanol stocks were 23.9 percent above a last year for the week ending February 6. Average daily ethanol production during that same time period also increased to a rate of 961,000 barrels per day (bpd), above the prior-week’s level of 948,000 bpd and 6.6 percent above the year-ago average of 902,000 bpd.

Increasing demand could reduce stocks and help ethanol producers maintain stable margins. Please note that the differential between the cost of corn and the return for the co-products of ethanol and DDGS is stable for week ending Friday, February 13, 2015:

  • Illinois differential is $1.78 per bushel in comparison to $1.84 the prior week and $4.40 a year ago.
  • Iowa differential is $1.46 per bushel in comparison to $1.46 the prior week and $2.74 a year ago.
  • Nebraska differential is $1.41 per bushel in comparison to $1.41 the prior week and $2.66 a year ago.
  • South Dakota differential is $1.67 per bushel in comparison to $1.66 the prior week and $2.78 a year ago.

7. Country News

Australia: Australian barley exports in 2014/15 are expected to drop by 25 percent to total 4.7 MMT this year, according to Reuters.

EU: A combination of low prices and decreased competition have set EU barley exports on the path to a record year, led by strong French exports of feed barley to China, reports Reuters. France’s Strategie Grains has increased its monthly estimate for EU barley exports in 2014/15 by 400,000 MT to total some 7.9 MMT, which is a marked increase over the 5.7 MMT exported last year. Of that total, 1.62 MMT is slated to go to China, which is up from the 112,000 MT sent there in 2013/14. They went on to predict that next year’s exports could reach 8.1 MMT, with 2 MMT slated for China.

Further, the UK has shipped its first bulk shipment of feed barley to Japan, while Germany is increasing exports to Saudi Arabia.

Ukraine: The Agriculture Ministry has announced that it stands ready to impose measures to defend local grain markets if a sharp devaluation in the hryvnia causes exports to increase dramatically, according to Reuters. In the last week, the hryvnia has lost 30 percent of its value against the dollar as Ukraine’s Central Banks moved toward a free-float. Domestic grain is priced in dollar equivalent, which has raised fears that traders could opt to export grain instead of keeping it for domestic consumption. Ukraine has exported 22 MMT of grain so far this season, with 9.2 MMT of that being corn and 3.8 MMT being barley.

South Africa: Continued hot and arid conditions over the coming two weeks will likely dictate food prices for the coming year, reports Bloomberg News. Yellow corn futures for July delivery dropped to $204.81/MT.

8. Ocean Freight Markets and Spread

Bulk Freight

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Like many things, the Baltic Indices and physical ocean freight rates could not stay down forever. They have, at least for now, bottomed out and are attempting a small bounce in many markets. The bounce however does not seem to be affecting the South American market to Asia, as that route is still under pressure and rates remain depressed.

I do not expect things to go up too much due to a large oversupply of vessels. As this week’s freight fixtures show, we are entering the beginning of the South American soybean shipping season and it appears the Argentine farmers are finally letting go of some supplies. Oilseed shipping is starting to shift.

The other big news this week is that the ILSW labor negotiations on the West Coast are not progressing very well. Work slowdowns and stoppages continue with greater severity and frequency, and things continue to slide down hill on service. Everyone needs to be very diligent regarding their shipment and arrival logistics.

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

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

Korea 2015
Korea 2014
International Freight Rates

10. Interest Rates

Interest Rates