Market Perspectives - April 2, 2015

1. Chicago Board of Trade Market News

Week in Review

Outlook: USDA’s Prospective Plantings and Grain Stocks reports of March 31 were considered bearish because data within both was larger than expected. The Prospective Planting report estimated U.S. farmers would plant 89.2 million acres of corn this spring. That was a 2 percent reduction from last year but larger than the average estimate of 88.7 million acres. USDA’s quarterly Grain Stocks report estimated that the total amount of corn in the United States on March 1 was 7.74 billion bushels, which is up 11 percent from a year ago. On-farm corn stocks were up 13 percent and off-farm corn stocks up 7 percent. That estimate of corn stocks on hand was larger than the average estimate of 7.63 billion bushels. As noted last week, Chicago futures contracts often react in accordance with how USDA’s data deviates from expectations. As a result, corn futures contacts sold off immediately after USDA’s data was released.

A third year of declining corn acreage and off-farm corn stocks that are up only 7 percent after a year of record production are not bearish factors, but there is always some pent up trading tension that needs to be adjusted immediately after important USDA reports are published. The fact that the data was less bullish than the market’s expectations resulted in the long positions being reduced, which caused a momentary sell-off. However, a sizable pool of traders was waiting to buy corn contracts at lower price levels when the opportunity presented itself. The buying of those traders become increasingly active as the December contract traded through $4.00 per bushel. Such price action continues to support the outlook that substantial price weakness in corn contracts is unlikely prior to June 1.

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: Rain from the lower and middle Mississippi Valley into New England will contrast with mostly dry conditions across the Southeast and Gulf Coast as well as from the Plains into the Southwest. A strong cold front will bring temporary relief from unseasonable warmth over the Plains, though above-normal temperatures will return by the weekend. Rainfall associated with the front will be light on the Plains and generally confined to central and northern-most portions of the region. However, rain will intensify as the cold front marches east, with five-day totals of 1-3 inches possible from the northern Delta into the Ohio Valley and Northeast. In contrast, dry conditions are expected from the Carolinas to the immediate Gulf Coast. Out west, some showers and high-elevation snow will overspread the Northwest during the weekend, while the Southwest and Four Corners Region remain dry.

The NWS 10-day outlook calls favorably cooler-and wetter-than-normal weather from the Pacific Coast into the Great Basin, including California. Likewise, wetter-than-normal weather is also expected from the Mississippi Valley and Gulf Coast States into the Northeast. In contrast, drier-than-normal conditions will prevail across the Rockies and Great Plains. East of the Rockies, abnormal warmth over southern portions of the Corn Belt and Mid-Atlantic States will contrast from cooler-than-normal weather across the northern Great Lakes and New England. 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 406,600 MT for delivery in 2014/15 were down 7 percent from the previous week and 26 percent from the prior four-week average. Increases were reported for Mexico (234,600 MT), Colombia (99,600 MT, including 22,000 MT switched from unknown destinations and decreases of 5,500 MT), Barbados (63,300 MT, switched from Guatemala), Japan (58,300 MT) and Peru (37,000 MT). Decreases were reported for unknown destinations (64,100 MT), Taiwan (56,700 MT), Guatemala (46,800 MT), the French West Indies (5,000 MT) and Costa Rica (1,700 MT). Net sales of 25,100 MT for 2015/16 were reported for unknown destinations. Exports of 683,400 MT were down 36 percent from the previous week and 37 percent from the prior four-week average. The primary destinations were Mexico (147,400 MT), South Korea (135,200 MT), Japan (126,900 MT), Colombia (122,400 MT), the Dominican Republic (34,100 MT), Taiwan (27,400 MT) and Costa Rica (19,900 MT). Optional Origin Sales: For 2014/15, outstanding optional origin sales total 68,000 MT, all South Korea. Export Adjustments: Accumulated exports to Japan were adjusted down 376 MT for week ending February 5. These sales were inadvertently reported as being shipped, but should have been reported as being cancelled. 

Barley: There were no sales reported during the week. Exports of 400 MT were reported to Taiwan (300 MT) and Canada (100 MT).

Sorghum: Net sales reductions of 212,700 MT for 2014/15 were down noticeably from the previous week and from the prior four-week average. Increases were reported for China (9,300 MT). Decreases were reported for Japan (222,000 MT). Net sales of 110,000 MT for 2015/16 were reported for China. Exports of 172,600 MT were down 40 percent from the previous week and 28 percent from the prior four-week average. The destination was China. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS buyers were encouraged back on March 13 to request that DDGS merchandisers inform them when specific pricing objectives became available. A potentially favorable pricing opportunity occurred this week when corn contracts sold off sharply immediately after the publication of USDA’s Prospective Plantings and Stocks reports. However, there seemingly was a substantial pool of buyers who were waiting on such a sell-off to occur because they quickly reacted and started making purchases. The result is that corn contracts quickly regained more than half of Tuesday’s losses. 

Ethanol plants and other domestic users of U.S. corn will actively monitor developing weather conditions across the Corn Belt this spring. Last year the U.S. weather condition remained favorable throughout the growing season, but that is not typical. Domestic buyers know that the price of corn can spike suddenly if spring weather becomes excessively wet and delays the planting of U.S. corn. Such concerns may explain why domestic DDGS buyers paid up to $5/MT more this past week even though the price of containerized DDGS for foreign buyers was unchanged to slightly lower. Foreign buyers may wish to request that DDGS merchandisers keep them informed on a daily basis about changing U.S. weather and soil moisture conditions as corn planting gets underway.

Ethanol Comments: Total U.S. ethanol stocks declined by a sizable 3.6 percent, from 21.3 million barrels to 20.5 million barrels, for the week ending March 27. Increased consumption seems primarily responsible for this decline in stocks as the average daily rate of production of 952,000 barrels per day (bpd) was basically unchanged from the prior-week’s level of 953,000 bpd.

U.S. gasoline, and accompanying ethanol, consumption is anticipated to be strong this spring as the national average retail price of regular gasoline is presently about $2.45 per gallon, which is more than $1.10 per gallon under the year-ago price. As the old adage in goes, “the best fix for low prices is low prices.” This summer it will be less expensive to fill up the tank and take the family on a weekend vacation and the season often kicks off over the weekend of Easter.

Due to the Good Friday holiday this week, there will be no report of ethanol and co-product processing values from the primary regions of the U.S. Corn Belt. 

7. Country News

China: U.S. farmers are planting the largest amount of sorghum since 2008 as China increasingly turns to it as a feed grain in preference to corn, according to Reuters. More than half of the 8 MMT sorghum slated for export this year will likely be shipped to China. Exporters have also already sold around 800,000 MT of next year’s crop. U.S. farmers will likely plant 8.129 million acres of sorghum, which is 1 million acres more than was planted last year, but far below the record 27 million acres planted in 1957. This year, sorghum is predicted to be worth around $100 more per acre than corn.

Further, WPI reports that China imported seven times more sorghum and double the amount of barley in February 2015 compared to February 2014.

Malawi: Severe flooding in Malawi has caused significant damage to the country’s croplands and the government has set aside $20 million in order to import corn, reports WPI.

South Africa: Farmers stand in opposition to a proposal from South Africa’s president that would limit farm size and ownership, reports WPI. The farmers believe that this initiative will result in reduced corn production.

8. Ocean Freight Markets and Spread

Bulk Freight

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: World freight markets are not giving me much to write about. For the most part, things are steaming in circles and not going very far. It seems we have reached a point where no one wants to sell at lower levels while at the same time there is no motivation for buyers of freight to pay up. So, we’ve seen rates go up $0.50/MT one week and back down the same amount the next. The only market that saw some support this week was in the Capesize sector.

The fact that any true turn around in rates may take a year or two (rather a month or two) seems to be sinking into the heads of vessel owners and their bankers. The new order book for vessels has dropped to almost nothing (which is what is needed) and a number of orders for new dry-bulk vessels have been changed over to tanker vessel orders. So the market is finally reacting in the proper way. 

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

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

Hong kong 2015
Hong kong 2014
International Freight Rates

10. Interest Rates

Interest Rates