Market Perspectives - April 24, 2015

1. Chicago Board of Trade Market News

Outlook: This week the price of the May corn contract fell back to levels that were not traded since October 20, 2014. At that time, the market was working slowly higher from the season lows that occurred at the end of September. Prices continued upward into the 2014 year-end as traders with short positions exited and other traders purchased to build long positions. Eventually, the average speculative position in corn transitioned from being short to being long. Many of those traders held on to their long positions in anticipation that a blatantly bullish catalyst would propel an explosive rally to the upside. However, that did not happen. Eventually, the established long positions needed to be reduced as the March and then May contracts transitioned toward their expirations. Such selling helped create some short-term bearish chart patterns. The result from present factors such as chart patterns and necessary money management is the price level for the current corn crop (in the initial stages of planting) is at the same level as occurred during the harvesting of the prior record crop.

Last week’s planting pace of 9 percent for U.S. corn was ahead of last year’s rate of 6 percent, but behind the five-year average of 13 percent. The quicker planting pace in the years prior to last season were not a great advantage. Obviously, there are other factors that influence final yields. For example, last season’s weather was favorable across most of the U.S. Corn Belt during pollination, and then remained that way to allow ears to fill without stress. Growing conditions in China and the Black Sea region were also favorable last season. There is a possibility that such a fortunate hand of conditions could again be dealt this year to the global feed grain market. However, a higher probability outlook seems to be that market participants will look back on the price action for the week ending April 24, 2015 and declare, “That was a good buying opportunity.” 

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: For the ensuing period of April 24-27, northern New England, portions of Georgia, Alabama and southern Florida are expected to receive 1.0-1.5 inches of precipitation, which would help in the mitigation of existing dryness/drought. Up to about 2 inches of rain is forecast for the easternmost portions of the drought region in both Oklahoma and Texas during this period. Light precipitation (0.25-inch or less) is anticipated for most of the Dakotas and upper Mississippi Valley, though western South Dakota is expected to receive 1.0-1.5 inches of rain. Between 1.0-1.5 inches of precipitation (liquid equivalent) is predicted for parts of the West.

For the 10-day period, April 28-May 2, there are enhanced odds of near- to below-median precipitation across most of the contiguous U.S. Odds favor above-median rainfall from the central and eastern Gulf Coast region northeastward across the Southeast, mid-Atlantic, and southeastern 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

Corn: Net sales of 867,900 MT for delivery in 2014/15 were up 48 percent from the previous week and 68 percent from the prior four-week average. Increases were reported for Japan (336,000 MT, including 82,600 MT switched from unknown destinations and decreases of 7,100 MT), Mexico (156,100 MT), Colombia (149,000 MT, including 30,000 MT switched from unknown destinations and decreases of 28,200 MT), Saudi Arabia (84,500 MT, including 79,500 MT switched from unknown destinations) and South Korea (67,900 MT). Decreases were reported for unknown destinations (119,400 MT), Guatemala (6,200 MT) and the Dominican Republic (2,100 MT). Net sales of 6,200 MT for 2015/16 were reported for unknown destinations (3,400 MT) and Trinidad (2,800 MT). Exports of 1,041,100 MT were up 20 percent from the previous week and 10 percent from the prior four-week average. The primary destinations were Japan (289,100 MT), Mexico (218,600 MT), Saudi Arabia (158,400 MT), South Korea (138,900 MT), Colombia (71,900 MT) and Taiwan (69,300 MT).

Barley: There were no sales reported during the week. Exports of 300 MT were reported to Taiwan.

Sorghum: Net sales of 83,500 MT for 2014/15 resulted as increases for China (188,500 MT, including 107,000 MT switched from unknown destinations and decreases of 4,100 MT), were partially offset by decreases for unknown destinations (105,000 MT). Net sales of 58,000 MT for 2015/16 resulted as increases for unknown destinations (108,000 MT), were partially offset by decreases for China (50,000 MT). Exports of 217,000 MT were down 38 percent from the previous week and 13 percent from the prior four-week average. The destination was China.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: The present setback in the price of Chicago corn futures contracts and the prospect of the likelihood for lower freight rates beginning in June has enabled containerized DDGS rates to Asian destinations to fall by more than $20/MT this past week. DDGS bulk rates to the Gulf of Mexico declined by $7-9/MT and the price for domestic buyers was down about $4/MT. Only rail rates to California and the Pacific Northwest were unchanged to slightly higher due to logistical costs.

A number of Chinese feed buyers have been watching as relatively weak demand within their own domestic market pressed on internal protein meal prices. They decided to watch and see if more favorable DDGS prices evolved before making additional purchases. The patience of these buyers has paid off this time with a better pricing opportunity becoming available. That same opportunity is being presented to all other Asian buyers, with the largest decline in price being offered to Japanese buyers.

DDGS merchandisers are being pressured to reduce prices by competing feed ingredients as futures contracts currently decline for soybean meal and corn. However, planting is not even half complete for these crops in the U.S. Corn Belt, thus the present sell-off is anticipated to be temporary before prices rebound.

Ethanol Comments: Recent declines in the price of corn and increases in the price of gasoline have encouraged some modest growth in ethanol production. The average daily rate of production increased to 930,000 barrels per day (bpd), up from the prior week’s daily production rate of 924,000 bpd. This growth contributed to an increase in ethanol stocks to 21.3 million barrels for the week ending April 17, 2015. This is 3.4 percent larger than the prior week’s level of 20.6 million barrels. The joint increase in production and stocks happened in conjunction with an increase in ethanol imports at a rate of 53,000 bpd. The composite of increases in stocks and imports is less than desirable and could dampen ethanol prices without a more substantial offsetting increase in demand.

Ethanol production is unlikely to decline if margins do not tighten. The differential between the price of corn and the spot price of corn and co-products improved across the Corn Belt for the week ending April 24, 2015:

  • Illinois differential is $2.40 per bushel, in comparison to $2.38 the prior week and $4.29 a year ago.
  • Iowa differential is $2.11 per bushel, in comparison to $2.00 the prior week and $3.92 a year ago.
  • Nebraska differential is $1.95 per bushel, in comparison to $1.89 the prior week and $3.64 a year ago.
  • South Dakota differential is $2.31 per bushel, in comparison to $2.19 the prior week and $4.20 a year ago.

7. Country News

 Brazil: Weather conditions for corn in southeastern Brazil are likely to be highly conducive to growing in the coming months, according to Reuters. This is good news for farmers, as the second corn crop still needs substantial moisture before the harvest begins in June.

India: Cargill has plans to open an 800 MT/day corn mill by September 2015 in order to export Indian corn to the Middle East and Africa, reports WPI. The facility is expected to process 300,000 MT of corn annually.

Kenya: The FAO has reported that up to 30 percent of Kenya’s post-harvest corn crop has been destroyed by pests, according to WPI. This huge loss serves as a stark reminder of Kenya’s struggles with inadequate storage facilities, infrastructure and transport for grains.  

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

 Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: For most of the week the Baltic Indices were up and trying to make the market look stronger. The BDI is actually up to a three month high, though it did not take much of a move to accomplish that. This indicates that some traders have been a little optimistic and willing to pay up slightly for long-term vessel time charters. But the increased indexes have not yet translated into much better rates in the physical markets. Business from East Coast South America to Asia is finding decent cargo demand, but vessel demand from North America and especially the Pacific is still wanting. There have been rumors of as many as 20 Supramax vessels spot in the U.S. Gulf looking for work. So, all in all I don’t see any big changes and that will leave most rates generally unchanged for the week. This is not a bullish market.

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 South Korea.

10. Interest Rates