Market Perspectives - July 24, 2015

1. Chicago Board of Trade Market News

Week in Review

Outlook: Last week this section explained why the short-term outlook was for corn contracts to selloff into the first of August, and that expected event appears to have largely happened. However, it is also prudent to explain that this anticipated decline is not assumed to be the start of a continuous price decline into harvest. Rather, corn contracts are expected to bounce prior to the release of USDA’s August WASDE and Crop Production reports on Wednesday August 12. This expectation is noted to benefit end-users of feed grains by highlighting that the present buying opportunity is not assumed to be prolonged.

The average crop condition for U.S. corn is closer to the average of the past 10 years than it is to last season’s continuously high ratings. Monday’s data did have a subtle increase in U.S. corn’s average crop condition ratings to 52 percent good and 17 percent excellent from the prior-week’s rating of 54 percent good and 15 percent excellent. However, please note that there was no increase in the combined total of 69 percent good-to-excellent ratings but a 2 percent shift in ratings from good-to-excellent. It is normally good to be optimistic, but being realistic is also necessary. There seems to be little-to-no possibility that corn condition ratings will escalate upward to last season’s 76 percent good-to-excellent rating that resulted in yields well above the trend-line. USDA is already giving the benefit of the doubt with their current average U.S. corn yield estimate of 166.8 bu., which is closer to last season’s read yield of 171 bu. than to the prior-year’s yield of 158.1 bu. Actual field data will come into play from August onward. Consequently, the expectation is given for some sort of rebound in the December corn futures contract prior to the release of August data.  

3. U.S. Weather/Crop Progress

Crop Conditions

U.S. Drought Monitor Weather Forecast: The NWS WPC Seven-Day Quantitative Precipitation Forecast (QPF) calls for generally dry conditions across most of the western U.S. with the exception of some modest accumulation (1-2 inches) in northern portions of the Great Basin, northern Rockies and North Cascades. In contrast, the central and northern Plains and western portions of the Midwest are forecasted to receive 1-3 inches while heavy precipitation is forecasted in southern Georgia and Florida with totals in the 3-7 inch range.

 

The CPC 10-day outlooks call for a high probability of above-normal temperatures east of the Rockies as well as along the West Coast while most of the interior West will be below normal. Across the West (with the exception of extreme southeastern Arizona and southwestern New Mexico), there’s a high probability of below-normal precipitation while the central and northern Plains, western portions of the Midwest, Northeast and Southeast have a high probability of above-average precipitation. 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 223,400 MT for delivery in 2014/15--a marketing-year low--were down 33 percent from the previous week and 54 percent from the prior four-week average. Increases were reported for Colombia (110,000 MT, including 60,000 MT switched from Panama and decreases of 300 MT), Japan (99,200 MT, including 94,600 MT switched from unknown destinations and decreases of 59,500 MT), Portugal (83,200 MT, including 77,000 MT switched from unknown destinations), Mexico (76,700 MT), South Korea (66,500 MT, including 65,000 MT switched from unknown destinations and decreases of 1,400 MT) and Egypt (65,000 MT, including 58,000 MT switched from unknown destinations). Decreases were reported for unknown destinations (321,400 MT), Panama (60,600 MT) and New Zealand (4,200 MT). Net sales of 311,400 MT for 2015/16 were reported primarily for Japan (147,300 MT) and Mexico (105,200 MT). Exports of 1,156,800 MT were up 2 percent from the previous week and 9 percent from the prior four-week average. The primary destinations were Japan (245,900 MT), Mexico (218,300 MT), South Korea (121,500 MT), Colombia (86,300 MT), Portugal (83,200 MT) and Taiwan (78,200 MT).Optional Origin Sales: For 2014/15, outstanding optional origin sales total 52,500 MT, all Egypt.

Barley: There were no sales or exports reported during the week. 

Sorghum: Net sales of 6,500 MT for 2014/15 resulted as increases for unknown destinations (58,000 MT), were partially offset by decreases for China (51,500 MT). Net sales of 105,000 MT for 2015/16 were reported for China. Exports of 116,500 MT were up 55 percent from the previous week and up noticeably from the prior four-week average. The destination was China.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Buying of DDGS slowed this past week and there is now about a $10/MT spread between most bids and offers. End users logically expect the price of DDGS to decline in unison with this week’s setback in corn futures contracts. In response, merchandisers note that the corn is seldom purchased at the time that DDGS are produced. Furthermore, it is hard for DDGS merchandisers to instantaneously drop their price in relation to the behavior of corn futures because such price action can often be temporary. The preceding Outlook section within this report explains why that presently may be the case.

Pricing and usage agreements can work in favor of both the merchandiser and the buyer during periods of uncertain price action. The merchandiser may agree to very thin margins in exchange for the buyers agreeing to purchase a set amount of inventory. Establishing such an agreement allows the merchandiser and buyer to then work as a team in devising a purchasing strategy for corn. Together they define the intended futures price and basis. More sizable agreements can also be mutually beneficial in allowing the team to negotiate better freight rates and maintain a steady flow of inventory. In contrast, consistent buying and selling in the spot market generally does not work in favor of both parties.

The price for both domestic and international DDGS were up about $5/MT this past week. Containerized DDGS that were purchased one to two months into the future for Asian destinations tended to have an additional modest reduction in price. Such reductions are not always offered on domestic bulk rates, presumably because of the tendency by domestic end users to purchase in the spot market.  

Ethanol Comments: Factors such as a renewed strength in the U.S. Dollar, the passage of peak U.S. driving demand, a lethargic Chinese economy and a potential Iranian deal combined to enable global crude oil prices to drift below $50 per barrel this past week. This low price level for gasoline can reduce the immediate demand for ethanol exports, particularly until there is better evidence that crude oil stocks are in decline. As well, there is no indication of declining ethanol stocks to incentivize blenders to secure more inventories.

U.S. ethanol stocks were 19.6 million barrels for the week ending July 17, which is basically unchanged from the prior-week’s level of 19.7 million barrels and 9 percent above the year-ago level of 17.9 million barrels. However, there was a modest decline in the average daily ethanol production rate for that week to 973,000 barrels per day (bpd), in comparison to the prior-week’s level of 984,000 bpd. Without increased demand, sizable declines in ethanol stocks seems unlikely so long as the weekly production level remain above the yea-ago level, which for the same week a year ago was an average rate of 959,000 bpd. The end result is that margins continue to slowly narrow and the advantage goes to the most cost-efficient ethanol producer. The differential between the cost of corn and the co-products is the following for primary Corn Belt locations for week ending July 24, 2015:

  • Illinois differential is $1.61 per bushel in comparison to $1.53 the prior week and $3.51 a year ago.
  • Iowa differential is $1.46 per bushel in comparison to $1.56 the prior week and $3.32 a year ago.
  • Nebraska differential is $1.19 per bushel in comparison to $1.20 the prior week and $3.22 a year ago.
  • South Dakota differential is $1.90 per bushel in comparison to $1.99 the prior week and $3.67 a year ago.

7. Country News

China: Corn imports increased by more than double in June and reached their highest level in a decade as buyers sought to beat a late-month surge in U.S. corn prices, reports Bloomberg News. June shipments reached 872,928 MT compared to 404,102 MT in May, which is the highest recorded since 2005. Corn imports in June 2014 totaled 27,230 MT. Chinese buyers were also incentivized to seek corn abroad as domestic supplies are both more expensive and of lower quality, despite the government’s best efforts to sell from the state stockpiles.

Iran: Iranian traders have purchased 180,000 MT of Brazilian corn for shipment in July and August this week, according to Reuters. This was the country’s first major grain purchase in months.

Further, Iran has imposed import duties on barley that will be in effect until September 22, 2015. Iran is the world’s third-largest feed barley importer after Saudi Arabia and China.

Ukraine: The Ministry of Agriculture has announced that it may reduce its outlook for the 2015 corn crop due to excessive heat and drought, reports Reuters. A June estimate placed corn output at 26.4 MMT in 2015 compared to 28.5 MMT last year. As of now the projection for the overall grain harvest remains unchanged at 60 MMT. 

8. Ocean Freight Markets and Spread

Bulk Freight

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: There was continued price support in global freight markets early this week as the eight-week rally attempted to continue its run. However, the daily increases in the Baltic indices became smaller as the week progressed and by Friday the market took back most of the week’s gains. It appears that the upswing is running out of steam. The primary factor in this recent rally has been the seasonal dislocation between demand and supply, primarily in the Atlantic.                                                      

It is also theorized that, with the previous long term slide in freight values, the big grain companies did not renew many of their annual time charters and therefore have less coverage than in past years. This may be one of the reasons we have seen so many grain buyers simultaneously entering the market and pushing it up.

It is also interesting to note that, in the first half of 2015 we saw a total of 19.6 million dwt worth of bulk carriers scrapped. When compared to the rate of new buildings this equates to a net fleet growth of just 1 percent. It looks like vessel owners have gotten the message and maybe we are starting to move towards a rebalancing? However, it is still going to be a long process.

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 Thailand.

Thailand 2015
Thailand 2014
International Freight Rates

10. Interest Rates

Interest Rates