Market Perspectives - July 31, 2015

1. Chicago Board of Trade Market News

Outlook: Large speculative traders are normally judged by their end of month returns and price volatility commonly increases during that time period as the tug-of-war intensifies. It is not uncommon for prices to eventually become over-extended in one direction or another during this period. Such a move to the downside appears to have occurred this past week and is presenting feed grain users a favorable buying opportunity.

Prospects of the December corn contract being aggressively sold below $3.80 per bushel prior to the August crop report seems low. Furthermore, the number of traders before forced out of losing long positions will decline and the number of traders wishing to take profits on short positions will increase. Such a composite of factors is expected to cause corn contracts to work higher prior to the release of USDA’s yield estimates for U.S. feed grains on August 12. From August forward, USDA’s average U.S. corn yield estimate of 166.8 bushels per acre will be altered as subjective crop condition reports are overridden by actual field surveys. These two items tend to harmonize rather efficiently by the end of the growing season, but time still remains and so the outlook is that market attention will remain heavily focused on yields in the near-term, before being increasing replaced by discussions about demand.

3. U.S. Weather/Crop Progress

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

Corn: Net sales of 364,900 MT for delivery in 2014/15 were up 63 percent from the previous week, but down 13 percent from the prior four-week average. Increases were reported for Japan (362,200 MT, including 235,900 MT switched from unknown destinations and decreases of 54,400 MT), Colombia (90,000 MT, including 30,000 MT switched from unknown destinations and decreases of 2,500 MT), Egypt (22,900 MT, including 21,000 MT switched from unknown destinations), Guatemala (22,800 MT, including 18,900 MT switched from unknown destinations), Ireland (20,000 MT) and Mexico (15,100 MT). Decreases were reported for unknown destinations (226,900 MT) and the French West Indies (7,000 MT). Net sales of 443,300 MT for 2015/16 were reported primarily for Mexico (279,500 MT), unknown destinations (70,600 MT), Japan (60,000 MT) and Guatemala (15,000 MT). Decreases were reported for Taiwan (10,000 MT). Exports of 1,072,700 MT were down 7 percent from the previous week, but down unchanged from the prior four-week average. The primary destinations were Japan (494,900 MT), Mexico (163,500 MT), South Korea (129,300 MT), Saudi Arabia (73,600 MT), Colombia (68,500 MT) and Peru (24,800 MT). Optional Origin Sales: For 2014/15, outstanding optional origin sales total 52,500 MT, all Egypt. 

Barley: Net sales of 100 MT for 2015/16 were reported for South Korea. There were no exports reported during the week.

Sorghum: Net sales of 107,200 MT for 2014/15 were reported for China (104,200 MT, including 58,000 MT switched from unknown destinations and decreases of 3,300 MT) and unknown destinations (3,000 MT). Net sales of 108,000 MT for 2015/16 were reported for unknown destinations (58,000 MT) and China (50,000 MT). Exports of 163,700 MT were up 41 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: Last week the point was made in this commentary section that further declines in corn futures could result in lower DDGS offers this week; that occurrence has indeed taken place. The most sizable price declines were approximately $10/MT for bulk DDGS being shipped by barge to the Gulf of Mexico or by rail to the Pacific Northwest of the United States. South Korean buyers were offered attractive $7-9/MT rate reductions for DDGS purchases in September and October. Vietnamese and Thai buyers were offered $4-5/MT rate reductions for that same time-period, and $1-3/MT reductions were offered for containerized rates to other destinations.

DDGS merchandisers indicate that the amount of total volume purchased is a major component in their ability to offer better pricing terms. There seems to be strong interest among merchandisers to take advantage of the current setback in corn futures contracts by working with DDGS buyers; a general consensus among the merchandiser is that favorable U.S. corn yields are already expected and any sort of disappointment could shock traders when the data is released on August 12, 2015. The result is that the vast majority of merchandisers have strong interest in discussing possible pricing strategies with DDGS buyers during the next week and a half.  

Ethanol Comments: The national average retail price of regular gasoline declined by about 6 cents to $2.75 per gallon on July 27, 2015. Such weakness could be somewhat concerning for ethanol producers, however, the fact that this price is 79 cents below the year-ago level should be incentive for good seasonal demand. Furthermore, while crude oil stocks are up substantially total U.S. gasoline stocks are below year-ago levels. Steady gasoline production should result in stable ethanol consumption.

The difference between total U.S. ethanol stocks and the year-ago level has fallen to 5.7 percent. The reason for this change may be partly because of increases in year-ago stocks rather than increases in current stocks, but it is still a favorable development because it implies that additional downward pressure on ethanol price is limited. That fact is important to ethanol producers because their present tighter margins are primarily the result of year over year reductions in returns from ethanol rather than DDGS. Speaking of the difference between the co-products (ethanol & DDGS) and corn, the differential is the following for week ending July 31, 2015:

  • Illinois differential is $1.80 per bushel in comparison to $1.61 the prior week and $3.42 a year ago.
  • Iowa differential is $1.69 per bushel in comparison to $1.46 the prior week and $3.26 a year ago.
  • Nebraska differential is $1.38 per bushel in comparison to $1.19 the prior week and $3.12 a year ago.
  • South Dakota differential is $2.15 per bushel in comparison to $1.90 the prior week and $3.68 a year ago.

7. Country News

Brazil: The first corn cargo from the new Brazilian grain terminal at Tegram in the northeastern state of Maranhao has been shipped, according to Reuters. Trading company CGG has shipped 65,000 MT of corn to the Middle East and is predicted to ship 1 MMT by year’s end. The port was constructed to alleviate the heavy congestion inherent in Brazil’s southern grain terminals.

China: Chinese demand for Australian sorghum has begun to slow amidst concerns that the government may impose a tariff to curb the large amount of the grain being imported in conjunction with a potential reduction of China’s domestic corn price, according to Reuters. Sorghum imports could fall by as much as 30 percent in 2015/16 as buyers have started cutting back on orders. Chinese imports of Australian sorghum are forecast to total a record-setting 483,000 MT in 2015/16, which is up from the 464,000 MT in 2014/15. Chinese sorghum consumption this year will be 11.1 MMT, which is a large increase over the 3.2 MMT consumed in 2012.

Further on China: Bloomberg reports that the International Grains Council (IGC) has raised its estimate for Chinese corn production by 5 MMT to now total a record-setting 225 MMT. Global corn production is expected to be 966 MMT this year.

South Africa: Africa’s largest corn producer is likely to once again cut the forecast for this year’s crop, reports Bloomberg News. The current estimate is that farmers will bring in between 9.6-9.75 MMT, which is a major decrease from last year’s bumper crop of 14.3 MMT.

Ukraine: Black Sea feed wheat bookings to Asia have increased as far out as December as millers increasingly look to use it as a corn substitute in feed rations, reports Reuters. South Korea, Thailand and the Philippines have ordered around 3 MMT of feed wheat worth $600 million for shipment between July and December. Thailand alone is ordering around 150,000 MT of wheat per month. One trader attributed the shift in ordering to the fact that Ukrainian feed wheat has been available at a cheaper rate than Brazilian corn. The 100,000 MT of feed wheat slated for September/October shipment to the Philippines was sold at $210-$220/MT cost and freight, while Brazilian corn was recently quoted at $220/MT cost and freight (although prices have since slid to around $190/MT). USDA reports that Ukrainian feed wheat exports are expected to be 12.5 MMT this year. 

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: The Baltic Indices spent the week reversing the market gains of the previous three weeks. Only the Capesize market held its ground and managed to squeak out modest gains.

This market action has is taken a lot of wind out of the sails of those who, once again, thought this might have been the market turn around they have long awaited. Hope does spring eternal, but all that vessel owners are quickly-fading small market rallies. The overall market is still faced with an imbalance of ships versus cargo demand and that is not going to substantially change for many months or even years to come. What has changed is that more charters have switched to buying in the spot market and this will create further seasonal volatility and logistical imbalances.

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 Vietnam.

10. Interest Rates