Market Perspectives August 21, 2015

1. Chicago Board of Trade Market News

Week in Review

Outlook: After the release of bearish USDA data and a sharp sell-off last week, the December corn contract has spent this past week within a narrow trading range while working slightly higher. Unfortunately, this type of price action is not indicative of a rebound or even a bottom formation. Rather, such price action is normally a temporary rebound before recent lows are again retested. End-users of feed grains who perceive such developments can use the temporary rebound as a beneficial lull in time to contact clientele and devise purchasing strategies in case the anticipated setback in prices should materialize. Obviously nothing is lost if that event does not materialize, but more favorable pricing and stronger customer relations are likely the result if devised strategies are correct.

Feed grain producers are seldom excited to observe a setback in the price of corn contracts, but when that event occurs it may be possible for them to negotiate better basis contracts for the future. That could be advantageous if prices work higher the following season. That event is eventually anticipated to happen, but there could momentarily be still lower price levels for the nearby corn contract because there are still some speculators who need to reduce their long positions. As well, the global corn export market is expected to be competitive during the fourth quarter of calendar year 2015 while demand is slow due to abundant supplies and the current reluctance of end-users to build stocks. Longer-term, the outlook is that feed grain prices in the second half of next year will average higher than the fourth quarter of 2015. 

2. CBOT Corn Futures

December Corn Futures

CBOT Table

Current Market Value:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Crop Condition

U.S. Drought Monitor Weather Forecast: During the next 6-10 days, the probability of cooler-than-normal temperatures is high in the Ohio and Tennessee River Valley’s extending into the Great Lakes and Midwest. Chances are likely that the rest of the country will experience warmer-than-normal temperatures, especially in the Northeast, Southeast, and Southwest.

Over the same period, precipitation associated with the large system centered over Wisconsin will move through the Great Lakes area. Further south, the precipitation will slowly move eastward and dissipate as the low pressure moves into Canada. Another, less powerful and drier system will follow producing the heaviest precipitation in the Midwest. Ridging continues to hold its grip in the West while monsoonal precipitation may bring light drought relief in the Southwest. 

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 and Exports
U.S. Export Inspections
USDA Grain Inspections for Export

Corn: Net sales of 282,700 MT for delivery in 2014/2015 were up noticeably from previous week and 84 percent from the prior 4-week average. Increases reported for Japan (166,300 MT, including 79,800 MT switched from unknown destinations and decreases of 9,300 MT), Mexico (89,000 MT, including 23,000 MT switched from unknown destinations and decreases of 300 MT), Peru (72,200 MT, including 63,700 MT switched from unknown destinations), Colombia (66,300 MT, including 55,000 MT switched from unknown destinations), and Venezuela (60,000 MT, including 30,000 MT switched from unknown destinations and 30,000 MT switched from Panama), were partially offset by decreases for unknown destinations (229,200 MT), Panama (30,000 MT), Honduras (11,400 MT), Egypt (3,300 MT), and Saudi Arabia (2,800 MT). Net sales of 576,400 MT for 2015/2016 were reported primarily for unknown destinations (210,300 MT), Mexico (132,000 MT), Japan (108,800 MT), and Colombia (66,000 MT). Decreases were reported for the Leeward Windward Islands (1,000 MT) and Canada (600 MT). Exports of 918,100 MT were up 9 percent from the previous week, but down 10 percent from the prior 4-week average. The primary destinations were Mexico (236,100 MT), Japan (212,300 MT), Venezuela (90,000 MT), Colombia (83,700 MT), Saudi Arabia (73,400 MT), Peru (66,700 MT), and Guatemala (42,200 MT).

Barley: Net sales of 15,000 MT for 2015/2016 were reported for Morocco. Net sales reductions of 15,000 MT for 2016/2017 were reported for Morocco. Exports of 100 MT were reported to South Korea.

Sorghum: There were no sales reported during the week, as increases for unknown destinations (8,500 MT) , were offset by decreases for China (8,500 MT). Net sales of 55,000 MT for 2015/2016 were reported for China. Exports of 112,100 MT were down 38 percent from the previous week and 40 percent from the prior 4-week average. The destination was China.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS prices have been reduced this past week as merchandisers seek to encourage buyers to increase the volume of purchases into the future. Chinese buyers have not been able to full take advantage of lower offers due to uncertainties about their own domestic regulations coming from the Chinese government that could momentarily influence DDGS imports as the Chinese government accesses their own corn stocks. This is creating an opportunity for other buyers as DDGS merchandisers extend lower offers to buyers of bulk volume and buyers within the United States’ market.

The price for DDGS delivered by barge to the Gulf of Mexico declined on average by $8/MT for nearby purchases and by $14/MT for the October to November time period. This pricing arrangement means that bulk DDGS are currently being offered into the future with a $3-$5/MT discount under the already inexpensive spot delivery. While bulk buyers were offered the largest discounts this past week, containerized rates also declined on average by $5/MT. Various Asian buyers may wish to consider these offers in conjunction with the fact that there is expected to be no General Rate Increase (GRI) on freight before November.

Domestic U.S. buyers of DDGS were also offered substantial price declines this past week that averaged $11/MT for spot delivery by rail, along with additional $1-2/MT discounts for rail delivered DDGS one to two months into the future. This composite of opportunities is presently being offered because DDGS merchandisers are anxious to sell their remaining inventory for the busy fourth quarter of calendar year 2015.

Ethanol Comments: The fact that total U.S. ethanol stocks of 18.6 million barrels are now only 1.7 percent larger than the year-ago stocks level of 18.3 million barrels strengthens the correlation of ethanol with the price action of RBOB gasoline contracts. Unfortunately, gasoline contracts have been in a constant decline since mid-summer. The cost of corn has also been in decline since the second half of July however that has not offset the price weakness of the co-products during the same time period. The result is that recent margins for ethanol producers have been relatively stable but consistently remain well below the year-ago level. The spot differential between the cost of corn and the co-products was the following for week ending August 21, 2015:

  • Illinois differential is $1.77 per bushel, in comparison to $1.69 the prior week and $3.55 a year ago.
  • Iowa differential is $1.81 per bushel, in comparison to $1.74 the prior week and $3.29 a year ago.
  • Nebraska differential is $1.48 per bushel, in comparison to $1.41 the prior week and $3.31 a year ago.
  • South Dakota differential is $2.16 per bushel, in comparison to $2.18 the prior week and $3.90 a year ago.

 

7. Country News

China: Chinese officials are requiring all imports of feeds such as barley, sorghum and distiller grains to be registered; the registration process with begin on September 1. China’s domestic buyers have increased imports of such feeds as an alternative to expensive state-held corn reserves and now the Chinese government intends to monitor those imports. Longer-term, China’s sizable domestic corn stocks seem likely to shrink because the Chinese government is reintroducing a 13 percent value added tax on all fertilizer imports as it seeks to curb what it calls “overuse.” The Chinese government intends to bring growth in commercial fertilizer use to zero by 2020, according to a story by Reuters.

France: French corn production could decline this season by up to 28 percent below last year’s record according to Reuters. Hot and dry weather has reduced corn yield potential and total production is estimated to be approximately 13.2 MMT. The weather did not have the same negative affect on French barley production, which is estimated to be slightly above last year’s production at 11.8 MMT.

Russia: While Russia is poised to produce its second largest grain harvest on record due to a favorable wheat crop, its corn crop is currently estimated to be 12 MMT and could be revised downward because of less-than-ideal weather in the nation’s southern regions, according to Reuters.  

Ukraine: Ukrainian grain exports to China are 800,000 MT so far year and total corn exports to China are anticipated to reach 3 MMT this year, according to Reuters. Corn and barley are the primary grain exports from Ukraine to China.

8. Ocean Freight Markets and Spread

Bulk Freight Indices for HSS

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Ocean freight values bounced around this week but did not move very far in either direction. The Capesize market fell back a bit while the Panamax and other markets were mostly stable to slightly better on the voyage market sector. We remain in the slow summer period and are still 45-60 days away from the North American fall harvest. The biggest concern in the markets this week is the slide in the Chinese and U.S. stock markets and the economic implications that come with this. If global economies are not growing and expanding at a good rate, cargo demand will not increase and the surplus in shipping capacity will not be absorbed. This does not bode well for shipping company financials – nor my IRA retirement account. For me this means I’ll probably have to work more years until retirement. For the shipping industry it will likely mean that many need to retire and get out of the business sooner.

Baltic-Panamax Dry-Bulk Indices
Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China:
Capesize Iron Ore
U.S.-Asia Market Spreads

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

Hong Kong Shipments 2015
Hong Kong Shipments 2014
International Freight Rates for Feed Grains

10. Interest Rates

Interest Rates