Market Perspectives November 12, 2015

1. Chicago Board of Trade Market News

Week in Review

Outlook: USDA increased the latest estimate for the average U.S. corn yield to 169.3 bushels per acre (bu.) on Tuesday, November 10 2015. This was a larger-than-expected 1.3 bu. increase above the October estimate of 168 bu. The result is that the nearby December corn contract punched through and closed slightly below key support at $3.60 per bushel. The significance of this price level was noted two weeks ago as it was explained that the December contract is likely to receive strong support in that region because of a common interest among traders to purchase corn contracts from March 2016-onward at lower prices. At that time and again last week, end-users of corn were encouraged to consider creation of a purchasing plan should a buying opportunity present itself. All indications are that that opportunity has arrived.

U.S. sorghum ending stocks increased to 58 million bushels in USDA’s November data. This is a sizable 16 million bushel increase above the October estimate, and well above the previous two years. The increase happened because sorghum exports were reduced and the average U.S. sorghum yield was raised to 77.7 bu., up 2.7 bu. from the prior October estimate of 75 bu. The upper end of the estimate for the average farm price of U.S. sorghum was reduced by 45 cents, and that in turn is expected to encourage U.S. ethanol facilities to utilize more sorghum at the expense of corn. The outcome is that corn used for ethanol production was reduced by 75 million bushels (while sorghum increased 85 million bushels) and that contributed to the ending stocks of U.S. corn increasing to 1.760 billion bushels from the prior October estimate of 1.561 billion bushels.

USDA’s logic in the preceding chain of events makes sense, particularly if one assumes that pinching pennies is necessary for ethanol facilities that are operating with increasingly tight margins. However, those same facilities are also likely to consider the desires of customers who may favor consistency in feed products. Irrespective, ethanol facilities and all other users of feed grains seem to be currently presented with a favorable opportunity to extend coverage of future needs.

2. CBOT Corn Futures

December Corn Futures

CBOT Table

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: During November 12-16, the heaviest precipitation should fall on windward slopes in western Washington and northern Idaho. Peak values of 12 to nearly 18 inches are anticipated in the northwestern-most reaches of Washington while totals may top 6 inches in northernmost Idaho. Substantial totals are also expected in western Oregon and far northwestern California, with amounts topping out in the 2-4 inch range along the Oregon Coast. Relatively heavy precipitation is also anticipated across the northern half of the Great Lakes, with 2 to 3 inches forecast in northwestern Wisconsin and adjacent areas. Meanwhile, moderate precipitation (with amounts above 2 inches only in a few isolated locations) is expected across the northern half of New England and New York, far southern Florida, the southeastern Great Plains and western Lower Mississippi Valley, and parts of the northern Sierra Nevada and southern Cascades. Temperatures should average well above normal (5 to 10 degrees) in the northern half of the Plains and much of the Great Lakes Region. In contrast, temperatures should average around 3 degrees below normal in the Great Basin and central Intermountain West.

For the ensuing 5 days (November 17-21), the odds at least slightly favor wetter than normal conditions nationwide, except in a small part of the northern Plains and in a swath across the Big Bend of Texas, southern sections of Arizona and New Mexico, and central and southern California. The best chances for wetness are in the southern half of the Mississippi Valley. We should see warmer than normal temperatures on average in the central and eastern parts of the country and cooler than typical conditions from the Rockies westward.

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

Due to the holiday on November 11, 2015, the next export sales report will be published on Friday, November 13. Next week’s edition of Market Perspectives will reflect newly released export sales information. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS merchandisers consistently reported that business was slow during the past week; that development presumably stems from the fact that many customers desired to see USDA’s November data before conducting any additional purchases. The Outlook section of this report notes that USDA’s data was more bearish than expected and that enabled corn contracts to fall down to levels around $3.60 per bushel for the nearby December contract. Prices only declined for a day after the report before stabilizing because there seems to be a large number of investors who are looking to purchase corn contracts around this lower level. Many ethanol facilities would like to lock in the price of their future corn needs and encourage their DDGS merchandisers to build mutually beneficial agreements with customers.

Domestic and foreign DDGS buyers limited most of their purchases in the nearby spot market this past week. For example, there was a sale of 3,000 MT to buyers from Thailand and another 1,000 MT to Vietnamese buyers. However, a number of merchandisers are willing to offer a larger volume of inventory into the future and they are seeking to entice such interest by reducing prices by $6/MT for containerized DDGS in December and January, but with little change in their offers for the nearby spot market.

Distant DDGS prices are modestly more expensive because of the cost of carry that is priced into corn futures contracts. It is presumably not realistic to assume that those more distant corn contracts will eventually decline down to the present level of the nearby contract, because uncertainty and price volatility normally increase going into the spring.

Ethanol Comments: Crude oil futures have been in decline while the most recently weekly data from the Energy Information Administration (EIA) reports that the national average price of regular gasoline increased 11 cents above the prior week. The development of such dichotomies may be an indication that a bottom is forming in prices. Such news would be welcomed by the majority of U.S. ethanol facilities.

Ethanol stocks of 18.9 million barrels for the week ending November 6, 2015 are basically unchanged from the prior week’s level of 18.8 million barrels. This occurred even though the average daily rate of production increased to 982,000 barrels per day (bpd); this is above the prior week’s rate of 969,000 bpd and is 3.8 percent above the year-ago rate of 946,000 bpd. The current sizable daily production rate and stable stocks could be interpreted to mean that there is a steady outflow of exports; however, ethanol imports are also on the rise. The average daily rate of ethanol imports increased to 26,000 bpd for the week ending November 6, 2015, above the week-ago rate of 10,000 bpd. Increasing imports could facilitate a rebound in total stocks, particularly if exports slow down, and that development could constrain ethanol producer margins as already seems to be implied in the data below that shows the differentials between the value of corn and co-products for the week ending November 6, 2015: 

  • Illinois differential is $1.70 per bushel, in comparison to $1.86 the prior week and $3.26 a year ago.
  • Iowa differential is $1.47 per bushel, in comparison to $1.60 the prior week and $2.80 a year ago.
  • Nebraska differential is $1.71 per bushel, in comparison to $1.78 the prior week and $2.76 a year ago.
  • South Dakota differential is $1.67 per bushel, in comparison to $1.79 the prior week and $2.76 a year ago.

7. Country News

Bulgaria and Romania: Favorable weather will enable the harvesting of the remaining 10 percent of the corn crop, but yields overall are down from a year ago by 20 percent in Romania and by 30 percent in Bulgaria as a result of drought. This is the second year in a row in which corn yields have been suboptimal and will encourage farmers to instead plant sunflower seed in 2016. (WPI)

China/India: Efforts to remedy pollution in China and India will cause a surge in demand for ethanol. (Dow Jones)

EU: Brussels has forecast barley production this year at 60.9 MMT, a 0.7 percent increase over 2014/15, but it has lowered the forecast for corn production to 57.4 MMT, a more than 20 percent slide from the 77.9 MMT produced last year. (EU Commission)

Iran: Tehran announced that the government purchase price for local barley will be increased by 10 percent for the 2016 crop. Iran is the world’s third largest importer of barley but it has been increasing its support to domestic farmers, first by raising the import duty in July and now by raising the support price. (WPI, Reuters)

South Africa: White maize prices fell three days in a row to their lowest level since August 19 ($211.07/MT) on reports of impending rain. However, the price could shoot back up quickly if the current forecast for hot and very dry conditions in production areas does not reverse itself. (Bloomberg)

Zambia: Maize farmers in Zambia are quite happy as the government reports that 60 percent of corn deliveries have been paid and that the balance should be covered in the next few weeks. A local study says that the country’s open borders for maize have led to growth in the farming industry while causing no negative effects on food security. Poor transport infrastructure and import barriers in neighboring countries prevents Zambia from becoming an even larger exporter of maize. (WPI)

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: Two weeks ago I asked the question: How low can rates go? It now looks like the market is attempting to answer that question. The month of October was seemingly hard enough on vessel owners as global indexes and physical rates basically slid south all month. However, November is not turning out to be any better from an owner’s perspective.

With the Baltic P2 Panamax index in the Atlantic at 9,064 we have reached a new five-and-a-half month low. If things drop just a little lower (below 8,200) we will be back to levels not seen since February of 2014 (7,721). And, if we break through that level we will be back to December 2008 levels. So, the market is truly flirting with disaster for those who own and operate ships. The 2015 low for Panamax rates from the PNW to Japan is $16.00. Beyond that we have to go back to January 2008 and a market low of $13.00. This is the lowest rate I’ve seen for as long as I’ve been keeping records (going back to 2003-plus).

The WTO has downgraded world trade growth this year to 2.8 percent from 3.3 percent; Asian imports are down to 2.6 percent growth from 5.0 percent. Chinese iron ore and coal imports have slowed. So, with no meaningful turn around in sight it is getting very ugly for the shipping industry and those who finance them. As they use to say on the 1980’s TV show Hill Street Blues – “Be careful out there.”

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 year-to-date 2015 versus January-December 2014 annual totals for container shipments to Japan.

Container Shipments 1
Container Shipments 2
International Freight Rates for Feed Grains

10. Interest Rates

Interest Rates