Market Perspectives December 3, 2015

1. Chicago Board of Trade Market News

Week in Review

Outlook: Futures tend to close higher ahead of the Thanksgiving holiday, and that is what they did last Wednesday. The big news this week was the U.S. Environmental Protection Agency’s (EPA) announcement of ethanol blending requirements for 2014-2016. The increase in ethanol use above the levels proposed last May will have to be factored into next week’s (December 9, 2015) USDA WASDE report. Some ambitious analysts predict that increased ethanol production will push corn disappearance by an additional 3.8-5.0 MMT. One analyst notes that if China is ignored, the world’s corn carryout is actually much smaller than characterized.

Brazil’s corn exports have been robust but they are now slowing and, despite the relative value of the dollar, the U.S. is now the world’s lowest-priced corn supplier. Weekly corn export sales have averaged over 2 MMT, blowing the top off of expectations. Imagine what they would be if not hindered by a very strong dollar.

Teucrium Trading LLC says that corn prices tend to bottom out in the last four months of the calendar year, with December exhibiting the largest number of price bottoms over the past 26 years.

Focused on the bear market as if it is guaranteed, the non-commercials have bunkered into huge short positions. Given their aversion to even short-term losses, it will not take too much adverse news (i.e. weather) for there to be a strong reversal in the market. In fact, some short covering before the end of the year seems likely.

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: The NWS WPC 7-Day Quantitative Precipitation Forecast (QPF) calls for significant precipitation totals (ranging from six-to-sixteen inches) in coastal northern California, Oregon, and Washington with coastal areas of Washington expected to receive the greatest accumulations. Otherwise, more meager accumulations are forecasted for the Northern Rockies of Idaho and northern portions of the Sierras; the remainder of the West will be generally dry. In the eastern tier, heaviest precipitation accumulations (one-to-four inches) are forecasted for parts of the Southeast and Mid-Atlantic. The CPC 6–10 day outlooks call for a high probability of above normal temperatures across nearly the entire continental U.S., with the exception of normal temperatures in southern New Mexico and Texas. Across most of the West, with the exception of the Pacific Northwest and extreme northern California, there is a high probably of below normal precipitation. Below normal precipitation is forecasted to extend across the Central and Northern Plains as well as across the Midwest into the Northeast. In contrast, portions of the Southeast, Southern Plains, and Texas have a high probability of above normal 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 and Exports
U.S. Export Inspections
USDA Grain Inspections for Export

Corn: Net sales of 499,400 MT for 2015/2016 were down 76 percent from the previous week and 50 percent from the prior 4-week average. Increases were reported for Mexico (216,900 MT), Japan (190,900 MT, including 47,600 MT switched from unknown destinations and decreases of 4,200 MT), Guatemala (30,800 MT, including 16,200 MT switched from unknown destinations and 2,100 MT switched from Nicaragua), Colombia (29,200 MT), Honduras (15,700 MT, including 13,500 MT switched from unknown destinations), and El Salvador (12,700 MT, including 11,700 MT switched from unknown destinations and 700 MT switched from Nicaragua). Reductions were reported for unknown destinations (8,500 MT) and Nicaragua (2,800 MT). Exports of 373,800 MT were down 30 percent from the previous week and 11 percent from the prior 4-week average. The primary destinations were Japan (114,700 MT), Mexico (102,900 MT), Peru (33,300 MT), Honduras (30,100 MT), Guatemala (27,700 MT), and Colombia (19,700 MT). 

Optional Origin Sales: For 2015/2016, new optional origin sales totaling 116,000 MT were reported for unknown destinations. The current outstanding balance is 511,000 MT, all unknown destinations.

Barley: There were no sales reported during the week. Exports of 100 MT were reported to Taiwan.

Sorghum: Net sales of 109,700 MT for 2015/2016 resulted as increases for China (216,200 MT, including 106,500 MT switched from unknown destinations and decreases of 5,400 MT), were partially offset by reductions for unknown destinations (106,500 MT). Exports of 172,800 MT were up 6 percent from the previous week, but down 17 percent from prior 4-week average. The destinations were China (158,000 MT) and Mexico (14,800 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: The U.S. EPA’s announced ethanol blend requirements for 2014-2015 received mixed reactions for being below statutory levels but above those proposed in May. The mandate for 14.05 billion gallons in 2015 is 4.85 percent above the proposed level in May and the 14.5 billion gallons mandated for 2016 is up 3.57 percent. This will in turn build the supply of DDGS; the premium presently being earned by ethanol in the market means that DDGS will continue to have an advantage over feed mills. 

DDGS exports were down in September, but were still up by nearly 30 percent for the first nine months of the year versus 2014. While some parts of the world are quiet, demand is picking up. Sales of 2,000 MT were made to Korea at $206/MT for January shipment, and Vietnam is in play for a shipment at a slightly higher price. In fact, the real story is that prices have stabilized – no longer moving about wildly. 

This past week saw some softening in container prices to Asia but a firmer basis for rail and FOB cargoes out of the PNW. The wider swings included a drop in the price of a 40-foot container to Shanghai, and an increase in rail delivered to the U.S. west coast.

Ethanol Comments: U.S. ethanol production was at 956,000 barrels per day (bpd), a slight drop from the average one million bpd during the two prior weeks. Nonetheless, ethanol stocks climbed by 1.9 percent to 20 million barrels as imports provided an additional 32,000 bpd on average. 

Note that the U.S. EPA’s ethanol mandate announcement for 2016 assumes exports at 750,000 gallons. Ethanol has been priced at a premium to gasoline for three months now due to export demand and this dynamic is likely to continue into 2016. 

Ethanol makers in China continue to lose money trying to convert higher-priced corn ($320/MT versus $311.60/MT a week earlier) into ethanol priced below $820/MT, and dropping. Meanwhile, for the week ending December 3, 2015 the differential between the price of corn and co-products averaged only 2 cents compared to the prior week for the four regions of the Corn Belt. 

  • Illinois differential is $1.75 per bushel, in comparison to $1.70 the prior week and $3.73 a year ago.
  • Iowa differential is $1.43 per bushel, in comparison to $1.46 the prior week and $4.18 a year ago.
  • Nebraska differential is $1.59 per bushel, in comparison to $1.59 the prior week and $4.28 a year ago.
  • South Dakota differential is $1.73 per bushel, in comparison to $1.67 the prior week and $3.42 a year ago.


7. Country News

Bulgaria: Farmers are refusing to sell their corn as the market is currently offering prices below their cost of production. (WPI)

India: The kharif season’s corn crop is much smaller, with the government predicting 16.4 MMT but the trade banking that it will be 12.5-13.8 MMT. At a cost of $235/MT and rising, poultry producers are switching to other feed ingredients. (WPI)

Jordan: Tenders for barley are being reissued by the government due to the lack of any bidders. The trade has backed away from the market after what it perceives as Jordan’s unjustifiable rejection of some wheat imports after inspection.

South Africa: The drought has resulted in the most imports of yellow corn in 11 years, bringing in nearly 100 KMT from South America. Corn on the South African Futures Exchange hit a record $232/MT. (Bloomberg)

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: I’ve obviously been a bit conservative on my rate indications, thinking that vessel owners would strongly resist going much lower. However, I continue to see new freight fixtures at even lower rates than I expected – and so I will adjust things this week. The Baltic Panamax index continues to drop. I must assume that the market believes that vessel owners have not yet felt enough pain. This begs the same old question: how much further down can things go?

Somehow we have not hit bottom yet, but we must be close. Low fuel prices have stemmed a lot of the previous slow steaming practices and this of course has only resulted in better logistical efficiencies and a greater availability of ships. I guess the market must now go to levels that force owners to layup vessels in order to reduce the volume of available capacity. So – are we there yet?

Panamax rates from the U.S. Gulf to China are trading in two different route values, one for shipping via the Panama Canal and another for going around the Cape. Rates on this business can differ by $1.50 or so per ton depending on the cargo size and route; the Cape route is currently the cheaper option. Please note that since there was no report published last week the below rates represent a two-week market change.

Baltic-Panamax Dry-Bulk Indices
Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to South 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 Malaysia.

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

10. Interest Rates

Interest Rates