1. Chicago Board of Trade Market News
Outlook: Last Friday’s WASDE report was surprising indeed. The report forecasted a national corn yield of 175 bushels per acre and production of 15.15 billion bushels. If realized, this would easily be the largest yield and crop on record. The report’s yield estimate is the first this year based on test plots and actual ear weights, rather than statistical forecasts. The record production forecasts brought USDA’s total supply estimate to 16.9 billion bushels, 9.8 percent larger than the 2015/16 crop.
Export forecasts were increased by 125 million bushels to 2.175 billion bushels given the tightness of Brazilian supplies. Despite 3 million bushels of increased total corn use for the year, ending stocks will swell to 2.409 billion bushels, a 40 percent increase over the 2015/16 crop. The forecast represents an overwhelming corn supply for the U.S. which will yield a largely negative financial tone for many corn farmers this year. The USDA lowered farm gate price forecasts for the 2016/17 crop year to $2.85-$3.45 per bushel.
Thursday’s export sales report was neutral-to-bearish with sales of 6.6 million bushels and shipments of 45.9 million bushels. The weekly figures mean this year’s exports will likely fall short of USDA’s projected 1.925-billion-bushel export volume for the 2015/16 crop. U.S. exports could continue their modestly strong activity of recent months into early 2017, however, given the demise of the Brazilian crop and tight supplies elsewhere in South America.
After the USDA’s record report, December corn futures closed higher for five consecutive days – a large divergence from what was expected. Many argue the trade had already factored a record yield into prices before the WASDE and now prices are working their way slightly higher as the market waits for confirmation of large yields. Additional support has come from significant strength in the soybean markets and from a lower U.S. dollar. More than likely, however, traders are simply somewhat skeptical the 175 bushel per acre yield will actually be realized and are pricing in a risk premium for now.
December futures were technically oversold before the report and this week’s higher prices may simply be a reflection of exhausted bearish sentiment. From a technical standpoint, December corn closed today just above the first key resistance mark of $3.4175. The next resistance will likely be found at $3.45 while support lies at $3.37 and again at $3.33 Farmer selling is still nonexistent but the U.S. national corn basis is slightly weaker than last week at $0.30 under the September contract with river terminals weaker and Gulf basis steady.
3. U.S. Weather/Crop Progress
U.S. Drought Monitor Weather Forecast: During the next 5 days (August 18-22), the Far West should stay seasonably dry. Meanwhile, the heaviest rains (1-4 inches) should fall on the southern Great Plains and upper Delta (TX-OK-AR), from southern Montana and northern Wyoming eastward to northern sections of Wisconsin and Michigan, on the southern Appalachians, and along the coast of the Carolinas. 5-day temperatures will be above-normal in the Far West and the Atlantic Coast States while subnormal readings are expected in the middle third of the Nation.
During August 23-27, the odds favor above-median precipitation in the southern three-quarters of the Plains, while sub-median rainfall is favored in Arizona, the Pacific Northwest, and mid-Atlantic southward to the central Gulf Coast. Subnormal temperatures are likely in the southern two-thirds of the Rockies and Plains, the Tennessee and lower Ohio Valleys, and central Appalachians, while above-normal readings are favored in the Pacific Northwest and along the East Coast.
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 167,400 MT for 2015/2016--a marketing-year low--were down 72 percent from the previous week and 61 percent from the prior 4-week average. Increases were reported for Japan (97,700 MT, including 31,000 MT switched from unknown destinations and decreases of 5,700 MT), South Korea (96,100 MT, including 95,000 MT switched from unknown destinations), Peru (88,300 MT, including 70,500 switched from unknown destinations), Canada (32,100 MT), and Morocco (28,100 MT). Reductions were reported for unknown destinations (250,100 MT), the French West Indies (5,600 MT), the Dominican Republic (1,500 MT), and Guatemala (1,300 MT). For 2016/2017, net sales of 1,042,700 MT were reported primarily for Mexico (425,200 MT), unknown destinations (269,300 MT), and Japan (152,400 MT). Exports of 1,166,300 MT were down 19 percent from the previous week and 10 percent from the prior 4-week average. The primary destinations were Japan (306,800 MT), Mexico (194,900 MT), Taiwan (144,500 MT), Peru (143,500 MT), and South Korea (96,400 MT).
Optional Origin Sales: For 2015/2016, new optional origin sales totaling 3,000 MT were reported for South Korea. Sales totaling 60,800 MT were switched from unknown destinations to South Korea. Options were exercised to export 63,800 to South Korea from other than the United States. The current outstanding balance is 334,000 MT, all unknown destinations. For 2016/2017, the current outstanding balance is 65,000 MT, all Taiwan.
Barley: Net sales reductions of 100 MT of 2016/2017 were reported for South Korea. There were no exports reported during the week.
Sorghum: Net sales of 60,700 MT for 2015/2016 were reported for China (56,600 MT, including 55,000 MT switched from unknown destinations), unknown destinations (3,000 MT), and Japan (1,000 MT). For 2016/2017, net sales of 8,100 MT were reported for unknown destinations. Exports of 79,600 MT were down 67 percent from the previous week and 40 percent from the prior 4-week average. The destinations were China (56,600 MT), Japan (11,200 MT), Mexico (10,900 MT), and Indonesia (900 MT).
6. Distillers Dried Grains with Solubles (DDGS)
DDGS Comments: Stronger corn prices in the week following the USDA report have led the DDGS market higher. Prices for product to the U.S. Gulf and NOLA increased by an average of $9/ton for delivery in the coming three months. Demand for other U.S. agricultural products at the Gulf has slowed this week, leading to more competitive offers in hopes of attracting more business. Shipments to Southeast Asia were priced higher this week as well with prices for 40-foot containers to Japan increasing by $6/ton for September delivery and $3/ton for October and November delivery. Containers destined for Vietnam, Malaysia, and China were priced steady to slightly higher.
The increase in DDGS prices is somewhat surprising given the tied-for-record large ethanol production noted at the end of last week. This may be indicative of improving end user demand or buyers simply returning to the market after sitting last week out waiting for the WASDE. In either case, tepid ethanol margins across the U.S. may slow production and leave DDGS supplies modestly tighter. DDGS still have a price advantage over soybean meal on a per unit of protein basis, making them more attractive to include in feed rations.
Ethanol Comments: The July WASDE report lowered expectations for corn use in ethanol for the 2015/16 crop year by 25 million bushels. The most recent report estimated 5.2 billion bushels will be used for ethanol and corn formerly pegged for the ethanol grind was added to exports. Estimates for the 2016/17 crop year were left unchanged at 5.275 billion bushels.
Ethanol production tied mid-July’s record-high this week, reaching 1.029 million barrels and climbing over 11,000 barrels over the previous week’s strong production. The strong production pace so far in 2016 prompted the EIA to increase forecasts for total ethanol production this year, with production expected to average 980,000 barrels per day or 15.1 billion gallons. Despite the record production, ethanol stocks fell for the third consecutive week as strong export sales outpaced production. U.S. gasoline consumption held steady this week at 9.726 million barrels per day, an increase of 0.6 percent from the same time last year.
The margin between the corn price and the value of ethanol and coproducts was stronger this past week in all of the four reference markets (see below), and the spread versus this time last year narrowed for all markets except Illinois, which rose $0.20 year-over-year this week.
- Illinois differential is $1.89 per bushel, in comparison to $1.72 the prior week and $1.69 a year ago.
- Iowa differential is $1.72 per bushel, in comparison to $1.64 the prior week and $1.74 a year ago.
- Nebraska differential is $1.45 per bushel, in comparison to $1.37 the prior week and $1.41 a year ago.
- South Dakota differential is $1.80 per bushel, in comparison to $1.70 the prior week and $1.86 a year ago.
7. Country News
Argentina: Farmers will plant corn on 4.5 million hectares for 2016/17, up 25 percent from the 3.6 million hectares planted in 2015/16, according to the Buenos Aires Grain Exchange. (Reuters)
China: Buyers took about 12 percent of the corn offered for sale out of government stocks this past week at prices roughly 27 percent below acquisition costs. However, with world prices continuing to fall, auctions prices will have to follow in order to shed inventory. (Bloomberg)
EU: Craft breweries in the U.S. are expanding at 20 percent per year and they use three times as much malt as conventional breweries. This is driving increased U.S. imports of malt from Europe. (Bloomberg)
Jordan: The government is tendering once more (closes August 24) for 100,000 of feed grade barley. The imposition of new quality and financing requirements stymied earlier purchase attempts. (Reuters)
9. Ocean Freight Comments
Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: This week, the Baltic Index traders tried to claw back some of last week’s losses; business from the U.S. Gulf and Black Sea regions is providing support for the Panamax market. Fall harvest is getting close. For now, rates are just moving back and forth in approximately a $1.00/MT range.
As mentioned last week, it is interesting to see 9-10 bigger vessels of 81-91,000 DWT (70-78,000 MT of cargo) in the U.S. Gulf waiting to load soybeans for China. These vessels could, but most likely will not, be going through the new Panama Canal locks due to the cost of tolls. With cheap freight rates and low fuel costs the vessels that can fit through the old locks will do so. Those that cannot will be going all the way around the Cape to China. To date, no Dry-Bulk cargo vessels have used the new Panama locks. It has been container, LNG and tanker vessels that have been utilizing the new expanded lock system. It just isn’t economical for Dry-Bulk vessels to use the new locks in this market. For example, a Supramax (55,000 DWT) vessel is required to pay 9 percent more than the previous toll to transit the Panamax locks and 49 percent more than the previous toll to transit the Neopanamax locks.
The charts below represent year-to-date 2016 versus January-December 2015 annual totals for container shipments to Hong Kong.