Market Perspectives October 6, 2016

1. Chicago Board of Trade Market News

Week in Review

Outlook: USDA reported that 24 percent of the corn crop is now harvested, slightly below the five-year average for this date, but maturity is above average. It rated 73 percent of the corn crop in good/excellent condition, down 1 percent from a week earlier but 5 percent above the volume rated good/excellent at this time last year. 

Average yields coming out of the fields have grown larger as the harvest moves northward into areas previously overly damp; there is a lot of grain in storage but the news this week was bullish. First up was the quarterly stocks report which showed corn on hand on September 1 at 0.5 percent larger than a year earlier, but that was 0.8 percent smaller than the volume expected by the trade. Adding to the fever was corn exports, which were expected to be higher but surprised many by clocking in at 2.6 MMT this past week, which is above the pace needed to hit USDA’s forecast. 

The rising volume of exports has added 13.4 percent to the volume being rail shipped versus a comparable period a year ago. This has the effect of pushing rail freight rates higher and thus pressuring interior basis levels lower. Despite abundant feed wheat, it cannot compete in the domestic market with the low prices on corn and sorghum. Sorghum prices should drop some based on exports falling off pace from USDA’s forecast. 

A mid-October rally is not unusual and the new resistance level is $3.65/bushel.

2. CBOT Corn Futures

CBOT December Corn Futures

CBOT Corn Futures Graph

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: Over the next 5-7 days, many across the Southeast and along the eastern seaboard will be watching to see what Hurricane Matthew does. There is a potential for significant rains over drought areas, so it will be watched closely. Precipitation is anticipated over much of the central United States from New Mexico northeastward into the Great Lakes, with some areas projected to receive 2-3 inches of rain. Another storm system will impact the Pacific Northwest, bringing with it heavy rains along the coastal regions of Washington and Oregon. Temperatures during this time remain above normal, with only those areas along the coastal region, where rain is expected, projected to record temperatures near normal or slightly below normal. 

The 6-10 day outlooks show all of the United States having above-normal chances of recording temperatures that are above normal; the greatest chances are in the Plains. Precipitation during this time is anticipated to be greatest over the Pacific Northwest. There are higher chances of below-normal precipitation along the East Coast and in the Plains.

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

US Export Sales and Exports
US Export Inspections
USDA Grain Inspections for Export

Corn: Net sales of 2,060,800 MT were reported for 2016/2017. The primary destinations were Mexico (1,251,100 MT), Japan (200,100 MT, including 75,400 MT switched from unknown destinations and decreases of 4,500 MT), Saudi Arabia (136,800 MT, including 111,000 MT switched from unknown destinations and decreases of 900 MT), South Korea (128,300 MT, including 125,000 MT switched from unknown destinations and decreases of 400 MT), and Colombia (86,000 MT, including 32,000 MT switched from unknown destinations, and decreases of 8,600 MT). Reductions were for unknown destinations (92,900 MT), Costa Rica (9,900 MT), and Chile (2,900 MT). For 2017/2018, net sales of 541,000 MT were reported for Mexico. Exports of 1,390,200 MT were reported to Japan (376,000 MT), South Korea (261,800 MT), Mexico (166,400 MT), Saudi Arabia (136,800 MT), Taiwan (76,200 MT), Chile (69,800 MT), and Colombia (69,100 MT). 

Optional Origin Sales: For 2016/2017, options were exercised the export 58,000 MT to Japan (switched from unknown destinations) from the United States. The current outstanding balance of 283,000 MT, is for unknown destinations (218,000 MT), and Taiwan (65,000 MT).  

Barley: Net sales of 200 MT for 2016/2017 were reported for Taiwan (100 MT) and Japan (100 MT). Exports of 200 MT were reported to Taiwan. 

Sorghum: Net sales of 5,000 MT for 2016/2017 resulted as increases for Japan (9,300 MT, including 8,100 MT switched from unknown destinations and decreases of 1,100 MT) and Nigeria (2,400 MT), were partially offset by reductions for unknown destinations (6,600 MT). Exports of 19,500 MT were reported to Japan (19,300 MT) and Mexico (200 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: For the same reasons that U.S. DDGS exports have been up the past few months (+6 percent in August over July), the decline in prices this past week was fully anticipated due to market conditions. That is why it was a relatively modest drop. Product destined to Yokohama took the biggest hit, but most other Asian market destinations were down an average $1-5/container, or around 2 percent or less. Some importers may game market softness to rewrite contracts but demand remains strong in top markets such as Mexico, Vietnam and South Korea. 

Ethanol Comments: U.S. ethanol exports were up 12 percent in August over July, with Brazil the top monthly customer (+65 percent) followed by Canada and India. Brazil incurred its fourth month in a row of declining ethanol exports. Despite some of the best margins in two years, U.S. ethanol production was down 9,000 barrels per day this past week to 980 thousand barrels per day. In a related fashion, stocks fell by 401,000 barrels dropping the overall total to 20.18 million barrels. The margin between the corn price and the value of ethanol and coproducts across the four regularly tracked reference markets is detailed below. 

  • Illinois differential is $2.34 per bushel, in comparison to $2.26 the prior week and $1.72 a year ago.
  • Iowa differential is $2.24 per bushel, in comparison to $2.05 the prior week and $1.54 a year ago.
  • Nebraska differential is $1.93 per bushel, in comparison to $1.82 the prior week and $1.70 a year ago.
  • South Dakota differential is $2.41 per bushel, in comparison to $2.21 the prior week and $1.74 a year ago.

7. Country News

Argentina: The country’s barley production area is smaller this year and the spread between malting quality and feed is so great that farmers will be patient in hopes of earning the malt premium. (WPI) 

Brazil: Corn export commitments were raised to 9.65 MMT, up 0.465 MMT from last month, but remaining 9.19 MMT lower than last year. (MDIFT) 

China: Despite feed imports of possibly 20 MMT, two state-owned companies have been given authority to export up to 2 MMT of corn. (Reuters) 

Ukraine: Feed wheat is being offered at $160/MT for November, which is at parity with corn and thus it still holds an advantage to feed millers. Meanwhile, Mariupol Port is being expanded, adding 2 MMT in capacity by 2019. (Various; 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: China has been out this week on their Golden Week holiday and this has added to the rather dull and quiet markets. Overall freight markets feel soft, but they have also been quiet this week and therefore do not warrant much change in the rate estimates. 

According to vessel owner Pacific Basin: “Despite record scrapping levels, new deliveries of dry bulk ships will outpace the number of vessels demolished by the end of 2016, leaving an unwelcome net fleet growth for the year of 2 percent…in the Capesize and Panamax markets, you are left with a one-way transportation model. It is very difficult to get backhaul cargo because the ships are too big. You are carrying iron ore from Brazil or Australia to China and going back empty, so how can you differentiate yourself as a ship owner? It is only price that counts.” 

So, the problem is not yet solved for the shipping industry (Dry-Bulk or Container) and it is still going to be a long voyage back to profitability. I frankly cannot see a true recovery on the horizon yet and believe it will be at least 2018 before the industry has a chance for any meaningful improvement. Of course, that also means that the same is true for my 401K and IRA retirement accounts.

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 Vessel Pricing
US-Asia Market Spreads

The charts below represent year-to-date 2016 versus January-December 2015 annual totals for container shipments to Vietnam.

Container Shipments 2
International Freight Rates for Feed Grains

10. Interest Rates

Interest Rates