1. Chicago Board of Trade Market News
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Outlook: Range-bound, quiet trading has defined the CBOT corn market this week. The week’s largest daily change came on Wednesday as the market digested USDA’s January 1 cattle inventory numbers which showed a 3 percent increase in beef cow numbers. The resulting implications for feed demand pushed the market higher. Bearish factors are still weighing against the market with improving weather in Argentina and Brazil and a probable slowdown in ethanol production. Despite another record-breaking production week ethanol margins are sharply lower than three months ago, and eventually production will slow – reducing corn demand. A combination of factors make the most probable outcome for the market continued, choppy trading for the next few weeks.
Decreasing export sales were noted in this week’s USDA report as sales dropped to 45.6 million bushels, with 45.03 from the current marketing year. Weekly exports totaled 30.1 million bushels, a fall from the past two week’s comparatively strong exports. YTD exports are 65 percent higher than last year as U.S. export prices have remained very competitive on the world stage. Exports will likely remain strong for a few weeks yet, before the Brazilian harvest kicks in, as South American farmer selling remains very light. A rally in the CBOT could shake loose some farmer-held corn but many farmers have good credit lines and little financial need to sell right now. Additionally, Argentine corn is priced $0.90/MT cheaper than U.S. corn which is not worth the quality difference to many global buyers. Look for exports to remain buoyant in the near-term with decreases coming in the next few months.
Commodity funds are still long corn futures, according to last Friday’s CFTC data. Noncommercial traders are holding a net position of 106,000 contracts, their largest long since November, 2015. Commercials took advantage of the recent rally to sell and hedge inventory, adding 25,000 contracts to their short position. Going forward, the pattern of fund buying and commercial selling is likely to produce choppy trade. It’s difficult to get funds to sell when prices are at multi-year lows and inflation is rising. At the same time, commercials hardly want to be long with 15 billion bushels of corn in the U.S. and more global production coming.
The March contract is still grinding higher along its shallow uptrend. The contract found significant support at the 40-day moving average earlier this week near $3.58 and has since bounced higher. Still, bulls appear unwilling to make a run at breaking out above $3.72, at least not without some new information to trade on. Sideways, choppy trading has been the modus operandi for the contract since September and it doesn’t look likely to change soon. Major support and resistance are forming at $3.58 and $3.72, respectively, and the market will likely trade this range without any new information. Next week’s WASDE report could be the catalyst to break out of this trading range.
3. U.S. Weather/Crop Progress
U.S. Drought Monitor Weather Forecast: The NWS WPC 7-Day Quantitative Precipitation Forecast (QPF) calls for moderate-to-heavy rainfall in the lower elevations of central and northern California as well as Oregon while significant mountain snowfall accumulations are forecast for the higher elevations of the Sierra, Cascades of Oregon and Washington, and the northern Rockies of Idaho and western Wyoming. Moving eastward, lesser precipitation accumulations (less than 1.5 inches) are forecast for northern portions of Alabama and Mississippi, Kentucky, and Tennessee. Conversely, dry conditions are expected across the southwestern U.S. and western portions of the Southern Plains and Texas. The CPC 6–10 day outlooks call for a high probability of above-normal temperatures across the entire conterminous U.S., with the exception of the Northern Plains and Pacific Northwest where there is a high probability of below-normal temperatures. Below-normal precipitation is forecast for the southwestern U.S., Central Rockies, and the Southern Plains. Above-normal precipitation is expected in the Eastern tier as well as the northern portion of the western U.S.
Follow this link to view current U.S. and international weather patterns and future outlook: Weather and Crop Bulletin.
4. U.S. Export Statistics
Corn: Net sales of 1,143,700 MT for 2016/2017 were down 17 percent from the previous week, but up 21 percent from the prior 4-week average. Increases were for unknown destinations (235,600 MT), Colombia (212,900 MT, including 28,800 MT switched from unknown destinations), Japan (178,000 MT, including 83,100 MT switched from unknown destinations and decreases of 1,100 MT), Taiwan (133,900 MT, including decreases of 100 MT), and Morocco (80,800 MT, including 55,000 MT switched from unknown destinations). For 2017/2018, net sales of 14,000 MT were reported for Mexico. Exports of 764,600 MT were down 22 percent from the previous week and 5 percent from the prior 4-week average. The primary destinations were Mexico (151,000 MT), Japan (132,200 MT), Malaysia (69,700 MT), South Korea (58,000 MT), and Colombia (56,800 MT).
Optional Origin Sales: For 2016/2017, the current optional origin outstanding balance of 760,000 MT is for South Korea (536,000 MT) and unknown destinations (224,000 MT).
Barley: There were no sales or exports reported during the week.
Sorghum: Net sales of 58,800 MT were down 23 percent from the previous week, but up 59 percent from the prior 4-week average. Increases were reported for unknown destinations (53,000 MT), Japan (5,100 MT), Mexico (1,100 MT, including decreases of 1,900 MT), and Indonesia (100 MT). Reductions were reported for China (500 MT). Exports of 200,200 MT were up 61 percent from the previous week and 91 percent from the prior 4-week average. The primary destinations were China (195,900 MT), Mexico (4,000 MT), Nigeria (200 MT), and Indonesia (100 MT).
6. Distillers Dried Grains with Solubles (DDGS)
DDGS Comments: DDGS prices FOB Gulf are now $14.50/MT higher than they were four weeks ago as the DDGS rally continues. The rally took a pause this week to reassess market conditions, leaving prices with a slightly weaker tone and FOB Gulf prices down $1.50/MT at $151/MT. FOB Gulf prices have come under some pressure to compete with falling FOB corn offers and a $12/MT drop in FOB soybean meal prices. Rail-delivered DDGS at the PNW fared better, losing only $2/MT as export and international prices were largely steady. Prices for 40-foot containers to Korea, Taiwan, and the Philippines were steady to $1/MT higher this week while prices for DDGS exported to Vietnam and Japan fell.
The value of DDGS FOB ethanol plants is 72 percent of corn futures this week and 28 percent of soybean meal futures. On a per protein unit basis, DDGS are $3.24 cheaper than soybean meal which will aide in feed ration inclusion. On the export front, FOB Gulf DDGS prices are retaining 89 percent of FOB corn value and 39 percent of FOB soybean meal value. Last week’s logistical issues (slow barge movement due to fog) have largely been resolved and exporters are catching up on contracted deliveries. Looking forward, ethanol production in unlikely to continue its record-breaking pace and will eventually slow, bringing DDGS supplies lower. This should underpin the DDGS market and provide a platform for prices to move higher.
Ethanol Comments: New record highs in ethanol production were achieved once again this week. The EIA’s weekly report showed ethanol producers rolled out an average of 1.061 million barrels per day (311.9 million gallons per week), an increase of 10,000 barrels/day (1 percent) from the prior week. At the same time, ethanol stocks were up 0.7 percent to their highest level since last February and gasoline supplied increased by 4 percent. Ethanol prices have been steadily falling for two months, commensurately pressuring ethanol production margins. Some estimates have ethanol returns over fixed costs at -$0.40-60/bushel right now. Surely these low margins will eventually stifle production, but when these forces will take effect remains unclear.
Across the four reference markets, ethanol margins fell in three; Illinois, Iowa, and Nebraska. Iowa producer margins took the largest hit, falling $0.27/bushel. South Dakota margins increased, helped by a $3/ton increase in DDGS prices. This week’s average margin of $1.30/bushel is now $0.09/bushel lower than one year prior.
- Illinois differential is $1.18 per bushel, in comparison to $1.27 the prior week and $1.35 a year ago.
- Iowa differential is $0.99 per bushel, in comparison to $1.26 the prior week and $1.21 a year ago.
- Nebraska differential is $1.27 per bushel, in comparison to $1.44 the prior week and $1.41 a year ago.
- South Dakota differential is $1.74 per bushel, in comparison to $1.71 the prior week and $1.55 a year ago.
7. Country News
Algeria: The government increased the value-added tax on grain and feed products (corn, sorghum, barley, oats, DDGS, etc.) from 7 to 9 percent with the goal of slowing the pace of imports. U.S. sales of grain and feed products to Algeria had been expanding, amounting to around $200 million last year. (USDA/FAS)
Brazil: Conab will release its first planted acreage numbers for 2017’s winter corn crop on February 9 but it is still quite early in the Brazilian planting period. Two-thirds of USDA’s forecast for Brazilian corn exports this year is predicated on a crop just now being planted and susceptible to unknown weather events. Moreover, bearish forward pricing is signaling Brazilian farmers to cut back on inputs, which will make the crop even more susceptible to adverse weather. The key will be to watch weather in Mato Grosso, the largest safrinha corn growing region. (seeitmarket)
China: A plan to reduce the nation’s huge corn stock pile by converting it into biodegradable plastic (polylactide, PLA) products could upend producers and suppliers elsewhere in the world. China has been importing PLA products but the government is financing startup domestic production. (Reuters)
Colombia: Private exporters sold 105 KMT of corn to Colombia, which at 2.509 MMT of imports to date, is the fourth largest buyer of U.S. corn. (Platts)
Mexico: A ban on planting genetically modified corn is likely to continue for many years. It has been subject to a slow rolling legal battle with a court last week upholding a 2013 ban on even pilot plots due to environmental concern. (Reuters)
9. Ocean Freight Comments
Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Given the big holiday week in Asia, things have been pretty quiet. And, as is common in quiet markets, rates have slipped lower. There is a lot of talk/questions in the market regarding the potential economic impact of the new policies the new U.S. President may enact. For now, the answer is simply unknown and the uncertainty that brings is not bullish on international markets – nor on any type of ocean freight rate projections.
I’m currently in Panama meeting with the management of the Panama Canal Authority. Our discussions revolve around the new canal lock, canal capacity and the future outlook for various types of vessel traffic through the canal. At the moment, the Canal Authority is only locking through 6 vessels per day (3 ships in each direction) via the new lock with a draft of 45 feet (going to 46 feet). Only 4 dry-bulk carriers have used the new lock since it was opened (all 4 were coal vessels) and the outlook does not seem to favor dry-bulk versus container and LNG vessels. A big container ship will pay tolls of $800,000 to use the new lock. LNG will pay $400,000 and Neo-Panamax dry-bulk vessels will pay $280,000. You do the math on what type of vessel produces the best revenue per transit.
On the container side of the markets, I saw a news article that stated that two thirds of the Hanjin Box ships remain unemployed and that 7 percent of the total box ship fleet was idled with rates still under overcapacity pressure.
The charts below represent January-December 2016 annual totals versus January-December 2015 annual totals for container shipments to Vietnam.