Market Perspectives March 16, 2017

1. Chicago Board of Trade Market News

Week in Review

Outlook: The ongoing battle between “big supply” and “big demand” continued this week, with supply bears winning early in the week and demand bulls gaining ground toward the end. Following the WASDE report in which Brazilian and Argentinian exports were increased to 780 million bushels over last year, corn prices came under substantial selling pressure. The May corn contract approached the lowest prices of 2017 on Monday but brisk U.S. export sales and export inspections put a bid under the market starting Tuesday. USDA announced the sale of 4.7 million bushels of corn to Mexico on Tuesday and China purchased three cargoes (195,000 MT) of PNW corn. China still has considerable corn in stock and the purchase is indicative that not all those stocks are of usable quality. 

The USDA’s weekly Export Sales report was bullish for corn this week as 58 million bushels in net sales were recorded, of which 49.4 were for the 2016/17 marketing year. This was well above the 18.7 million bushels needed to meet USDA’s export projections for the year. Moreover, it was above the 29.9 million bushels needed to meet USDA’s projections when seasonal trends are incorporated. Weakness in the U.S. dollar last week was helpful in promoting exports, as was the drop in CBOT prices. 

From a technical perspective, May corn futures became oversold this week and subsequently found support at $3.60. In the short-term, the contract has some upward potential but longer term technicals are more bearish. Despite a 2 ½ cent gain today, May corn failed to close above its 100-day moving average at $3.67; a signal which may prompt traders to stack up additional sell orders at that point. Should bears succeed in holding back the current corrective movement in the market, a close below $3.60 would be needed to confirm the resumption of a minor downtrend. Following that, the next bearish downside target is $3.52. Should the contract close above the 100-day moving average, the next significant patch of resistance lies at $3.74-3.75. A test of this target would likely bring fund buying back from its recent hiatus.

2. CBOT Corn Futures

CBOT May 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, the impact of the winter storm over New England will subside and another system will make its way across the Ohio River valley. Precipitation is anticipated to be greatest over an area from Kentucky to New York. Another series of storms will impact the Pacific Northwest from Washington to California, possibly bringing several inches of precipitation to the area. Temperatures are expected to be warmer than normal over most areas west of the Missouri River valley, with departures of up to 8-10 degrees above normal possible. Cooler than normal temperatures will dominate the eastern seaboard, with departures of 6-9 degrees below normal possible over portions of the Southeast.

The 6-10 day outlooks show that the probability of below-normal temperatures will be greatest over California, the upper Midwest and into New England. The highest probabilities of above-normal temperatures are centered over Texas, with much of the South and Rocky Mountain regions anticipating warmer than normal temperatures. The highest probabilities of above-normal precipitation will be over California and Nevada and into the Ohio River Valley. Drier than normal conditions are anticipated over Texas and the Gulf Coast as well as the upper Midwest, where the greatest probabilities of below-normal precipitation exist. 

Follow this link to view current U.S. and international weather patterns and 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 1,255,400 MT for 2016/2017 were up 69 percent from the previous week and 70 percent from the prior 4-week average. Increases were for Mexico (300,400 MT, including 120,500 MT switched from unknown destinations and decreases of 12,800 MT), Japan (282,600 MT, including 88,400 MT switched from unknown destinations and decreases of 87,500 MT), Colombia (182,200 MT, including 157,500 MT switched from unknown destinations), South Korea (129,900 MT, including decreases of 600 MT), and Taiwan (91,200 MT, including 61,800 MT switched from unknown destinations and decreases of 1,600 MT). Reductions were reported for Nicaragua (1,800 MT). For 2017/2018, net sales of 218,100 MT were reported primarily for Mexico (90,000 MT), Panama (78,500 MT), and unknown destinations (22,400 MT). Exports of 1,580,400 MT--a marketing-year high--were up 9 percent from the previous week and 17 percent from the prior 4-week average. The primary destinations were Japan (485,200 MT), Colombia (267,000 MT), Mexico (231,100 MT), Taiwan (132,300 MT), and South Korea (132,200 MT). 

Optional Origin Sales: For 2016/2017, decreases in optional origin sales totaling 50,000 MT were reported for unknown destinations. The current optional origin outstanding balance of 638,000 MT is for unknown destinations (243,000 MT) and South Korea (395,000 MT). 

Barley: Net sales of 6,400 MT for 2016/2017 were reported for Japan (6,000 MT) and Taiwan (400 MT). For 2017/2018, net sales of 1,900 MT were reported for Japan. There were no exports reported during the week. 

Sorghum: Net sales of 16,000 MT for 2016/2017 were down 86 percent from the previous week and 82 percent from the prior 4-week average. Increases were for China (53,300 MT, including 51,300 MT switched from unknown destinations), Japan (13,300 MT, including 3,000 MT switched from unknown destinations and decreases of 900 MT), and Mexico (5,100 MT). Reductions were reported for unknown destinations (55,700 MT). Exports of 133,400 MT were up noticeably from the previous week and up 10 percent from the prior 4-week average. The destinations were China (103,300 MT), Japan (28,400 MT), and Mexico (1,700 MT). 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: The softer tone which permeated the DDGS market at the start of the week has firmed, with merchandisers reporting increased buying interest when FOB vessel prices dip below $150/MT. Prices for FOB Gulf DDGS increased $1/MT this week to $146, moving the DDGS/corn price ratio above 90 percent for the first time in two weeks. Prices for 40-foot containers to Southeast Asia were largely steady this week, except for those destined to Japan where prices increased $13/MT for April delivery. Prices to Vietnam were $5-8/MT higher as well. Finally, CNF containers to Southeast Asia from NOLA were quoted at $199/MT, up $5 for the week. 

Movement of DDGS onto the export market is limited and suppliers are sending product to river markets at significantly better values than it can be put into shipping containers. Traders are reporting an $8/ton spread in the domestic market on trucks and a $12/MT spread on export business to Southeast Asia. Demand from this region has been limited as buyers work through their current inventories. Even so, steadiness in NOLA bulk prices brought support to the container market, noted above. While some further increase in demand is possible in the second quarter, expected freight rate increases make for unattractive forward quotes. 

In the U.S., FOB plant prices were softer again this week as increases in ethanol production prevented any supply drawdown. Still, softer pricing allowed DDGS to regain some pricing advantage against soybean meal and the per-protein unit cost advantaged held by DDGS increased above $3 this week. Looking forward, increased buying interest should buoy prices but if ethanol production continues to rise contrary to its seasonal decrease, the additional supply may limit upward price momentum.

7. Country News

China: Ji Tao Han of New Hope Liuhe says that growth in per capita meat consumption will come from rural areas whereas urban Chinese will seek better quality meat. Jean-Yves Chow of Mizuho Bank says that corn production this year will be down by nearly 10 MMT to a total of 215 MMT, but demand for feed will also decline due to avian influenza and a slower recovery in pig numbers. Meanwhile, the FAS attaché says poultry production will be 11 MMT, down from 12.3 MMT in 2016. Chow believes total corn demand this year will be 230 MMT and not the 237 MMT forecast by USDA. 

Separately, JSC researcher Takaki Shigemoto says that Dalian corn futures are the highest since April on speculation that the government will do more to spur demand and reduce inventories. (Bloomberg) China booked at least three cargoes of U.S. corn totaling 195,000 MT with delivery in late spring. (Reuters) 

Iran: Oil production increased following the end of sanctions, and the improved revenues has spurred an all-time high in corn imports. Domestic Iranian corn has challenges from temperature and moisture. The increased imports are mostly helping Ukraine. (UkrAgroConsult) 

Japan: Continental Rice President Nobuyuki Chino says that the small purchase (30 KMT) of Chinese corn is over. (Bloomberg) 

South America: USDA, private analysts and even Brazil’s CONAB have on average tended to under-estimate the size of the corn crop in the region. The tendency to go too low in March with corn production forecasts for Brazil and Argentina lends to the view that the crops will be bigger than currently forecast. (Reuters) AgriMoney reports that CONAB has raised its estimate of the combined Brazilian corn crops to 88.969 MMT. 

South Korea: Authorities have already culled 35.36 million birds (19 percent of chickens) due to avian influenza and more flocks are scheduled to be culled. (Bloomberg) 

Vietnam: The government intends to impose an E5 ethanol blend requirement beginning in 2018. Two previously moth-balled plants have been reopened because current ethanol production is less than half of the 7.5 million tons of ethanol needed to meet the requirement. (Biofuels Digest)

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: This week it was a case of “what goes up must come down” or “the party can’t last forever.” There just wasn’t enough justification to keep market values up that high. We continue to be in a bumpy market and must expect things to move up and down going forward. The real issue is where rates will end up at year’s end, and where they happen to be at the moment when a vessel needs booked. 

My long-term projection is that things will probably be a little bit higher 6-9 months out, but we will get opportunities to lock in good (lower) rates from time to time if no one gets greedy. 

U.S. interior rail logistics to West Coast ports in the PNW seem to have returned to a basic level of normalcy. Grain shuttle trains are getting through and delivered in normal volumes, and logistics are clearing up. We do however still have a very have a very healthy vessel lineup of 63 ships waiting to load. So, business off the PNW remains robust.

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 YTD 2017 versus January-December 2016 annual totals for container shipments to China.

Container Shipments 1
Container Shipments 2
Freight Chart 1
Freight Chart 2
Freight Chart 3

10. Interest Rates

Interest Rates