Market Perspectives June 15, 2017

1. Chicago Board of Trade Market News

Week in Review

Outlook: July corn’s months-long pattern of trading a “boring” 10-cent trading range is clearly over. The contract is trading as a “weather market” with daily directions dependent on whether the meteorological forecast du jour is bullish or bearish. A good weather forecast on Monday (June 12) sent corn 10 cents lower but Thursday’s (June 15) NOAA forecast calling for above-normal temperatures for much of July put corn through a 12-cent trading range. The market is now almost solely trading supply changes implied by the weather and corn demand is almost forgotten. 

The early portion of corn’s rally was driven by the wheat market. Drought in the Dakotas and spotty results from the Kansas wheat harvest sent all wheat futures higher. Spillover buying from wheat’s rally initially pulled corn futures higher. More recently, however, USDA rated a concerningly large portion of Illinois and Indiana’s corn as poor or very-poor, which is pulling yield estimates lower and pushing futures higher. Long-range forecasts for hotter and possibly drier weather this summer added to direct concerns about the corn crop. The futures market is presently grappling with the implications of a wet spring and a possibly dry summer, trying to find a clear trading direction. 

Corn exports remain generally positive for the market, with Monday’s Export Inspections report showing 41 million bushels exported, above the 36.5 million needed to meet USDA’s projections. Thursday’s Export Sales report showed more than sufficient sales volume in old crop corn (24.2 million bushels) but slightly less-than-needed exports (39.1 million bushels of 41.2 million needed). 

On Thursday, U.S. corn FOB NOLA prices were nearly equal to Brazil’s FOB Paranagua prices. So far, U.S. corn has remained competitive against South America, which has been hugely helpful for the U.S. market. Slow farmer selling in Brazil and Argentina, augmented by a slow Argentine harvest, is keeping South American prices elevated. Argentine exporters are facing negative (or nearly so) export margins which is limiting their market participation. 

From a technical perspective, July corn is starting to heat up. An uptrend is forming and large trading volumes are supporting the upside breakout. Thursday’s trading, which featured a low of $3.70 and a 2.5-cent higher close, will be an important bullish marker going forward. Momentum in the market certainly swings bullish but world ending stocks will make bears unwilling to give up easily. A close above $3.90 is needed to fully confirm a strong bullish market. A close below $3.70 would be a victory for bears but the risks present in the market now make this an unlikely occurrence. For now, expect volatile trading with a bullish lean to the market.

2. CBOT Corn Futures

CBOT July Corn Futures

CBOT Corn Futures Graph

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Crop Planting Progress
U.S. Crop Condition

U.S. Drought Monitor Weather Forecast: During the next five days (June 15-19), WPC’s 5-day QPF forecasts widespread rainfall across most of the Midwest, Southeast, central Appalachians, and Great Lakes region, with the greatest totals (2-3 inches) from northern Missouri eastward into western Pennsylvania and southward into the Carolinas. Rain should also fall on coastal Washington and the northern Rockies. Dry weather should encompass the rest of the West, High Plains, Texas, and western Gulf Coast. Temperatures should average above-normal across the southern two-thirds of the U.S., with subnormal readings limited to the northern sections of the Rockies and Plains and upper Midwest. 

For the ensuing five-day period (June 20-24), odds favor sub-median precipitation in the Northwest, Rockies, northern three-quarters of the Plains, and western Corn Belt, while above-median rainfall is likely along the Atlantic and eastern Gulf Coast States and the Great Lakes region. Above-normal temperatures are likely in the western half of the U.S. and Florida, with subnormal readings in the Great Lakes region and Midwest. 

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 600,700 MT for 2016/2017 were up 72 percent from the previous week and 25 percent from the prior 4-week average. Increases were reported for Mexico (200,400 MT, including decreases of 1,600 MT), Colombia (109,700 MT, including decreases of 1,100 MT), China (60,800 MT, switched from unknown destinations), Peru (57,800 MT, including 45,500 MT switched from unknown destinations), and Nigeria (39,100 MT, including 40,000 MT switched from unknown destinations and decreases of 900 MT). Reductions were reported for unknown destinations (103,000 MT) and Taiwan (61,000 MT). For 2017/2018, net sales of 13,500 MT were reported for Panama (16,500 MT), the French West Indies (8,200 MT), and Nicaragua (1,500 MT), were partially offset by reductions for unknown destinations (12,700 MT). Exports of 992,300 MT were down 18 percent from the previous week and 23 percent from the prior 4-week average. The primary destinations were Mexico (276,900 MT), Japan (195,800 MT), Taiwan (74,500 MT), South Korea (64,500 MT), and China (62,100 MT). 

Optional Origin Sales: The current optional origin outstanding balance for 2016/2017 of 122,000 MT is for South Korea (68,000 MT) and unknown destinations (54,000 MT). The current outstanding balance for 2017/2018 of 112,000 MT is for unknown destinations. 

Barley: No net sales were reported for the week. Exports of 100 MT were reported to Japan. 

Sorghum: Net sales of 60,600 MT for 2016/2017 were up noticeably from the previous week and from the prior 4-week average. Increases were for China (53,000 MT) and Mexico (7,600 MT). Exports of 1,400 MT were down 98 percent from the previous week and from the prior 4-week average. The destinations were Mexico.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS prices worked their way higher this week as higher corn and soybean meal futures gave merchandisers room to increase offers. Fresh buying interest came mid-week as international buyers sought to secure supplies ahead of further price increases. 

Recent sales and flagging ethanol production have significantly tightened June and July DDGS supplies. Merchandisers (and this publication) have been noting tight June supplies for several weeks but the tightness has now extended into July shipments. Some traders are attributing supply tightness to lower old crop corn availability, but others claim this is merely a “talking point” rather than an actual driving factor. 

Kansas City soybean meal prices are $5/MT higher this week while FOB ethanol plant DDGS prices were steady. Consequently, DDGS moved to a $1.94 cost advantage (on a per-protein unit basis) against soybean meal. Domestically, DDGS are prices at 85 percent of cash corn values, a 1 percent gain from last week and still historically undervalued. 

FOB Gulf prices are $1-5/MT higher this week (averaging $161/MT), bringing the DDGS/corn value ratio to 101 percent. This week marks the first time this metric has been above 100 percent since early December 2016. On a per-protein unit basis, FOB Gulf DDGS are $0.60 cheaper than FOB soybean meal, the latter having fallen price despite higher futures. 

Internationally, new importers have been looking to secure U.S. DDGS for ports including Taiwan, Colombia, Indonesia and Bangladesh but merchandisers are reporting prices and volumes are low (less than 500 MT and bids $10 under market trades). Prices for 40-foot containers destined for Southeast Asia were $5/MT higher on average, led by a $5/MT gain in Japan and Philippines prices. 

7. Country News

China: The Chinese Agricultural Supply and Demand Estimates report reduced its June forecast for corn production to 211.65 MMT, a 0.7 percent decline from May and a 3.6 percent reduction from last year. The China National Grain and Oils Information Center says this may be the smallest corn crop since 2013 due to drought conditions, hail, and farmers switching to planting soybeans. 

The government sold 1.02 MMT of state owned corn reserves last Friday and is expected to offer 3.5 MMT of 2013 reserve corn for auction this week. (Reuters; Bloomberg) 

EU: Corn and barley yields have declined due to hot, dry weather. Strategie Grains dropped its forecast for barley production by 1.6 MMT to 58 MMT, a 3 percent reduction year on year. It cut its maize production forecast by 1 MMT to a total of 60 MMT, the same level as last year. However, FranceAgrimer increased its estimate of corn ending stocks from 2.2 to 2.3 MMT. (Reuters) 

Israel: Traders tendered for optional origin corn and feed wheat with two consignments of 50 KMT apiece of corn reportedly purchased. (Reuters) 

Korea: The Korean Corn Processing Industry Association (KOCOPIA) tendered for 55-60 KMT of optional origin corn. (Reuters) 

Philippines: Davao Region corn production is up 26 percent for the first quarter of 2017 versus a year ago. Yellow corn production was up 11.69 percent to 13.476 MMT, and white corn production was up 32.5 percent to 39.829 MMT. (Sunstar) 

Tunisia: The state grains agency tendered for 25 KMT of barley. (Reuters)

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 turned out to be predominately a “give back” week. What the market lost last week, it gained back this week. So, Dry-Bulk markets remain in a fairly narrow trading range without sufficient support to surge higher – nor do we see willingness among vessel owners to drop rates in any meaningful way. The forward curve on the Baltic Exchange shows a bit of hope for rates to improve slightly as we go out into the second half of 2017 – but nothing that should provoke any excitement nor greatly improve the bottom line for most ship owners. If you own vessels you have to hope that 2018 will be better. 

In relative terms, East Coast South America continues to be the hot spot as the vessel line up in Brazil grows and more vessels ballast to that market in hopes of better values. The idle container vessel fleet remains large and young container vessels continue to be sold for scrap, but consolidation and shipping alliances have kept container rates from dropping.

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 2016 annual totals for container shipments to Japan.

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

10. Interest Rates

Interest Rates