Market Perspectives July 6, 2017

1. Chicago Board of Trade Market News

Week in Review

Outlook: The corn market has been trading like a weather market this week, but the weather really hasn’t been driving the rally. At least, not directly. Poor crop conditions and expanding drought in the wheat country of the Dakotas and Montana has sent CBOT and MGEX wheat skyrocketing this week. The wheat market has pulled corn higher, though it’s questionable whether the fundamentals are truly bullish corn. 

From a fundamental perspective, December corn is trading a bag of mixed news. Weather risk exists but current crop conditions are generally good. U.S. export demand has been solid so far, but Brazil’s harvest is pressuring U.S. exporters. The latest planted acreage estimates from USDA were larger than expected but harvested acres could still be substantially smaller. 

USDA’s latest Crop Progress report showed 68 percent of U.S. corn in the good/excellent categories. This figure is below last year’s outstanding numbers and between the ratings of 2015 and 2013 for this point in the marketing year. The crop is heading into the key silking stage where hot and dry weather can be very damaging. 

Current U.S. weather forecasts call for maximum temperatures that are slightly above average for much of the Midwest. Hotter temperatures will be more prominent in the Western Corn Belt, though the Eastern Corn Belt will receive warmer-than-normal weather mid-next week. Fortunately, precipitation models suggest good rainfall from Iowa eastward. This will be welcome relief to producers in Iowa and Illinois, as the latest drought monitor showed expanding dryness in these states. 

USDA’s June 30 acreage report should have been bearish corn as the agency reported 90.9 million acres planted this year. The acreage estimate keeps the corn area larger than that of soybeans, though the area is down 3 percent from last year. USDA estimated an increase in “lost” acres, however, as harvested acres were forecast to be down 4 percent to 83.5 million. The market still anticipates risk that this figure will shrink further, given the flooding problems earlier this spring and marginal dryness early this summer. The interplay between planted/harvested acres left many analysts viewing the report as essentially neutral for the market. 

U.S. corn exports have been robust this year, with export inspections rising 39 percent YTD from last year. Brazil’s slow harvest has certainly helped this figure, but with Brazilian farmers more aggressively collecting the crop and marketing it Brazilian FOB prices have started to fall. The Brazilian market should continue to pressure U.S. export prices, which, in turn, will limit futures gains. 

From a technical perspective, December corn is trying to break it’s trading range ceiling at the June 8 high of $4.09. The nearest support exists at $3.94 and then again at $3.75, the bottom of the trading range. Profit-taking in the wheat market has pressured prices there, consequently ending spillover support in corn. Funds are likely taking neutral positions in corn and have been active buyers this week. Continued market closes above $3.94 will keep open the possibility of higher, weather-driven prices, while a close below would signal the probable end of the weather market. So far, basis has remained stable and weaker basis levels will signal the rally’s end.

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. Crop Condition

U.S. Drought Monitor Weather Forecast: The NWS WPC 7-Day Quantitative Precipitation Forecast (QPF) calls for moderate precipitation accumulations (1 to 3 inches) across much of the Eastern Tier of the conterminous U.S. with some heavier accumulations (3 to 4 inches) forecasted for portions of the Mid-Atlantic. Lesser accumulations (less than 1.5 inches) are forecasted for the central and southern Rockies as well as portions of the desert Southwest including eastern Arizona and southwestern New Mexico as monsoonal moisture returns to the region. The CPC 6–10 day outlooks call for a high probability of above-normal temperatures across the western half of the conterminous U.S., upper Midwest, and Florida while the Eastern U.S. is forecast to be normal. Below-normal precipitation is forecast for the Pacific Northwest, northern Rockies, and the Plains while above-normal precipitation is expected in the portions of the Intermountain West, Arizona, western Colorado, Utah, and the eastern third of the 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

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

Due to the Tuesday, July 4 holiday, weekly U.S. export sales will be published on Friday, July 7. Updated U.S. export sales will be published in the July 13 edition of Market Perspectives. 

Corn: Net sales of 316,200 MT for 2016/2017 were down 40 percent from the previous week and 33 percent from the prior 4-week average. Increases were reported for Mexico (144,900 MT, including 60,000 MT switched from unknown destinations and decreases of 7,900 MT), Japan (106,600 MT, including 92,700 MT switched from unknown destinations and decreases of 800 MT), China (58,200 MT, including 60,000 MT switched from unknown destinations and decreases of 1,800 MT), Guatemala (28,900 MT), and Ireland (19,600 MT, including 20,000 MT switched from unknown destinations and decreases of 400 MT). Reductions were reported for unknown destinations (107,000 MT), El Salvador (15,000 MT), and South Korea (2,900 MT). For 2017/2018, net sales of 68,400 MT were reported for unknown destinations (51,400 MT), Mexico (11,000 MT), and Trinidad (6,000 MT). Exports of 1,020,800 MT were down 16 percent from the previous week and 14 percent from the prior 4-week average. The primary destinations were Mexico (384,700 MT), Japan (199,200 MT), South Korea (197,100 MT), China (59,100 MT), and Colombia (52,800 MT). 

Optional Origin Sales: The current optional 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 1,700 MT were reported to Japan (1,500 MT) and Taiwan (200 MT). 

Sorghum: Net sales of 2,000 MT for 2016/2017 were reported for China. Exports of 74,800 MT were up 17 percent from the previous week and 9 percent from the prior 4-week average. The destinations were China (62,000 MT), Japan (8,800 MT), and Mexico (4,000 MT). 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: U.S. DDGS prices are $3-5/MT higher this week as the explosive corn and soybean meal markets gave merchandisers room to increase asking prices. Kansas City soybean meal jumped $25/ton this week, and FOB ethanol plant DDGS prices increased accordingly. The soybean meal/DDGS price dynamic heavily favors DDGS on a per-protein unit cost basis: DDGS are now $2.16 cheaper than soybean meal. This represents a $0.47 per-protein unit cost advantage gain since last week. 

FOB NOLA DDGS prices jumped up $10/MT this week to $166.80. FOB NOLA corn prices rose by an equal amount to $166.75, keeping the DDGS/corn price ration at 100 percent. This metric is still below historic norms and may signal additional price appreciation potential for DDGS. 

Merchandisers are reporting container trade has been slow surrounding the Independence Day holiday but the barge market has firmed (up $8/MT to $153). Prices for 40-foot containers to Southeast Asia were stable this week, as they have been for the past two weeks, averaging $183/MT. The forward curve for July, August, and September shipments to Southeast Asia is comparatively flat, with July and August priced equally and September $2/MT higher. This may signal steady demand for the next two months before increasing in early fall. 

The slower export pace discussed in this publication for several weeks now is reflected in the latest U.S. export data. U.S. DDGS exports fell from their April levels, totaling 742,043 MT. Mexico was the top DDGS buyer, importing 134,000 MT, down from April. Exports to Canada and Thailand increased, however, and both countries were in the top five importers for May. 

Looking forward, the corn and soybean meal markets will exert an abnormally large influence on the DDGS market. Fundamentals are bearish for corn but farmers are reluctant sellers now, thinking they will see higher prices. Higher soybean meal prices will also support higher DDGs prices. Ethanol margins remain thin but positive; estimated Iowa margins are $0.27/bushel this week. Narrow margins should help restrict DDGS supplies going forward. 

7. Country News

Brazil: Ethanol imports have been exempted from paying the Mercosur tariff of 20 percent but with imports at three times last year’s level, there are calls to reimpose it. (Bloomberg; Ethanol Producer Magazine) 

China: Corn prices are at an elevated level due to a tight domestic supply, according to COFCO’s Liu Yanliang. Corn futures are at a 3-month high, pushed up by rising summer demand for corn starch products, drought in the northeast, and availability of varying qualities of corn. 

Meanwhile, Sinograin was to offer 4.3 MMT of stockpiled corn at auction (2.8 MMT of 2013 crop, 1.5 MMT of 2014 crop and 12.5 KMT from 2011/2012) on July 7; 1 MMT of 2013 corn was offered for sale on July 6 and the National Grain Trade Centre reports that of that amount, 48,939 tons (4.73 percent of the amount offered) were sold at 1,251 yuan ($183.92) per ton. (Bloomberg; Reuters) 

Ethiopia: The Ethiopian Sugar Corporation has hired the German firm Eugen Schmitt to build an ethanol production plant at the Wonji Shoa Sugar Factory. (AgraNet) 

EU: European sugar and ethanol producers are demanding that Brussels grant no additional access for imports in the EU-Mercosur trade negotiations. The domestic industry complains that the Brazilian policy amounts to a subsidy to ethanol production.  (Biofuels International) 

India: Ethanol was previously affected by a central excise tax (12.5 percent) plus state level taxes that varied from 5-8 cents/liter. As of July 1, that has been consolidated into a single federal Goods and Services Tax of 18 percent, but traders see it having little impact. More impactful is the fact that ethanol supply fluctuates with the sugar supply and the National Policy on Biofuels, which targets an increase to 20 percent blends by the end of this year, restricts purchases to domestic production only. Consequently, the blend rate in 216 was 4.07 percent and will drop to 2.23 percent in 2017. (Platts) 

Indonesia: Agriculture Minister Amran Sulaiman says that Malaysia and the Philippines have agreed to accept up to 3 MMT of corn. Indonesia’s production expanded 18.1 percent last year and will be up again this year with a resulting surplus. (BBN) 

Kenya: Kenya’s private dealers will now be able to source corn from Zambia on a one-day turnaround import permit. With drought affecting 23 of 47 counties in Kenya, the government is seeking to import 100 KMT of maize. (Xinhua)

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: The market continues to steam in circles. For a week or so the market goes up, and then, over the next week or two, it gives back previous gains. This is, once again, the story of current freight markets. Not surprisingly, every time the market rallies there are reports of additional freight sellers showing up. So, we are still fighting the same old balancing game. 

Today, for the first time, I heard news of 35,000 MT of Dutch non-GMO DDGS being sold into Turkey for July-August in five shipments of 7,000 MT each. The freight was about $38.00/MT. This was sold at a big discount to equivalent Spot FOB values in Holland.

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 the Philippines.

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

10. Interest Rates

Interest Rates