Market Perspectives August 10, 2017

1. Chicago Board of Trade Market News

Week in Review

Outlook: The August WASDE held no shortage of surprises. Chief among them was USDA’s 2017/18 corn yield forecast of 169.5 bushels per acre (BPA). The trade had been expecting a much smaller yield, between 163-166 BPA, and today’s report was undoubtedly bearish. Moreover, 2017/18 ending stocks were only reduced by 52 million bushels to 2,273 million, leaving an ending stocks/use ratio of 15.9 percent. Combined with steady world corn ending stocks, the report left almost no room for the corn market to move higher until the September WASDE. 

The USDA reduced its yield estimate by 1.2 BPA from the July WASDE, which when combined with no changes to harvested acres, pulled U.S. 2017/18 corn production down 102 million bushels to 14,153 million. USDA also reduced Feed & Residual use as well as its expectations for U.S. corn exports. The USDA now estimates 1,850 million bushels of corn will be exported this marketing year. Brazil’s large crop is putting pressure on U.S. corn exports but reports of that country’s bumper crop being stored in poor conditions may increase U.S. export opportunities later in the marketing year. 

From a technical perspective, December corn passed a major milestone. The contract closed below $3.74, the major support point above which the contract has traded for most of 2017. With this support broken, the next downside target lies at $3.58 ½, the August 2016 contract low. From there, the next support point is $3.14 ¾, the August 2016 low on corn’s continuous monthly chart. Notably, USDA is still predicting farm prices between $2.90 -3.70/bushel this year, and these technical targets align well with the lower end of this range. Additionally, funds are still long corn futures, and should they decide to liquidate their positions, additional downside could be prominent. For now, December corn looks to be headed lower, unless unexpectedly strong demand appears. 

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: Since the Tuesday morning cutoff for this week’s map, rain has continued to fall on the central and southern High Plains and over a swath from south central Texas to the mid-Atlantic. For August 9-15, the National Weather Service’s Weather Prediction Center forecasts more rain across the drought-stricken regions of the upper Midwest and Great Plains. The upper Midwest and northern Plains can expect to see about an inch of rain while locations in the southern Plains and Mid-Atlantic may see amounts approaching 3 inches. Rainfall should keep temperatures in these regions near or below normal. Conditions in the Pacific Northwest are not expected to show considerable improvement over the coming week with the forecast of minimal rainfall amounts and continued warm temperatures. 

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 52,000 MT for 2016/2017 resulted as increases for Japan (88,100 MT, including 92,700 MT, switched from unknown destinations and decreases of 5,700 MT), Mexico (87,600 MT), Peru (56,800 MT, switched from unknown destinations), Colombia (16,400 MT, switched from unknown destinations), and Honduras (13,500 MT, including 12,300 MT switched from unknown destinations). Reductions were reported for unknown destinations (248,100 MT) and Panama (500 MT). For 2017/2018, net sales of 628,400 MT were reported primarily for Colombia (275,000 MT), Mexico (194,100 MT), and unknown destinations (124,800 MT). Reductions were reported for Nicaragua (9,000 MT), Costa Rica (1,000 MT), and Taiwan (300 RB). Exports of 973,500 MT were down 11 percent from the previous week, but unchanged from the prior 4-week average. The primary destinations were Japan (328,100 MT), Mexico (245,400 MT), Colombia (108,900 MT), South Korea (74,200 MT), and China (68,800 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 500 MT were reported to Japan. 

Sorghum: Net sales reductions of 2,200 MT for 2016/2017 were reported for China. For 2017/2018, net sales of 145,500 MT were reported for unknown destinations (138,000 MT) and Japan (7,500 MT). Exports of 102,000 MT were down 39 percent from the previous week, but up 6 percent from the prior 4-week average. The destinations were China (99,300 MT) and Mexico (2,800 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments:Pricing strength has returned to the DDGS market. Ethanol plants sold most of their September inventories last week and, in the face of tightening supplies, domestic prices have risen. Barge CIF NOLA prices rose again after last week’s pause in the market, gaining $1.50/MT to reach $161.50/MT. FOB U.S. Gulf DDGS prices did not follow in lock step, falling $3/MT to $174/MT as international interest waned in the face of higher prices. Merchandisers are defending asking prices, however, despite trades being completed at the low end of current values. 

Merchandisers are reporting “difficult” container sales on the international front this week as overseas buying interest is not yet ready to follow U.S. prices higher. Prices for 40-foot containers to Southeast Asia increased $1/MT this week, on average, reaching $193.30/MT. August shipments to the Philippines rose $7/MT while those to Indonesia rose $2/MT. Other August shipment prices were largely steady. For September shipment, price increases were noted for almost every route. 

Domestically, DDGS are priced at 95 percent of cash corn values and 38 percent of soybean meal, both down modestly from the week prior. The per-protein unit cost analysis favors DDGS by a $1.80/unit margin this week, equal to last week’s value. 

The latest export data from USDA FAS shows June U.S. DDGS exports rose nearly 20 percent from May. June’s exports reached 889,114 MT which was lower than the volume shipped in June 2016. Mexico was the largest buyer in June, taking 175,000 MT, followed by South Korea (which imported 123,000 MT). 

7. Country News

Argentina: Sales of fertilizer are up 3.9 MMT this year and farmers have increased their purchases of advanced-technology corn seed as they prepare for crop sowing to start in September. (Reuters) 

Brazil: Endrigo Dalcin of the farmers’ group Aprosoja says that abundant production and a lack of storage is causing large amounts of corn to be stored outdoors in piles. Storage capacity is half the amount recommended by the UN’s FAO. The weather is dry now but rains will come later this year and the inadequately stored corn will become subject to rot, pests and rodents. (Bloomberg) 

China: The National Meteorological Center reports that rain in north China last week eased the drought and likely improved the output prospects for some of the corn planted in the region. Some areas could even exceed last year’s totals, but the latest estimate from China’s Agricultural Supply and Demand Estimates is that adverse weather will reduce corn production this year by -1.2 MMT for an overall production total of 210.7 MMT. (Bloomberg) 

EU: The European Commission reports that the ample supply of grains and low prices automatically triggered import duties. An import duty of €5.16/MT will be applied to maize, sorghum and rye. (Bloomberg) 

Kenya: The National Biosafety Authority announced that field trials will begin for biotech corn and cotton. The government had announced a ban on all GM crops in 2012 but a review of their safety led a task force to recommend approval on a case-by-case basis. (Business Daily Africa)

 

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: Ocean freight markets are trying to shake off that sinking feeling. It was an up and down market for most of the week, but it looks to be ending on a more positive note for vessel owners. A degree of optimism has returned to the Baltic Indices and the faces of owners and their bankers. Though many Dry-Bulk vessel owners have decreased their annual financial losses, they still remain in the red. So, we will have to see if the markets can actually sustain a rally or if this simply turns out to be another false start. Physical markets have been slower to react this week and I am therefore leaving most rates unchanged; we’ll wait to see what next week brings. 

I continue to doubt that we will experience any substantial upward turn in vessel rates in 2017.

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 Hong Kong.

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

10. Interest Rates