Market Perspectives October 12, 2017

1. Chicago Board of Trade Market News

Week in Review

Outlook: Trading on the October WASDE’s release day was interesting, to say the least. Traders were bracing for a bearish report – so much so that that December corn futures put in a new life-of-contract low before the report’s release. Typically, the market does not make such technically or psychologically important moves until after USDA releases the report. Today, however, per-report expectations turned out to be more bearish than the report itself. After the report, the contract traded as much as 6 cents higher before ending with only half as much in gains. 

The most anticipated number from today’s report was the U.S. average corn yield. USDA initially predicted a large yield in the May WASDE which was promptly dismissed by the trade. With each successive WASDE, USDA increased its yield projections, only to be met by analyst’s comments that it would surely be reduced in the October WASDE – which was not the case. USDA today pegged the 2017/18 corn yield at 171.8 bushels per acre, up almost 2 BPA from the September WASDE and above analysts’ expectations. Today’s figure makes this year’s yield the 3rd largest in history. 

USDA reduced harvested acres by 0.4 million to 83.1 million based on a slow start to the current harvest efforts. More notably, the agency reduced beginning stocks by 55 million bushels, a -2 percent change from the prior report. Between the beginning stocks reduction and 96 million bushels of additional production (totaling 14.28 billion bushels), total U.S. supplies increased 40 million bushels. 

On the demand side, Feed and Residual use increased 25 million bushels while Food, Seed and Industrial use bumped up 10 million bushels. Ethanol use and exports were unchanged, leaving total use higher by 35 million bushels. The net of larger supplies and bigger demand left an extra 5 million bushels in ending stocks, compared to USDA’s September forecast. The 2017/18 U.S. corn carry out figure currently stands at 2.34 billion bushels, nearly unchanged from last month but up 2 percent from 2016/17. 

Traders are largely viewing the report as neutral to bearish the corn market. However, it’s hard to be bullish when exports are down 49 percent YTD and ending stocks are growing. Spillover buying from the soybean pit helped pull corn futures higher today but eventually December corn will have to trade its own fundamentals. On the bullish side, U.S. exports should increase substantially as the marketing year progresses and the U.S. gains its seasonal advantage over South America. 

From a technical perspective, December corn is still range bound but with important new features. Today’s trade included a new life-of-contract low and a substantially higher close on a big volume of trade (320,000 contracts). Those factors may help establish that the market has reached its seasonal lows and that corn’s seasonal grind higher may be underway.

2. CBOT Corn Futures

CBOT December Corn Futures

CBOT Corn Futures

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: During the upcoming 5-day period (October 12-16), a band of heavy rain (2-3 inches) is predicted from southeastern Iowa across Lower Michigan to extreme northern Maine, with similar totals anticipated over extreme southeastern Florida, and the Cascades of the Pacific Northwest. One to two inches of rain is forecast over portions of the mid-Atlantic region. This raises the possibility of drought relief next week from the Midwest into northern Maine. 

During the 6- to 10-day period (October 17-21), odds for above-normal precipitation are elevated over the Pacific Northwest and northern Rockies, as well as over Florida. Odds for below-normal precipitation are enhanced across most of the Great Plains, the southern Rockies, eastern portions of the Southern Intermountain Region, from the Ohio Valley and central Great Lakes region to the New England coast. 

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 814,100 MT for 2017/2018 were reported for Mexico (190,600 MT), South Korea (119,600 MT), Colombia (116,700 MT, including 95,000 MT switched from unknown destinations), unknown destinations (115,300 MT), China (76,100 MT, including 65,000 MT switched from unknown destinations), and Honduras (65,300 MT, including 12,300 MT switched from unknown destinations). Reductions were reported for the French West Indies (8,300 MT). Exports of 966,000 MT were primarily to Mexico (401,500 MT), Japan (154,600 MT), Colombia (137,100 MT), South Korea (72,300 MT), and Peru (69,400 MT).

Optional Origin Sales: For 2017/2018, the current optional origin outstanding balance is 168,000 MT, all unknown destinations. 

Barley: Net sales of 400 MT for 2017/2018 were reported for Taiwan. Exports of 400 MT were reported to South Korea (300 MT) and Japan (100 MT). 

Sorghum: Net sales of 116,000 MT for 2017/2018 were reported for unknown destinations (66,000 MT) and China (50,000 MT). Exports of 300 MT were reported to Mexico. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS prices were steady in very quiet trade before today’s WASDE report. Merchandisers are reporting prices jumped $2-3/MT after the report was released (and corn futures gained 3-6 cents), but it is yet unclear whether buyers will pay these new prices. Barge CIF NOLA prices were heard at $162.50/MT this week, down $2/MT from last week while FOB U.S. Gulf prices were heard from the mid-$170s to $180s. The average FOB Gulf price reported from merchandisers/traders was $178/MT. 

DDGS are competitive as a feedstuff but buyers have little reason to buy sooner than necessary with ample feed supplied around the world. DDGS FOB ethanol plant prices are at 106 percent of cash corn values and 37 percent of KS soybean meal. The per-protein unit cost of DDGs is $1.86 less than that of soybean meal, keeping the ethanol co-product very competitive in feed rations. 

On the international side, U.S. exporters are reporting a very quiet market. Some have received inquiries from Vietnam, Malaysia, and the Philippines but no sales have been made yet. Most buyers are just returning from last week’s holiday and have covered their needs for at least the next few weeks. Exporters note that ocean freight is still a concern with $150 GRI’s reported on the table to begin in late October. The GRI is keeping some pressure on international sales. 

On average, CNF Southeast Asia prices were $2/MT higher at just over $200/MT. Prices for October shipments of 40-foot containers to Southeast Asia were higher for all routes and those destined for Myanmar led the way, gaining $6/MT this week. Prices for November shipment were steady/higher with smaller gains noted.

7. Country News

Brazil: A USDA/GAIN report details investment in Brazil’s grain handling infrastructure as it tries to move 98.5 MMT of 2017/18 corn production. Sixty percent of production moves by roads that are still partially unpaved. Private sector investment in infrastructure has increased over the past five years, particularly in the north where lower cost floating terminals could become more common. (World Grain) 

China: China will suspend sales of state grain reserve corn at the end of this month because of the availability of the new crop being harvested. (Bloomberg; Reuters)

European Union: The variable import duty on corn and barley was automatically triggered lower to €5.61/MT because of the drop in the U.S. dollar. The tariff had been €10.95/MT. The duty is based on the relationship between a European reference price and the price of U.S. corn. (World Grain) 

Kenya: Excess rain and armyworms have resulted in a corn harvest that is a quarter short of needs. The government is paying $377/MT for imported maize and then subsidizing its cost to millers to make flour affordable to consumers. Kenyan farmers are demanding the same kind of pay scheme. The government has offered to supply driers to farmers. (The East African) 

Ukraine: Rains have slowed harvesting and damaged some corn, causing the price to rise to $160/MT for quality corn after hitting a three-year-low just a few weeks ago. This has made Ukrainian corn uncompetitive against Latin American suppliers in the traditional Middle East market except where smaller volumes (≤25 KMT) and/or proximity are important. Barley exports are down 10.5 percent overall but exports to China are up 87 percent (566 KMT) and sales to the EU are up 18 percent (220 KMT). (Platts; SyndiGate Media) 

Zimbabwe: The government is claiming success from its Command Agriculture program whereby it has targeted increases in production area, including 400,000 hectares of maize. The result is a reported 1.1 MMT exportable surplus instead of the imports that were common in the past. The import substitution scheme will continue to advance production area in the future. (The Chronicle)

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: In a rather quiet trade, Dry-Bulk freight markets gained back what they lost last week. It is obvious that Dry-Bulk ocean freight markets bottomed out in 2016, and have since staged a recovery. The question today is, has the degree of recovery been fully justified – and is it sustainable? According to Clarkson Research, since February 2016 the Dry-Bulk sector recovery to date “is equivalent to moving 61 percent of the way back to historical averages.” That’s a big move. I do not argue the justification for the market turnaround, I’m just wondering if some in the market have not gotten a bit too optimistic too quickly. As we all know, nothing goes straight down or up forever and market players do tend to over-guess moves. 

I do expect Dry-Bulk freight markets to be well supported with cargo demand through the fall harvest, and then I expect we are likely to witness a bit of a setback/adjustment going into the first quarter of 2018. 

As you look at the growing U.S. grain port vessel line ups, it is obvious that we are getting deeper in the harvest. Russia thinks it might sell wheat to Mexico; if so, it would take freight of close to $38-$39.00.00/MT (e.g., $199 FOB Black Sea plus $38.00 freight would equate to $237.00/MT CIF West Coast Mexico?) Argentina has announced a sale of 33,000 MT of FH December wheat to Mexico. I’m guessing the freight to be around $35.00/MT. 

A note on Panamax Dry-Bulk ocean freight rates for corn or soybeans to HCMC Vietnam: The appropriate market spreads on this route are not necessarily a direct thing to rate. If you are going from the U.S. Gulf via the Cape of Good Hope the steaming time to Vietnam (versus Northern China) is shorter, so, that freight would be a little cheaper. However, routing via the Panama Canal the distance is longer and thus more expensive. So, on average maybe it is best to say that the rate from the U.S. Gulf to Vietnam is about the same as to Northern China (give or take $1.00/MT depending on routing). The freight spread between N. China versus S. China is generally a $1.00-1.50 difference. Close to 90 percent of the Panamax vessels going from the U.S. Gulf to China are currently going around the Cape rather than thru the Panama Canal. This is due to relatively cheap fuel prices and the desire to avoid paying Canal fees.

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 China.

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

10. Interest Rates

Interest Rates