Market Perspectives October 19, 2017

1. Chicago Board of Trade Market News

Week in Review

Outlook: December corn futures defied the bearish fundamentals in the October WASDE for a few days, buoyed by spillover buying from the soybean market. Ultimately, however, corn’s own fundamentals caught up with the market, sending it slowly lower. The contract is range bound (again) with support from commercial value-buying and pressure from bearish global fundamentals. 

U.S. corn export sales and exports have both been slow, but the latest USDA report showed positive signs of large sales volume of 49.9 billion bushels (1.245 MMT). Export sales are down 33 percent from last year and have reached 32 percent of USDA’s export projections, versus the historic average of 44 percent for this time of year. The reason for slow exports and sales lies with the competitiveness of South American corn. Currently, U.S. FOB Gulf corn is at a 10-cent premium to Brazil and a 19-cent premium to Argentina Upriver FOB quotes. Rising freight rates are keeping Argentina on the sidelines for now but Brazilian prices are actively working against U.S. exports. 

The U.S. harvest is well behind schedule. USDA’s latest report noted 90 percent of U.S. corn is mature and only 28 percent of the crop was harvested as of last week. The harvest rate is nearly half of the normal pace (44 percent). Improving weather conditions should allow farmers to get into fields and make good progress this week. The soybean harvest is delayed but is closer to “normal” and farmers will likely switch to corn harvest soon. 

From a technical perspective, December corn is heading sideways. Moving averages are theoretically bearish but, in reality, are converging to a directionless tangle of chart lines. The contract is neither oversold nor overbought and is treading water a few pennies above its life-of-contract low. The new contract low will likely serve as major support going forward, and cash market fundamentals indicate the market is unlikely to test this point again soon. U.S. corn basis is steady at $0.44-0.45 under December futures, showing both a lack of harvest selling and moderate commercial buying interest. With cash markets offering some support and global fundamentals leaning heavily on the market, December corn seems relegated to trade sideways for the next several weeks.

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: For the week of October 17-23, the extreme Northwest and the South/Southeast are likely to receive above-average precipitation, very heavy in the Northwest and up to 3 inches in parts of the South. Less than half an inch of precipitation is forecast across the mid-Atlantic states, the Northeast, and the High Plains into Montana. Looking a bit further to the October 22-26 timeframe, above-normal temperatures are expected over the western U.S, while parts of Texas may see below-average temperatures. Below-normal precipitation is also forecast for the western U.S. Looking even further out to the week of Oct 24-30, most of the contiguous U.S. is favored to see below-average precipitation, while above-normal precipitation is favored across the Appalachians and eastward. The Great Lakes region is also favored to receive above-normal precipitation at this time. 

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 1,254,900 MT for 2017/2018 were down 21 percent from the previous week, but up 58 percent from the prior 4-week average. Increases were reported for Mexico (510,100 MT), Japan (233,800 MT), Honduras (132,200 MT, including 132,100 MT switched from unknown destinations), Peru (117,200 MT), and Colombia (98,100 MT, including 75,000 MT switched from unknown destinations and decreases of 6,000 MT). Reductions were reported for unknown destinations (16,900 MT) and Canada (14,400 MT). For 2018/2019, net sales of 15,000 MT were reported for Peru. Exports of 339,300 MT were primarily to Mexico (166,100 MT), Colombia (80,100 MT), Peru (39,200 MT), Japan (28,600 MT), and Canada (12,600 MT). 

Export Adjustments: Accumulated exports to Canada were adjusted down 14,150 MT for week ending October 5th. This corn was Canadian corn and should not have been reported. 

Optional Origin Sales: For 2017/2018, new optional origin sales of 60,000 MT were reported for unknown destinations. The current optional origin outstanding balance is 228,000 MT, all unknown destinations. 

Barley: No net sales were reported for the week. Exports of 700 MT were reported to Japan (500 MT), Taiwan (100 MT), and South Korea (100 MT). 

Sorghum: Net sales of 120,000 MT for 2017/2018 resulted as increases for unknown destinations (119,000 MT) and Mexico (2,400 MT), were partially offset by reductions for China (1,400 MT). Exports of 52,300 MT were reported to China (51,600 MT) and Mexico (700 MT). 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Merchandisers are reporting a very quiet week in DDGS trade. Prices are holding steady and neither buyers nor sellers are eager to push the market. Traders are noting near-term production is tight and that the trade is beginning to push forward. The carry is relatively flat in the domestic market but the freight increases traders expect to happen in November or December are pushing the export market into a steeper carry. 

Prices for DDGS delivered by truck to Chicago increased $3/MT this week to $132. CIF NOLA Barge prices were steady as logistics issues continue to diminish. FOB Gulf quotes were steady/lower with limited buying or selling interest and averaged $177/MT. DDGS delivered via rail to the PNW increased $5/MT to $193 this week. 

Domestically, DDGS values are 38 percent of Kansas City soybean meal and 104 percent of cash corn. Stronger soybean meal prices have made the ethanol co-product more competitive and the cost per-protein unit favors DDGS by $1.80. 

On the export side, exporters are reporting overseas buyers are not aggressive in buying with their immediate needs filled. Some traders are noting an uptick in Vietnamese demand but also that asking prices are below the market, once fumigation costs are included. Prices for DDGS CIF Southeast Asia were steady to $1/MT higher this week, averaging $201/MT. Prices for Bangladesh rose $7/MT, the largest gain this week, followed by prices for DDGS CIF Thailand which rose $3/MT. Prices for other Southeast Asia destinations were steady this week. 

7. Country News

China: The Agriculture Ministry forecasts a larger corn deficit for 2017/18 to 4.31 MMT after reducing the production amount by 2.38 MMT and increasing the expected consumption by 1.05 MMT. Top corn producing province Heilongjiang will reduce the subsidy to farmers by 13 percent to 133.46 yuan ($20.30) per mu (0.067 hectares). However, Zhang Dalong of COFCO Futures expects farmers to still plant corn because it is more profitable. (Bloomberg; Reuters)

Ukraine: USDA/FAS forecasts that Ukrainian barley production will be down 11 percent this year compared to last (to 8.6 MMT). The crop is losing out in production area to wheat due to equivalent production costs but 25 percent lower yields. Meanwhile, the corn harvest is 20 percent complete but at a total of 27.2 MMT, the final crop will be 3 percent smaller than last year. (World Grain)

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: Global Dry-Bulk freight markets found the energy to stage another rally this week. We are experiencing record Chinese soybean imports; big Chinese iron ore imports; record Russian wheat exports out of the Black Sea; and good new crop U.S. grain exports. All of these factors have come together to support higher rates in Dry-Bulk freight markets in the Atlantic, Pacific and Black Sea. 

If you need vessel freight for the next two months it feels like you should step in and cover those needs now. However, I expect that we will see a market correction to the down side once the harvest is over and we get into the first quarter of 2018. 

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 Hong Kong.

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

10. Interest Rates

Interest Rates