Market Perspectives December 14, 2017

1. Chicago Board of Trade Market News

Week in Review

Outlook: Corn prices remain on the defensive after a neutral December WASDE report. No major changes were made to the U.S. corn balance sheet in this week’s report and, except for dry weather in Argentina, all other fundamentals remain bearish. Some technical indicators and recent fund activity may give way to a mild rally, but the long-term trend for corn is still down. 

The December WASDE featured one demand-side change to the U.S. balance sheet: 50 million bushels of additional corn for ethanol use. This carried through and reduced U.S. ending stocks by an equal amount, leaving the 2017/18 U.S. carry out figure at 2.437 billion bushels. This equates to a 16.8 percent ending stock/use ratio, the second largest in the past 10 years, which will keep futures on the defensive. The extra 50 million bushels of corn for ethanol came at the expense of sorghum used for the same product, and USDA lowered its forecast of sorghum use in this industry. The USDA consequently increased its forecast of U.S. sorghum exports by 50 million bushels. 

Elsewhere around the world, the USDA increased Brazil’s beginning stocks and ending stocks by 11.81 million bushels, boosting that country’s ending stocks/use ratio to 9.8 percent. China’s 2017/18 ending stocks were increased as well, due to higher production estimates. On balance, the December WASDE was neutral the world corn markets and did not contain any trend-changing information. 

Reuters today announced that Argentine corn planting is on its slowest pace ever (data back to 1995). According to Argentina’s Ministry of Agriculture, 62 percent of the country’s corn crop is sown to date, behind last year’s 70 percent pace and the 5-year average of 75 percent. The slow plating is the result of La Nina-induced dry weather which has kept farmers out of the field. So far, the weather and consequent planting delays have not worried the global markets, but a continuation of this trend could spark a short-covering rally. 

Global competition for corn buyers is one reason U.S. corn exports remain below last year’s volumes. YTD corn exports total 345.5 million bushels, only 18 percent of USDA’s forecast (versus an average of 25 percent for this point in the marketing year), even though YTD bookings (unshipped sales + exports) total 935.6 million bushels (49 percent of USDA’s forecast versus 58 percent on average). The slow export pace is a key factor keeping corn prices in their current bearish state. 

From a technical perspective, some support late this week has come from funds unwinding long soybean/short corn spreads. This activity has pressured the soy complex and given some strength to corn. Technical indicators are neutral/bearish March corn, with the RSI at a neutral 40, and the 10, 20, and 40-day moving averages stacking up bearishly. Stochastic oscillators, however, point to over-sold conditions in the short-run, which, when combined with the recent spread activity, could produce a modest bounce. Fundamentally, nothing has changed for corn and the long-term trend is bearish, but a small rally could come from technical buying/fund activity.

2. CBOT Corn Futures

CBOT March Corn Futures

CBOT Corn Futures

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: The precipitation pattern across the contiguous United States over the next week appears to be somewhat similar to the pattern seen over this past week: dryness from California stretching over to eastern Texas and Kansas. The far Pacific Northwest is poised to see heavy precipitation and some precipitation is expected over other parts of the Northwest and the High Plains. Most of the East Coast should also see some precipitation, with the heaviest amounts likely in New England. 

Looking further ahead, the Climate Prediction Center’s (CPC) 6-10-day forecast (December 19-23) indicates probable dryness across the western U.S., and parts of the Midwest, Mid-Atlantic, and Florida. Temperatures are expected to be above normal during this time across most of the contiguous U.S. However, New England may be colder than average. Wet conditions are expected across the northern tier of the U.S. and in the Southeast, from Mississippi to Georgia. Looking even further out, CPC’s 8- to 14-day forecast (December 21-27) suggests dryness will prevail across the western U.S. and southern Florida. Wetness is projected across much of the northern U.S., most of the High Plains, and much of the South and Southeast. Warmer-than-average temperatures are expected across most of the Southwest and the Southeast, while cooler-than-average conditions may occur across most of the rest of the contiguous 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

Corn: Net sales of 866,900 MT for 2017/2018 were down 1 percent from the previous week and from the prior 4-week average. Increases were reported for Japan (182,900 MT, including 56,400 MT switched from unknown destinations and decreases of 5,100 MT), Colombia (126,400 MT, including 50,000 MT switched from unknown destinations), the Dominican Republic (88,000 MT), China (65,800 MT), South Korea (65,000 MT), and Jamaica (63,600 MT). Reductions were reported for the Leeward and Windward Islands (300 MT). Exports of 690,800 MT were up 17 percent from the previous week and from the prior 4-week average. The destinations were primarily to Mexico (273,900 MT), Japan (218,200 MT), Colombia (84,400 MT), Costa Rica (30,400 MT), and Guatemala (29,100 MT). 

Optional Origin Sales: For 2017/2018, new optional origin sales of 136,000 MT were reported for South Korea. The current optional origin outstanding balance is 565,500 MT for South Korea (342,000 MT) and unknown destinations (223,500 MT). 

Barley: No net sales were reported for the week. Exports of 900 MT were reported to Japan (500 MT) and Taiwan (400 MT). 

Sorghum: Net sales of 317,400 MT for 2017/2018 were down 22 percent from the previous week, but up 7 percent from the prior 4-week average. Increases were reported for unknown destinations (198,000 MT) and China (119,400 MT, including decreases 6,600 MT). Exports of 101,400 MT were down 61 percent from the previous week and 39 percent from the prior 4-week average. The destinations were China (100,900 MT) and Mexico (500 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Prices remain firm with buyers stepping up to pay asking prices. FOB ethanol plant prices hit $127/MT this week as demand remains strong. FOB ethanol plant DDGS are valued at 42 percent of Kansas City soybean meal prices and 115 percent of cash corn. On a per-protein unit basis, DDGS are $1.31 cheaper than soybean meal, with their advantage losing $0.30 this week. Rising soybean meal prices have increased demand for DDGS in feed rations but a weaker soy complex may push some DDGS from domestic use to international destinations. 

Barge CIF NOLA prices rose to $188/MT this week while FOB Gulf prices climbed to $200, the first-time prices have reached such levels since July 2016. Prices for 40-foot containers to Southeast Asia are stronger this week as well, though gains were more muted than those in the FOB Gulf market. DDGS CIF Southeast Asia averaged $219/MT this week, up $4 from last week. Product destined for Bangladesh (up $6/MT) and Myanmar (up $5/MT) experienced the largest price increases, while other destinations reported $3-4/MT gains. Some merchandisers are hearing strong buying interest from Vietnam, where prices rose $3/MT this week.

7. Country News

Argentina: La Nina-imposed drier weather in the latter half of this year threatens late planted corn in the Pampas production area, and some corn may not get planted. The Argentina Rural Society says about half the corn crop tends to get planted later. (Reuters) 

China: The government’s estimate of corn imports was reduced by 500 KMT for the year as a result of larger than expected domestic production. Meanwhile, the National Development Reform Commission says that plans are in place to subsidize grain transportation and storage in the country to improve efficiency. (Reuters) 

Ukraine: Market participants are saying that corn production and exports will be less than the amounts predicted by USDA. The last USDA WASDE report pegged Ukrainian corn production at 25 MMT with 20.5 MMT of exports. However, production is expected to be down to 24 to 24.5 MMT due to less ideal conditions in the south and east. Exports may only hit 18 MMT, in part due to tougher world competition. U.S. corn is priced at $156/MT, which is $10/MT less than Ukrainian corn as the latter depends upon spot selling in nearby markets. 

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 Capesize Dry-Bulk Index and physical markets have truly enjoyed an impressive rally, and the Panamax and other freight markets were pulled up with it. The term I hear a lot is “market sentiment is positive.” This is true – it is now very optimistic and even bullish. 

Vessel owners and freight analysts now believe that we have turned the corner and largely rebalanced the fleet size versus cargo demand. I’m not sure that the first quarter of 2018 will see higher values, but it does appear that 2018 daily hire rates will be higher than in 2017. Hang on to your hats and be prepared to pay more. 

The 2020 CO2 emissions regulations and their impact on the type of fuel vessels will burn, and the actions owners will have to take to comply, will also have a dramatic influence on vessel scrapping and freight rates as we move forward. Dry-Bulk rate increases are certainly outpacing container grain rates, and we will have to see how that potentially changes the percentage of grain moved for export in containers. 

On the container side of things: buyers in the Asian Sub-Continent are experiencing considerably longer delivery/transit times due to the consolidation that has occurred in the shipping industry and the change in Asian transshipment ports.

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 Vietnam.

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

10. Interest Rates

Interest Rates