Market Perspectives September 20, 2013

1. Chicago Board of Trade Market News

Week in Review

Outlook:The Farm Service Agency released data on Tuesday, September 17th that showed U.S. farmers were prevented from planting 3.572 million acres this spring. That figure was an upward revision from their prior August estimate of 3.411 million acres. This is not a huge acreage adjustment, and its final significance is largely dependent on whether yield estimates increase or decrease in upcoming USDA reports.

A large number of speculative traders remain short corn in anticipation of a record U.S. corn crop, but there has not been a lot of bearish news this week that justifies driving the December corn contract to new lows. True enough, cash basis is declining — but basis declines each season during harvest and this year the national average basis is still positive. That is noteworthy when considering the prospect of a potentially record harvest. Bearish traders may proclaim that it is just a matter of time before basis declines to historical levels. Perhaps, but there is no precedence for futures pulling cash lower, particularly when final yields and harvested acreage remain uncertain.

The export sales pace gives no indication that global buyers find current U.S. corn prices to be unpalatable, and recent weakness of the U.S. dollar will make U.S. corn even more attractive to international consumers. Additionally, domestic buyers seem more than willing to purchase the December corn contract below $4.60 per bushel whenever speculators offer them the opportunity. It is commercial buying that has kept speculative selling in check and the December contract confined within a trading range and unable to punch through its prior low of $4.4575 per bushel. This condition can be particularly exasperating for speculative traders who are in the spread of long November soybeans and short December corn. Those traders need the December corn contract to make a new low before they are forced to exit their position in November soybeans, and that is not happening. Consequently, if the December corn contact does not soon make a new low, then it becomes increasingly likely there will be some sort of short-covering rally. Commercial end-users seem to be aware of that fact and are contently buying corn futures at present levels.

2. CBOT Corn Futures

December Corn Futures

CBOT Table

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: During the period of September 20-23, a slow-moving frontal system will trigger showers and thunderstorms from the Great Plains eastward to the Atlantic Coast, with the largest totals (more than 1.5 inches) expected along the Rio Grande Valley eastward along the Gulf Coast and into the Southeast. An inch of rain is also forecasted from the central Great Plains northeastward into the upper Great Lakes region, with unsettled weather returning to the Pacific Northwest. Much drier weather should return to the Southwest, central Rockies and High Plains, allowing for a recovery from flooding. Temperatures should average above-normal across the contiguous U.S. except for subnormal readings in the Far West.

For the period of September 24-28, the odds favor enhanced chances for precipitation from the Pacific Northwest eastward to the upper Midwest and southern Florida. Subnormal precipitation in the Tennessee and Ohio Valleys and eastern Great Lakes region. Above-normal temperatures are probable east of the Rockies and west of the Appalachians, while a tilt toward subnormal readings are forecast for the West. Follow this link to view current U.S. and international weather patterns and the future outlook: Weather and Crop Bulletin

4. U.S. Export Statistics

Export Sales and Exports
U.S. Export Inspections
USDA Grain Inspections for Export Report

Corn: Net sales of 437,400 MT for 2013/14 resulted as increases for Mexico (136,500 MT, including 33,300 MT switched from unknown destination and decreases of 5,000 MT), Japan (108,500 MT, including 64,300 MT switched from unknown destinations and decreases of 10,500 MT), China (64,500 MT, including 55,000 MT switched from unknown destinations), Peru (40,000 MT), and Taiwan (35,900 MT), were partially offset by decreases for unknown destinations (18,000 MT). Exports of 518,800 MT were primarily to Mexico (196,400 MT), Japan (104,300 MT), Venezuela (67,000 MT), China (60,000 MT), and the Dominican Republic (26,400 MT). Optional Origin Sales: For 2013/14, new optional sales totaling 3,200 MT were applied to new or outstanding sales for South Korea. Outstanding optional origin sales total 100,000 MT, all Mexico. 

Barley: Net sales of 800 MT were reported for Taiwan (500 MT), South Korea (200 MT), and Japan (100 MT). Exports of 23,100 MT--a marketing-year high--were to Japan.

Sorghum: Net sales of 48,200 MT for 2013/14 resulted as increases for China (58,600 MT, including 60,000 MT switched from unknown destinations and decreases of 1,400 MT), Japan (4,800 MT, including 4,100 MT switched from unknown destinations), and Mexico (3,800 MT). Decreases were reported for unknown destinations (19,000 MT). Exports of 146,200 MT were reported to Mexico (64,500 MT), China (58,600 MT), and Japan (23,100 MT). Optional Origin Sales: For 2013/14, outstanding optional origin sales total 60,000 MT, all China.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: China’s national tariff-rate quota (TRQ) restricts corn imports to 7.2 million metric tons (MMT) per international calendar year (January-December). Market participants estimate that there could be some additional allotments by the Chinese government to private users for the October-December period that will press total imports up against that 7.2 MMT total. As well, many of the private Chinese companies do not have any corn quota allotments left, so they are looking at DDGS as a popular alternative. The strong Chinese demand for DDGS is in direct competition with buying from Japan, Indonesia and Vietnam. One DDGS merchandiser who is active in the Asian market reported almost being overwhelmed with inquiries this past week and as he sold over 22,000 MT of DDGS.

Such active competition has caused domestic DDGS buyers to take things day by day in hopes that DDGS values will back off against corn. (As a result, it was more difficult to secure domestic prices this week for the DDGS Summary table.) The prospect that export demand will remain strong through December means that those domestic buyers of DDGS who remain hand-to-mouth are willing to take a calculated risk.

Ethanol Comments: Ethanol producers are presently enjoying the best margins since the fall of 2011, which was actually before the blenders lost their tax credit. Those favorable margins are primarily attributable to present corn prices. As noted in the Outlook section, speculators are offering end-users an opportunity to lock in profitable margins, and many ethanol producers are willing to take that offer.

The industry is showing great resolve in maintaining stable production. Consider that weekly ethanol production decreased this past week to 838,000 bpd, in comparison to 848,000 the prior week. As well, total U.S. ethanol stocks remain basically unchanged at 16.2 million barrels in comparison to the prior-week’s level of 16.3 million barrels. Lastly, ethanol imports into the United States for the week ending September 13 declined to just 3,000 barrels per day (bpd); below the prior week’s average of 15,000 bpd and below the same week a year ago level of 58,000 bpd.

The differentials between corn and the value of co-products values indicate the continued strong margins:
• Illinois differential increased to $3.57 per bushel. In comparison to $3.54 the prior week and $1.59 for this same week a year ago.
• Iowa differential decreased slightly to $2.72 per bushel. In comparison to $3.28 the prior week and $1.38 for this same week a year ago.
• Nebraska differential decreased to $2.71 per bushel. In comparison to $3.17 the prior week and $1.31 for this same week a year ago.
• South Dakota differential decreased to $2.97 per bushel. In comparison to $3.27 the prior week and $1.63 for this same week a year ago.

7. Country News

China: Chinese imports of U.S. DDGS could hit a record high next year due to the combination of a bumper U.S. corn crop and increased demand from Chinese feed mills for the by-product, according to Reuters. Increased demand for meat, eggs and dairy is likely to push 2014 imports above the record-setting 3.16 MMT imported in 2010. China imported 369,096 MT of DDGS in July, which is an increase of 24.6 percent over the same time last year.

European Union: The EU Commission has again lowered its corn forecast as hot and dry weather continues to plague Europe, reports Reuters. The revised estimate for EU corn production is now 6.88 MT per hectare, which is down from the 6.97 MT per hectare forecast last month. This prediction would put production for this year 1.5 percent lower than the five-year average. However, even with this reduction, the overall yield is still 13.8 percent higher than last year’s drought blighted harvest. This reduction was driven by conditions in Italy, Romania and Hungary.

France: Exports from the port of Rouen fell by 25 percent this week due to a decline in deliveries to Algeria and because a shipment to Cuba was not repeated, according to Bloomberg News. Grain exports fell to 135,860 MT in the period of September 12-18, which is down from 181,303 the prior week. Algeria remained the largest destination, and took in 26,250 MT of barley. Jordan also received a shipment of 36,858 MT of feed barley.

India: Corn harvested from India’s early sown crop has been twice last year’s yield in some cases, but much of it is also afflicted by high moisture levels (23-25 percent), reports WPI. Further, poor harvesting practices are expected to increase problems with fungus and overall crop deterioration. Deals for export have been completed at $220/MT, but farmers anxious for money are selling at $177/MT at the farm gate.

Iraq: The Iraqi government has released a five-year economic plan that seeks to increase agricultural production among other sectors in order to diversify the country’s economy away from being so heavily reliant on oil, according to Reuters. A key part of the plan is to increase grain production to cover the country’s domestic needs, and to that extent the government hopes to increase the annual production of barley from the 820,000 MT seen in 2011 to 1.2 MMT in 2017.

Japan: The Ministry of Agriculture has reported that Japan will import 67,000 MT of feed barley, according to Reuters. The government had intended to purchase 200,000 MT of feed barley in the weekly tender, and will try to obtain that amount in a tender held on September 25.

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: Well, it seems that I’ve been wrong about this market. It continues to move up and I cannot fully understand why. As we say, the market is always right, but I can’t figure out why we have a tight supply of ships in an overbuilt market and a less than robust economic situation. I’m still waiting for things to top out and the break to occur, but I know enough not to fight the market when it wants to move against you. I do however see reluctance in the physical market to follow the index up much further. I’m therefore not adjusting my rate quotes by much this week. You will, however, see a very different look to the Baltic Panamax Index forward curve.

I’ve been asked about my rate quotes to Mexico. Some say they have heard rates as low as $14.00/MT US Gulf to Vera Cruz, Mexico. That is certainly not the current market. It could be a figure someone purchased 6-9 months ago on a one year time charter and is using to leverage their grain sales to Mexico, but this is not a rate that can be contracted today.

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 Iron Ore
U.S. Asia Market Spreads

The charts below represent January-December 2011 and January-December 2012 annual totals versus January-June 2013 year-to-date container shipments for Taiwan.

International Freight Rates for Feed Grains

10. Interest Rates

Interest Rates