Market Perspectives February 7, 2014

1. Chicago Board of Trade Market News

Week in Review

Outlook:USDA will update their global supply and demand estimates on Monday, February 10. The estimate for U.S. corn exports could be increased and the South American production forecast reduced slightly. Market participants are waiting to see how any changes in data will impact U.S. and global ending stocks of feed grains. This pre-report anticipation is one reason that corn contracts have been able to work higher for the past week. The daily moves have been moderate in size but important in the ability to push through resistance levels. 

The majority of market participants are expecting USDA to lower ending stocks for U.S. corn below the most recent January estimate of 1.631 billion bushels for the current 2013/14 season. Estimates range from a high of 1.667 down to a low of 1.574 billion bushels, with an average of 1.606 billion bushels. An estimate below 1.6 billion bushels could further dampen some of the recent bearish mindset. That fact will be particularly true if there is a notable decline in South American corn production estimates as well. In January, USDA estimated that total Brazilian corn production would be 70 MMT and Argentine corn production 25 MMT.

After USDA’s estimates are published on Monday, then attentions will quickly return to the U.S. export sales pace for corn and South American weather, which could improve some next week. Shortly thereafter, thoughts and discussion will turn to the topic of U.S. plantings. USDA will give very preliminary estimates for 2014/15 acreage at their Agricultural Outlook Forum that will occur on February 20-21. Actual survey results of farmer planting intentions will be published by USDA on March 28 in the Prospective Plantings report, which will also be accompanied with the important Grain Stocks report.

As noted last week, a further modest increase in prices could entice farmer selling in order to take care of some tax and lease obligations, but aggressive selling seems unlikely prior to seeing the contents of USDA’s reports and weather forecasts at the end of March. After all, many farmers simply find it difficult to call corn overpriced when the nearby oat contract has recently held a premium.

2. CBOT Corn Futures

March 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 February 7-10, very heavy precipitation (as much as 7-9 inches, liquid equivalent) is predicted in northern California, and 3-4 inches in western Oregon. This will go a long way in helping to mitigate some of the drought conditions in these areas, though reassessment of conditions next week will be needed to determine the extent of any potential improvements in the Drought Monitor depiction. Along the Southeast coast including northern Florida, 1.0-1.5 inches of rain is expected during the period which will be beneficial to the small areas of abnormal dryness (D0) in that region. With the exception of 3-4 inches of precipitation anticipated over the central Rockies and Wasatch Range, most other areas of the CONUS can expect a half-inch or less of precipitation within the next five days.

For the period of February 11-15, there are elevated odds of above-median precipitation for most of the northern and eastern Lower 48 states. Probabilities for above-median precipitation rise up to 60 percent in the Pacific Northwest, and 50 percent over the Gulf and Atlantic Coast states. Below-median precipitation is favored for southern California, much of the Southwest and southern Rockies, the central and southern High Plains. 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 1,700,100 MT for 2013/14 were down 8 percent from the previous week, but up 94 percent from the prior four-week average. Increases were reported for Japan (798,900 MT, including 117,000 MT switched from China, 83,700 MT switched from unknown destinations, and decreases of 50,000 MT), unknown destinations (311,900 MT), Spain (280,000 MT), Vietnam (78,100 MT) and Taiwan (66,500 MT, including 57,400 MT switched from China). Decreases were reported for China (72,400 MT) and Peru (1,400 MT). Exports of 747,300 MT were down 26 percent from the previous week and 3 percent from the prior four-week average. The primary destinations were Japan (255,000 MT), Taiwan (137,000 MT), Mexico (121,700 MT), Vietnam (63,100 MT) and Venezuela (32,000 MT). Optional Origin Sales: For 2013/14, outstanding optional origin sales total 55,000 MT, all South Korea. Export Adjustments: Accumulated exports to China were adjusted down 63,127 MT for week ending December 19, 2013. Vietnam is the new destination for these shipments and is included in this week’s report

Barley: Net sales of 32,400 MT for 2013/14 were reported for Japan. Exports of 44,100 MT--a marketing-year high--were to Japan (43,900 MT) and Taiwan (200 MT)

Sorghum: Net sales of 125,800 MT for 2013/14 were down 34 percent from the previous week, but up 18 percent from the prior four-week average. Increases reported for China (297,500 MT, including 175,000 MT switched from unknown destinations and decreases of 2,200 MT), were partially offset by decreases for unknown destinations (117,300 MT) and Japan (54,500 MT). Exports of 149,500 MT were to China (144,200 MT) and Japan (5,300 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: The preceding Outlook section discusses some reasons that corn prices have worked higher during the past week, and that is one reason why DDGS prices have increased from $5.00 to $10.00 higher per metric ton. An additional reason for said price increase is that recent winter storms moving across the United States have produced extremely cold temperatures and deep snow. That cold weather has driven up the cost of natural gas, which is used to dry DDGS. Some of the domestic end-users of DDGS are attempting to avoid the impact of higher natural gas prices by purchasing more of the product wet. This strategy can work to some degree for domestic buyers, depending on how cold the weather gets. However, the increased weight of wet product means that it is only feasible to market to local consumers within a limited radius; otherwise, ethanol facilities need to dry the DDGS product.

Foreign buying has slowed somewhat this week due to the Chinese New Year holiday, but DDGS merchandisers noted that inquiries are again starting to pick up from Asian buyers and are likely to return in greater force next week. Of course, many of those foreign buyers will desire to ship their purchased product by container. Foreign buyers may want to work with the DDGS merchandisers to allow sufficient time to acquire containers and arrange logistics for the following reasons:

1. There is a seasonal tendency for containers and vessel space to tighten, but that shortage has become more pronounced this year due to the large export volumes.
2. This year’s severe winter weather has delayed truck traffic and even caused some highway closures. As well, the extremely cold temperatures and dangerous wind chills have slowed container loading activities.
3. Weather is also one factor that is contributing to a shortage of ethanol rail cars. The limited supply is causing some of the ethanol plants to slow down their production, thus resulting in reduced DDGS production.

Ethanol Comments: In relation to ethanol policy, the Environmental Protection Agency (EPA) recently noted that any further reductions in the annual blending requirements are presently unnecessary and would not support the objectives of Congress as laid out in the original 2007 Energy Independence and Security Act. While the agency did agree to reduce the cellulosic ethanol requirements, it would not reduce the requirement to blend 16.55 billion gallons into the fuel supply of the United States. EPA estimates that this mandate can be met with corn-based ethanol, bio-based diesel and the petroleum industry’s own stockpile of renewable identification numbers (RINs).

A limited decline in weekly U.S. ethanol production was reported by the Energy Information Agency (EIA) this past week at 895,000 barrels per day (bpd), down slightly from an average rate of 900,000 bpd the prior week. There was also a modest decline in total U.S. ethanol stocks to 16.7 million barrels. This is down from 16.9 million barrels the prior week, a substantial 16.7 percent from the year-ago level of 20.1 million barrels and 20.5 percent from the 21.2 million barrel level two years ago.

Additionally, there was a story in Bloomberg news this week that said about 3.3 million gallons of U.S. corn-based ethanol had been exported to Brazil. Exports to Brazil imply that ethanol imports into the United States are unlikely anytime soon. It has been approximately 20 weeks since any ethanol was imported into the United States. Such positive news stories are pointed out to reemphasize the fact that the U.S. ethanol industry is healthy and it is expected to remain in this condition so long as corn prices continue at present levels.

Differences between corn and co-product processing values across the Corn Belt are not producer margins, but they can be used as indicators of changing conditions. The differentials for locations across the Corn Belt are as follows:

• Illinois differential is $3.43 per bushel, in comparison to $3.49 the prior week and $1.74 a year ago.
• Iowa differential is $2.60 per bushel, in comparison to $2.60 the prior week and $1.55 a year ago.
• Nebraska differential is $2.60 per bushel, in comparison to $2.48 the prior week and $1.91 a year ago.
• South Dakota differential is $2.75 per bushel, in comparison to $2.72 the prior week and $1.73 a year ago.

7. Country News

Australia: Drought has caused the price of sorghum to jump to its highest point since 2007, reports Bloomberg News. The grain, which is commonly used to feed livestock, was at $310/MT in January.

Brazil: Rains are forecast for Brazil’s dry center-south growing region after February 17, according to Reuters. However, the amount of rain that could fall remains uncertain and the hot and dry weather have already caused stress to the country’s corn crop.

Vietnam: One corn cargo of 63,127 MT that had been reported as shipped to China was instead diverted to Vietnam, according to Reuters. Other cargoes have also been reported as diverted to Japan, South Korea and Spain.

Japan: The Ministry of Agriculture received no bids for the importation of feed barley or feed wheat in its weekly auction that closed on Wednesday, reports Reuters. The MOA had sought 120,000 MT of feed wheat and 200,000 MT of feed barley and will seek the same amounts in a tender that closes February 12

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:

By Monday the Lunar New Year celebrating should be over and Asian industries should be returning to work.

World ocean freight markets are anxious to see what new business develops and are certainly hoping that the uptick in North and South American grain and oilseed exports will provide a needed boost in cargo demand and prices. Current Baltic indices are back to where they were in mid-November, but they are considerably better relative to this time last year.

U.S. grain and oilseed exports continue at a very good pace and are soaking up much of our export capacity for the next three months. According to USD data, during the week ending January 30, 37 ocean-going grain vessels were loaded in the U.S. Gulf, which is 5 percent less than the same period last year. Ninety-seven vessels are expected to be loaded within the next 10 days, which is 106 percent more than the same period last year. Interior logistics remain messy and expensive. Buying grains, oilseeds and freight is not the problem – getting the product to the port and loaded in a timely fashion is. Logistic should be as much a concern as price in today’s markets.

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 2013 year-to-date container shipments for Japan.

International Freight Rates for Feed Grains

10. Interest Rates

Interest Rates