Market Perspectives - August 22, 2014

1. Chicago Board of Trade Market News

Outlook: The outlook is that multiple factors could heighten volatility in corn basis this fall across much of the Midwest. Pressure on cash prices is initially expected as producers and local elevators deal with the storage of an abundant harvest, resulting in a weak basis. Such a development may not be overly concerning for U.S. producers who have the ability to carry their corn stock further into the future than competing corn growers in other global regions. That competition from regions such as South America and the Black Sea is anticipated to cap basis at U.S. ports through the first quarter of the crop year (September-November). Domestic cash prices during that same time period may also be weakened by factors such as reduced gasoline consumption and a decline in the ratio of DDGS prices to corn, and encourage many ethanol plants to limit their extended coverage. The domestic feeding industry may also purchase in a hand-to-mouth manner as meat and livestock prices become more erratic.

Pork exports that were rejected by China are expected to seek a home in the domestic U.S. market. Cattle prices recently escalated to such lofty levels as to slow beef consumption. Reduced cattle on feed placements may cause another attempted rally in beef prices, but pork and growing poultry supplies will be ready to act as substitutes. Competition from meat cuts can be reflected into more volatile livestock prices, which is the reason that domestic feed purchases are likely to remain more short-term than one would initially expect when corn prices are so low.

The development of full carry in futures contracts may also encourage corn end-users to purchase in a hand to mouth manner. After all, no one will want to buy a more distant contract and then ride it down as it becomes the nearby month. Such a perspective could well continue right through the calendar year. However, there it will become increasingly evident through time that the downside is limited in corn prices and the upside has enormous potential if negative developments should evolve in the next growing season. At that point, speculators will attempt to buy on a limited scale, but few will be willing to take the short side of the contract. Commercials will see this development and recognize that they need to extend coverage, and basis is then likely to strengthen beyond expectations. Pronounced swings in basis could occur in a relatively short six month time period.

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: During August 22-25, a swath of moderate-to-heavy rain is forecast from the northern Intermountain West eastward through the northern half of the Plains, the Great Lakes Region, the central Appalachians and the mid-Atlantic. Between 2-5 inches is anticipated across much of Montana, western and southeastern parts of the Dakotas, southwestern and northeastern Minnesota, the southern Great Lakes, the central Appalachians and the mid-Atlantic from central Pennsylvania southward through Maryland and eastern Virginia west of the Chesapeake Bay.

Light to locally moderate rain is forecast for most other parts of the central and southern Rockies, the Southeast and areas immediately adjacent to the primary precipitation swath.

Little-or no-precipitation is expected along the West Coast, in the lower half of the Mississippi Valley and across the southeastern Plains. Mild temperatures are expected from the Rockies and northern Plains westward to the coast. Montana and western North Dakota are expecting daily high temperatures 6-15 degrees Fahrenheit below normal. Hot weather is anticipated from the Southeast and central Appalachians westward through the southeastern half of the Plains, with daily highs averaging 9 degrees or more above normal from the Tennessee and lower Ohio Valleys northwestward through Illinois.

For the period of August 26 – 30, odds at least slightly favor above-normal rainfall for a large swath of the country from the Southwest and the Rockies eastward through the Northeast, the central Appalachians, the central and eastern Gulf Coast region and the Southeast as far east as Georgia and Florida. Enhanced chances for below-normal precipitation are restricted to the Northwest and southern Texas. 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

Corn: Net sales of 99,900 MT for 2013/14 were up noticeably from the previous week, but down 15 percent from the prior four-week average. Increases reported for Egypt (112,900 MT, including 60,000 MT switched from China and 40,000 MT switched from unknown destinations), South Korea (93,500 MT, including 63,000 MT switched from unknown destinations and 20,000 MT switched from Japan), Colombia (79,500 MT, including 70,000 MT switched from unknown destinations), Mexico (55,200 MT), Japan (47,600 MT, including 78,700 MT switched from unknown destinations and decreases of 11,100 MT) and Canada (24,900 MT), were partially offset by decreases for unknown destinations (250,500 MT), China (64,400 MT), El Salvador (9,500 MT) and Morocco (2,700 MT). Net sales of 719,300 MT for 2014/15 were reported primarily for Colombia (223,300 MT), Mexico (193,600 MT), unknown destinations (161,900 MT) and Peru (98,500 MT). Exports of 1,144,300 MT were up 59 percent from the previous week and 25 percent from the prior four-week average. The primary destinations were South Korea (315,600 MT), Mexico (253,900 MT), Japan (206,200 MT), Egypt (172,900 MT), Colombia (71,500 MT), Costa Rica (37,000 MT) and Morocco (27,300 MT). Optional Origin Sales: For 2013/14, outstanding optional origin sales total 55,000 MT, all South Korea. 

Barley: There were no net sales reported during the week. Exports of 300 MT were reported to Taiwan. 

Sorghum: Net sales of 7,900 MT for 2013/14 resulted as increases for China (61,900 MT, including 54,000 MT switched from unknown destinations and decreases of 4,000 MT), were partially offset by decreases for unknown destinations (54,000 MT). Net sales of 107,000 MT for 2014/15 were reported for China. Exports of 161,200 MT were reported to China.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS prices recently declined to 70 percent of the value of corn in some areas and end-users are suddenly buying very aggressively to take advantage of this opportunity. However, price quotes have not been significantly influenced. For example, rail rates to the Pacific Northwest and California are on average up about $5.00/MT and the FOB vessel rate at the Gulf was up only about $3.00/MT. However, the fact that CIF barge rates were up approximately $15 seems to indicate that bulk DDGS prices will be on the increase if there is no further decline in corn prices.

Domestic hog and poultry buyers have become particularly interested in securing more product from DDGS merchandisers because of the high price of soymeal. In comparison, DDGS appears to be the most cost effective protein source. It was reported that $135 traded in volume for truck delivery to Chicago in October.

U.S. pork and poultry buyers may soon find increasing competition from Mexican cattle and pork buyers in the northwestern states of Sinaloa and Sonora. This is a region of potential strong demand for bulk DDGS if cost effective logistics can be arranged. In the past, Mexican buyers have not been extremely well organized in purchasing DDGS in bulk or containerized form, but the recent setback in DDGS prices seems to have sparked increased interest.

Ethanol Comments: Declining gasoline consumption, the need to move DDGS inventory and increasing competition from Brazilian ethanol exports may combine and start applying pressure to ethanol producer margins. Justification for such a concern was not reflect in this week’s differential between the price of corn and co-products, but stocks did have a significant rebound while production is at sizable levels in comparison to a year ago.

The last reported ethanol production was at an average daily rate of 937,000 barrels per day (bpd) for week ending August 15. This is an increase over the prior week’s production level of 931,000 bpd and the year ago level of 844,000 bpd. Ethanol stocks increased to 18.3 million barrels, in comparison to the prior week’s level of 17.8 million barrels.

The differential between the cost of corn and the co-products at ethanol facilities across the Corn-Belt is the following for week-ending Friday, August 22, 2014:

  • Illinois differential is $3.55 per bushel in comparison to $3.55 the prior week and $2.40 a year ago.
  • Iowa differential is $3.29 per bushel in comparison to $3.47 the prior week and $2.28 a year ago.
  • Nebraska differential is $3.31 per bushel in comparison to $3.50 the prior week and $1.98 a year ago.
  • South Dakota differential is $3.90 per bushel in comparison to $3.81 the prior week and $2.57 a year ago.

7. Country News

Argentina: Argentine farmers are expected to plant less corn this year due to low global prices for the grain, according to WPI. As a reference point, corn prices two years ago were around $195/MT, $150/MT at this time last year and are currently resting around $138/MT, at which level farmers would be unable to cover their production costs.

China: China is increasing its checks on U.S. sorghum and barley in order to check for pesticide residues and heavy metals, reports Reuters. This comes as Chinese feed mills have increasingly turned to U.S. sorghum as a cheap substitute for domestic corn. It is believed that inspections will impact bookings made following the ruling, but sorghum shipments that have already been booked or are in transit may not face any additional scrutiny. Shanghai JC Intelligence Co. has cut its forecast for sorghum imports to 1.6 MMT in 2014/15, which is down from its earlier prediction of 3.9 MMT. China is the world’s largest importer of U.S. sorghum.

EU: Europe’s rain-damaged wheat harvest is expected to benefit Asian grain importers as the crop is now considered suitable only as animal feed, according to Reuters. Importers in South Korea, Thailand and the Philippines are expected to favor European wheat over corn imports. Feed wheat production in Europe and the Black Sea is expected to increase to 75 MMT, which is about 13 MMT more than what was brought in last year. It is expected that European feed millers will add 3 MMT of wheat to their rations in order to reduce their dependence on corn imports. USDA recently reduced its forecast for EU corn imports to 11 MMT through September 2015, which is down from the 13 MMT it predicted in July as well as the 15.5 MMT that were shipped in the 2013/14 season.

India: Monsoon rains will be following the pattern set by the past two weeks and continue to be weak into next week, according to Retuers. The outlook for India’s corn crop is not likely to change despite the weak rains. 

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting:A firm-to-better tone stayed with world ocean freight markets most of the week and most rates moved slightly higher.

By Thursday the market strength seemed to be abating and things were topping out, at least for the moment. We are entering Q4 of the calendar year and vessel operators are still looking for signs of a true turnaround and recovery. It looks like they will have to wait just a bit longer.

We are only about one month from the true North American fall crop export season and the prospects for big crops and heavy export movements remain good. North American domestic rail logistics, although still problematic, appear to be improving and bids in the secondary rail car market are coming down.

Harvest logistics will be as important as harvest prices for end users of grains and oil seeds.

Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China:

The charts below represent January-December 2013 annual totals versus January-August 2014 container shipments for Hong Kong.

10. Interest Rates