Market Perspectives August 7, 2015

1. Chicago Board of Trade Market News

Week in Review

Outlook: USDA will update feed grain production estimates next Wednesday, August 12, and there seems to be a uniform expectation among market participants that yield and production estimates for U.S. corn will decline by one degree or another. Bearish analysts call for additional price weakness if the average U.S. corn yield only has a limited reduction, but World Perspectives pointed out that U.S. corn ending stocks for 2015/16 are currently estimated to be 1.6 billion bushels with no reduction in yield, and the December 2015 contract is currently trading near the low of last season. They elaborate that increasing U.S. ending stocks by 250 million bushels, to 1.850 billion bushels, would raise the stocks-to-use ratio to 13.5 percent. This is similar to the present 13 percent that the 2014/15 season eventually drifted down to and would not imply that corn contracts should go lower. Alternatively, reducing USDA’s current estimate of 1.6 billion bushel ending stocks for 2015/16 by 250 million bushels would cause the stocks-to-use ratio to decline down to 10 percent. At this level the price of corn contracts starts to increase exponentially.

The yield estimates will become increasingly accurate as the August reports are followed by updates in September, October and November. Market participants recognize that there is a tendency for declining yields to continue declining. Of course, bearish traders can tout the fact that China is poised to reduce the price on their sizable domestic corn stocks this fall. That action could limit near-term U.S. exports of corn and DDGS to China, but please recall that China was not a buyer of U.S. corn for a part of last season and the U.S. corn futures prices did not fall much below recent lows back in 2014/15, when ending stocks were presumed to be closer to 2 billion bushels.

Truly forcing large funds to temporarily drive corn contracts lower by throwing in the towel on their large pool of unprofitable long positions may also require an increase in feed grain yield estimates and a decrease in demand estimates for 2015/16. Otherwise, end users will increase long hedges if limited downside is perceived. If it appears that corn contracts have formed a bottom and may work higher, then Individuals holding sizable short positions can become nervous as increasing prices approach their entry point. As well, export sales tend to pick up when it appears that prices have reached a bottom and are starting to rebound. 

3. U.S. Weather/Crop Progress


U.S. Drought Monitor Weather Forecast: For the period August 7 through August 11, monsoon precipitation will again be relatively scarce across the Desert Southwest and the rest of the West will be seasonally dry as well. Prospects for the southern Plains and lower Mississippi Basin don’t look good either. Better odds for the wet stuff can be seen in the upper Midwest, the Mid-Atlantic (heavy rains are forecasted for Virginia, Delaware and extreme western Carolinas along with northeastern North Carolina), the Southeast (central Alabama and the western half of Georgia) and along the coastal reaches of the Gulf Coast region (from southern Alabama across the Florida Panhandle and into northern Florida) if all goes as forecasted. Temperatures for this same period show cooler weather across the Great Basin with near-normal readings likely in the Pacific Northwest and rest of the West Coast. Cooler weather is also expected across the northern Plains, New England and Mid-Atlantic. The only real projected hot spot over the next 5 days can be found in the central Plains, the southern and central Rockies and front ranges, southern Plains and lower Mississippi Basin where temperatures are expected to run 3-9 degrees above normal.

The 10-day (valid for August 11-14, 2015) and14-day (valid for August 13-19, 2015) outlooks appear pretty similar and the models are in good agreement about the building of a ridge across the west-central U.S. during this timeframe. This will likely bring a late summer heat wave across the Great Plains, upper Midwest, lower Mississippi Basin, the Rockies and the Desert Southwest. Cooler weather is expected in the Pacific Northwest, western Great Basin and the Northeast. One significant feature worth noting is that the 14-day outlook projects a stronger likelihood of above-normal temperatures across the West and into the Southeast and Carolinas, which the10-day outlook does not.

As for precipitation during these time frames, below-normal totals are more likely, and coincide with, the projected hot spot areas depicted across the entire mid-section of the country from the Gulf of Mexico to Canada (Texas to Michigan and most points in between across the Great Plains and Midwest). Better chances of precipitation can be found in the Pacific Northwest, east-central Great Basin, the Atlantic Seaboard region from Maine to north Florida and the coastal areas in the Gulf Coast region from Mississippi eastward to Florida. The southern tip of Florida looks to remain dry at least through the middle of the August as well. 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
Grain Inspections for Export

Corn: Net sales reductions of 2,700 MT--a marketing-year low--for delivery in 2014/15 were down noticeably from previous week and from the prior four-week average. Increases were reported for Mexico (129,300 MT), South Korea (72,700 MT, including 63,000 MT switched from unknown destinations and decreases of 3,600 MT), Venezuela (58,000 MT), Japan (48,000 MT, including 73,700 MT switched from unknown destinations and decreases of 59,400 MT) and Panama (15,100 MT, including 14,400 MT switched from unknown destinations). Decreases were reported for unknown destinations (228,200 MT) and Taiwan (126,700 MT). Net sales of 277,000 MT for 2015/16 were reported primarily for unknown destinations (131,300 MT), Mexico (105,300 MT) and Colombia (30,500 MT). Exports of 1,005,000 MT were down 6 percent from the previous week and 7 percent from the prior four-week average. The primary destinations were Japan (319,100 MT), Mexico (312,700 MT), South Korea (119,600 MT), Colombia (76,000 MT), Costa Rica (44,700 MT) and Guatemala (27,700 MT). Optional Origin Sales: For 2014/15, outstanding optional origin sales total 52,500 MT, all Egypt.

Barley: Net sales of 15,000 MT for 2015/16 were reported for Morocco. There were no exports reported during the week.  

Sorghum: Net sales of 56,800 MT for 2014/15 resulted as increases for China (110,800 MT, including 54,000 MT switched from unknown destinations and decreases of 7,100 MT), were partially offset by decreases for unknown destinations (54,000 MT). Net sales of 223,000 MT for 2015/16 were reported for China (169,000 MT) and unknown destinations (54,000 MT). Exports of 283,300 MT were up 73 percent from the previous week and up noticeably from the prior four-week average. The destination was China. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS prices declined for both the domestic and international markets this past week. The largest price declines were offered on containerized DDGS and averaged about $6/MT, but the difference between the largest price reduction, to Japan, and the smallest price reductions, to Thailand and China, was more than $10/MT. It appears that some of the merchandisers were seeking to court stable Japanese business.

A number of buyers seem inclined to wait on USDA’s publication of market data on August 12 to see if there is any additional price weakness. A number of Asian buyers noted that they would like to see an additional $10-15/MT decline from current price levels for DDGS in the last quarter of calendar year 2015. However, DDGS merchandisers are hesitant to sell DDGS inventory in that time period for lower or even money because corn futures contracts have the cost of carry priced into them.

There is some market discussion that China may seek to decrease feed stocks by reducing domestic corn prices, but there would have to be a significant decline in order to fully offset the demand of Chinese consumers who have learned to appreciate the price and quality of U.S. DDGS and corn. Those customers purchase about 15 percent of U.S. DDGS production, but Chinese government policies caused their demand to vary last year and buyers from other locations increased their purchases. Furthermore, the majority of ethanol facilities presently have enough available storage that they prefer to hold their future prices stable at the moment.

Ethanol Comments: Ethanol producer margins tended to improve slightly this past week as total U.S. ethanol stocks declined to 19.2 million barrels for week ending July 31, 2015. That is down from the prior week’s level of 19.6 million barrels. Most importantly, that figure is up only 5.4 percent above the year-ago level. The year-to-year difference has been consistently declining for the past two months. As well, the average daily production rate fell to 961,000 barrels per day (bpd) from the prior week’s level of 965,000 bpd. There was also a slight improvement in the spot price differential between the co-products (ethanol and DDGS) and corn for the week ending August 7, 2015: 

  • Illinois differential is $1.84 per bushel, in comparison to $1.80 the prior week and $3.16 a year ago.
  • Iowa differential is $1.77 per bushel, in comparison to $1.69 the prior week and $3.17 a year ago.
  • Nebraska differential is $1.44 per bushel, in comparison to $1.38 the prior week and $3.02 a year ago.
  • South Dakota differential is $2.20 per bushel, in comparison to $2.15 the prior week and $3.31 a year ago.

7. Country News

China: The agriculture ministry has suggested that the state corn price be cut to counteract a spike in domestic pork prices, according to Reuters. Corn prices are set by the finance ministry and the National Development and Reform Commission. China currently has upwards of 100 MMT in its state corn reserves.

EU: The Overall EU corn crop is expected to shrink as persistent heat and drought plague the continent from France to Romania, reports Bloomberg News. The most recent EU estimate was a 3 MMT cut down to 65.5 MMT, while some traders have estimated the crop as low as 61 MMT. Last year, the EU brought in 77.8 MMT.

France, Europe’s largest corn producer, could see its harvest drop to 12-12.5 MMT this year. Irrigated corn yields could fall by 10-15 percent while unirrigated corn yields could drop by 20-50 percent, which gives this year’s crop the potential to be the worst since 2003 when 12.02 MMT were harvested. French corn production in 2014 totaled 18.32 MMT.

Romania is expected to bring in 10 MMT, which is down from the 11 MMT forecast last month and the 11.7 MMT harvested in 2014. The crop could shrink to as much as 9.3 MMT if the poor weather persists. Germany’s corn harvest is expected to fall by 7.2 percent to 4.7 MMT.

Indonesia: The Indonesian Poultry Farmers Association has stated that a recent decision to block corn imports for feed mills will cause poultry and egg prices to increase by 6 percent over the next month, according to Reuters. Indonesia generally sources its corn from Argentina and Brazil and ceased its imports in an effort to make the country more self-sufficient in its food production. Indonesian demand for corn has risen over the past few years in tandem with increased demand for poultry. The country was expected to import 430,000 MT of corn in July and August, but those shipments are now being held up in Indonesian ports. However, the government has allowed feed millers to receive some of those imports on the condition that the state logistics agency oversees the entire process from unloading to distribution. 

Ukraine: Ukraine’s exportable grain surplus could total 40 MMT in 2015/16, according to Reuters. Farmers could bring in as much as 63 MMT of grain this year, which would include 28.5 MMT corn and 8 MMT of barley. Total grain ending stocks could total 74 MMT, while domestic consumption is only expected to be 24 MMT. Ukraine has exported 2.6 MMT of grain since June. 

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: It was not a very news-worthy week in global ocean freight markets. For the most part, things were fairly quiet. The Capesize fleet benefited from a decline in new buildings and deliveries and growing volumes of iron ore business out of western Australia. Most of the grain demand continues to come from South America and the Black Sea region, but this has not been sufficient enough to rally prices.

Container rates for grains and oilseeds look like they have dropped just below $1,000 per 40 ft. TEU for 45-60 day shipment. This would equate to a dollar rate of about $38.00/MT from the Chicago area to China. The decline in incoming loaded containers from China due to the slow U.S. economy has created a poor, and hungry economic environment for shipping lines on both east and west-bound traffic. It’s still a buyers’ market out there. But even at current rates levels Dry-Bulk remains cheaper than container freight for buyers of quantity.

Baltic Panamax Dry Bulk
Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to South China:
Capesize Vessel Freight
US-Asia Market Spreads

The charts below represent January-December 2014 annual totals versus year-to-date 2015 container shipments to Taiwan.

2015 YTD Taiwan Container Shipments
2014 Jan-Dec Taiwan Container Shipments
International Freight Rates

10. Interest Rates

Interest Rates