Market Perspectives April 6, 2017

1. Chicago Board of Trade Market News

Week in Review

Outlook: The USDA gave the corn market everything it could to induce a bullish rally. Last Friday, the USDA’s Planting Intentions report surprised the market by estimating 90 million acres of corn would be planted this year, nearly 1 million less than the average analyst’s estimate. Beyond forecasting tighter supplies, the USDA’s Grain Stocks report showed record-high corn demand during the first half of the 2016/17 marketing year. March 1 corn stocks were pegged at 8.62 billion bushels which, while higher than expected, implied 8.32 billion bushels of record-breaking corn consumption from the 2016/17 crop. 

The USDA’s report was more bullish new-crop corn futures than old. The record-breaking demand apparent in USDA’s stocks report has been largely known for some time, as reported in the booming exports and ethanol use reports. Despite excellent demand, the prospect of huge South American supplies and large global stocks are limiting old-crop gains. 

The acreage-induced new-crop corn rally provided a few days of excellent marketing opportunities but will likely not last long. While planted area was “only” 90 million acres, this figure still implies a 14.4-billion-bushel crop given trendline yields. If realized, this production would exceed USDA’s initial 2017/18 demand projection by 200 million bushels, hardly a bullish scenario.  In the near-term, fund positioning (funds were short heading into the report and covered much of this position in the following days) and spring weather developments will have a more profound market impact. 

Today’s Export Sales report was again bullish corn. The report identified 44.8 million bushels of old-crop corn sold last week, which was above the 15.6 million needed in this week’s report. Similarly, weekly exports of 62.9 million bushels were well above the 44.5 that was required to meet’s USDA’s demand projections. The report continues to highlight the competitiveness of U.S corn, which is now the cheapest in the world. 

From a technical standpoint, May corn is still in a long-term uptrend but is under pressure from a short-term down trend. Friday’s post-report price action initially broke the short-term downtrend but subsequent trading has reconfirmed its presence. Today’s trading found support at the 10 and 20-day moving averages which could set up the contract for a test of the 40-day moving average at $3.76. The contract is neither over- nor undersold, giving little indication for corrective action one way or another. For now, the contract will essentially trade sideways until weather, commercial selling, or funds’ actions motivate other activity. 

2. CBOT Corn Futures

CBOT May Corn Futures

CBOT Corn Futures Graph

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Crop Planting Progress

U.S. Drought Monitor Weather Forecast: During the next five days (April 6-10), the Weather Prediction Center (WPC) precipitation forecast calls for moderate precipitation (0.5-1.5 inches) to reach perhaps as far south as Santa Barbara, CA. The Northern Plains is predicted to receive close to a half-inch of precipitation during this 5-day period, which should at least offset any additional deterioration. Light precipitation (less than 0.5-inch) expected over the Central and Southern Plains offers little in the way of additional drought improvements. One to two inches of rain anticipated for the Northeast and Mid-Atlantic Coastal Plain provides improved prospects for additional drought relief in that region, as does moderate to heavy rainfall (0.5-4.0) inches across the Southeast, with the possible exception of Florida. 

For the ensuing five-day period (April 11-15), there are elevated odds for above-median precipitation across the south-central CONUS, northern California, the Pacific Northwest, the northern Rockies, and parts of the Upper Mississippi Valley. There are elevated odds for below-median precipitation across the Southeast, and in a band stretching from the southern Sierras of California eastward across much of the Rockies and Plains, the north-central Mississippi Valley, the southern Great Lakes region, and the Northeast. 

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 1,138,100 MT for 2016/2017 were up 59 percent from the previous week and 13 percent from the prior 4-week average. Increases were reported for Mexico (280,500 MT, including 30,000 MT switched from unknown destinations and decreases of 18,300 MT), Colombia (252,300 MT, including 206,000 MT switched from unknown destinations and decreases of 104,300 MT), Japan (242,500 MT, including 65,400 MT switched from unknown destinations), Taiwan (135,500 MT), and South Korea (130,700 MT, including decreases of 67,000 MT). Reductions were reported for unknown destinations (287,900 MT), Haiti (700 MT), and the Leeward and Windward Islands (100 MT). For 2017/2018, net sales of 34,600 MT reported for Mexico (37,600 MT) and Guatemala (8,000 MT), were partially offset by decreases for Nicaragua (11,000 MT). Exports of 1,597,700 MT--a marketing-year high--were up 14 percent from the previous week and 11 percent from the prior 4-week average. The primary destinations were Colombia (474,500 MT), Japan (373,100 MT), Mexico (242,600 MT), Saudi Arabia (134,700 MT), and South Korea (133,500 MT). 

Optional Origin Sales: For 2016/2017, options were exercised to export 60,000 MT to South Korea from the United States. The current optional origin outstanding balance of 402,000 MT is for unknown destinations (203,000 MT) and South Korea (199,000 MT). 

Barley: No net sales were reported for the week. Exports of 700 MT were reported to Japan. 

Sorghum: Net sales of 130,200 MT for 2016/2017 were up noticeably from the previous week and 50 percent from the prior 4-week average. Increases were reported for China (63,500 MT, including decreases of 1,300 MT), unknown destinations (53,000 MT), Mexico (13,200 MT), and Taiwan (500 MT). Exports of 220,500 MT were up noticeably from the previous week and from the prior 4-week average. The destinations were China (202,300 MT), Mexico (17,700 MT), and Taiwan (500 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Prices were higher this week on modest supply reductions. Spring maintenance season has sprung for Midwest ethanol plants which resulted in a 3.3 percent drop in weekly ethanol production. In turn, DDGS prices were steady to a few dollars higher, led by FOB ethanol plant values. 

The average DDGS price quoted by ethanol plants increased $2/MT this week to $100.03. Spring maintenance closures and modest CBOT gains allowed merchandisers to gain some pricing advantages. Domestically, DDGS are priced at 70 percent of corn futures and hold a $2.88 per-protein-unit advantage over soybean meal. Both values are essentially unchanged from last week. 

Prices at the Gulf have come off recent lows by $3-4/MT. FOB Gulf prices averaged $146.25 this week (up $3/MT) while Barge CIF NOLA values were steady. Increases in PNW corn prices pulled rail-delivered DDGS higher by about $2/MT as export demand to Asian destinations remains strong. On the export market, DDGS are priced at 91 percent of FOB corn values and have a $1.17 per-protein-unit advantage over soybean meal. 

Coming off recent lows, DDGS prices have additional upward potential. However, as spring weather increases across the Midwest and pastures green up, there will be some reduction in feed demand. International buyers will have to provide the bulk of any price increases. Merchandisers are reporting some increased interest from international buyers who were well covered through the early spring but are looking to secure product for late spring/early summer. In summary, pricing strength remains but significant gains are not expected for this well-supplied market.

7. Country News

Argentina: The government’s new tax and trade policies have energized farmers into growing more wheat and corn. Farm equipment sales are expected to rise for the first time in three years. South American sales of harvesting combines will be up 20 percent and tractor sales will rise by 15 percent. (Reuters) 

China: The Grain Reserve Corporation has lowered the purchase price of corn by 100 yuan ($14.50) per ton, indicating an early end to post-harvest purchasing. Total corn procurement is down and auctions begin next month with the National Development and Reform Commission seeking a balance in sales that will repress imports but not hurt farmers. Instead, there will be an effort to verbally persuade farmers to switch from corn to soybean production. Grain and Oil News reports rumors that 2013/14 stocks of corn will be sold at a 33 percent discount to their acquisition price, and that 2011/12 corn stocks will be sold to distillers at a 38 percent discount to their original acquisition value. 

Separately, Sinograin says that state grain reserves of corn will begin selling next week, well ahead of the usual May start date. (Bloomberg) 

France: The bird flu outbreak will reduce total feed demand by 330,000 tons this year. Maize growers had said last month they expect a 150,000-ton reduction in demand due to the flu. (Reuters) 

India: The government slashed subsidies for potash by 20 percent, which will force a rise in prices for the key production input. Higher prices are expected to reduce utilization and thus affect the production of crops like corn, rice and soybeans. (Reuters) 

Zimbabwe: Agriculture Minister Dr. Joseph Made says that maize production will be 2.5 MMT this year, up from an earlier projection of 2 MMT. The Grain Marketing Board is offering farmers the equivalent of $390/MT for their maize via a $500 million, three-year campaign. Imports will be cut off via a government order of not issuing import permits. (Zimpapers LTD)

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 Chinese are back from their brief holiday but don’t seem to be in a big buying mood. Global freight markets are therefore feeling a bit toppy and rates today are somewhere between unchanged to slightly lower than last week. 

The Dry-Bulk Supramax and Handymax markets continue to be the softest among the freight sectors. The bigger news is probably in the U.S./Mississippi River barge freight market where reduced demand and overcapacity have driven April-May barge freight rates down to 185-245 percent of CCR. At these low rates barge owners are contemplating parking their tow boats and barges and waiting for rates that cover their cost of operation. Domestic rail business is also suffering and rail car costs are also down substantially from past weeks and months. But we are, of course, in the U.S. spring planting season when farmers focus on their fields and not their grain marketing needs.

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 Japan. 

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

10. Interest Rates

Interest Rates