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 CHICAGO BOARD OF TRADE MARKET NEWS

Outlook: The March corn contract has been in a trading range since the middle of January.  This type of condition is generally reflective of a market that is evenly matched between determined long and short traders who have decided to each stand their ground.  Often the pressure builds like a coiling spring and then snaps decidedly in one direction.

Corn futures contracts are not “inverted.”  In other words, the nearby contracts are not trading at a premium to the more distant contracts, which often happens when markets are extremely bullish.  Instead, the nearby March contract is trading in a $6.40 to $6.70 range while the July contract is trading with a comfortable 15 to 20 cent premium that reflects the cost of carry.  According to normal seasonals, futures prices then fall back off into harvest.  The December 2011 contract is trading around $5.80.

A $5.80 prices is adequate for the December contract only if weather conditions are average or better.  Consequently, the market seems uncertain.  Nearby price levels seem to be slowing export demand and there is no indication what the weather will be this spring.

A side note is that the USDA is no longer able to report yield grades on cattle slaughtered because most facilities are now judging the carcass with privately owned cameras instead of USDA inspectors.  USDA will not receive rights to the camera-graded data.  The new camera systems supposedly judge the carcasses more easily than the USDA inspectors were able to.  If that assumption is correct, then feedlot operators may adjust their rations.

CBOT MARCH CORN FUTURES

 Current Market Values:

U.S. WEATHER/CROP PROGRESS                                                                                            

U.S. Drought Monitor Weather Forecast: Winter weather systems will move across the northern, central, and eastern United States during the next five days (January 26-30), bringing rain and/or snow to the Pacific Northwest, western Gulf of Mexico Coast, and Mid-Atlantic to Northeast.  The systems will bring warmer-than-normal temperatures ahead of them and cooler-than-normal temperatures behind them, with very cold air masses forecasted to move into the central U.S. by February 3.  During the first week of February, a strong upper-level ridge will become entrenched over the West with an upper trough holding sway in the East.  Below-normal temperatures are expected February 1-9 from the southern Plains to Northeast while above-normal temperatures should dominate from Alaska to the Northwest.  This circulation pattern will bring drier-than-normal weather to western Alaska and much of the West, central Plains, and Midwest, while the weather is expected to be wetter-than-normal along the Gulf of Mexico Coast, Atlantic Seaboard, northern Plains to western Great Lakes, and southern Alaska.  Follow this link to view current U.S. and international weather patterns and the future outlook:  Weather and Crop Bulletin

 U.S. EXPORT STATISTICS

Corn: Net sales of 414,700 MT were down 54 percent from the previous week and 31 percent from the prior four-week average.  Increases were reported for Japan (207,000 MT, including 100,200 MT switched from unknown destinations and decreases of 6,200 MT), Colombia (84,200 MT), Saudi Arabia (68,200 MT, including 62,000 MT switched from unknown destinations), Taiwan (66,500 MT), and South Korea (47,700 MT, including 50,000 MT switched from unknown destinations and decreases of 6,500 MT).  Decreases were reported for unknown destinations (203,700 MT) and Mexico (14,300 MT).  Net sales of 132,800 MT for delivery in 2011/2012 were for unknown destinations (58,000 MT), Japan (47,800 MT), and Costa Rica (27,000 MT). Exports of 770,100 MT were up 31 percent from the previous week and 10 percent from the prior four-week average.  The primary destinations were Japan (237,200 MT), South Korea (163,200 MT), Mexico (109,900 MT), Saudi Arabia (68,200 MT), and the Dominican Republic (38,400 MT). 

Barley: There were no sales or exports reported during the week.

Sorghum:  Net sales of 120,700 MT were up noticeably from the previous week and from the prior four-week average.  Increases were reported mainly for unknown destinations (117,000 MT).  Exports of 20,600 MT were to Israel (11,200 MT), Mexico (6,400 MT) and Japan (3,000 MT).

FOB

DISTILLERS DRIED GRAINS WITH SOLUBLES (DDGS)  

General Comments:

The market is reporting new important sales to Southeast Asia for the coming months, particularly March positions.  Sale price levels are still firm despite uncertainty from China.

The corn market this week has not provided sufficient clarity to customers. Export market purchases are still lagging and buyers are bidding at very low levels. This shows how the market is still not comfortable with the current status.In general, buyers are still waiting for the right moment as prices are currently high. Seasonally strong domestic demand is allowing DDGS to manage its flow for the time being. We may need more export demand more quickly than expected if we start to see accumulation of stocks; at this time there is no news, but people are making references that this may happen.

The Environmental Protection Agency (EPA) lifted a limitation that restricted cars made in 2001 to 2006 to using only 10 percent blend ethanol.  The waiver allows cars produced in those years to now utilize E15.  No waver is being granted for E15 use in motorcycles or off road vehicles.

Senator Tom Harkin (D-Iowa) introduced legislation to expand the number of flex-fuel vehicles in America.  He is also seeking to expand the number of blender pumps and to make renewable fuel pipelines eligible for federal loan guarantees.

In the meantime, a study by the Rand Corporation discouraged the additional use of alternative fuels by the military.  Their study basically said that alternative fuels were too expensive and would provide no meaningful benefit.

COUNTRY NEWS                  

Argentina: Argentina’s farmers remain furious that their government is enabling domestic millers to buy wheat well below global market prices.  The Argentinian government only allows grains to be exported after domestic demand is satisfied.  As a result, Argentina’s farmers can lose the opportunity to market when grains prices spike.  Farmers revolted in 2008 and shut down all market activity and they are threatening to do so again this year.  Farmers have given the government two weeks to compromise. 

Australia: Approximately 62 percent of Australia’s wheat is fit for human consumption according to a Dow Jones news wire.  Last year the percent of food grade wheat was 86 percent

Brazil:  The La Nina weather that reduced Argentina’s corn and soybean crops and caused flooding in parts of Brazil did not hurt the Brazilian soybean crop.  Aroconsult group estimates that Brazil will produce a new record soybean crop of 70.3 million metric tons.

China:   A news story from Yigu Information Consulting reports that the Chinese government told industrial users to stop buying domestic corn.  Starch and ethanol producers are instructed to allow the remaining corn to be purchased by the livestock sector.  This story indicates just how tight Chinese corn stocks have become.

EU:  French President Sarkozy is irritated by an EU report that says there is no evidence that speculation is contributing to higher food prices. Sarkozy is determined to increase regulation and basically proclaims that it is ridiculous to say that the inflow of money that increased from $15 billion in 2003 to $300 billion in 2008 made no difference in price.

India:  is considering allowing Walmart to enter the country to improve the food distribution network.  Walmart is known for its excellent distribution system.  Large amounts of India grain rotted in storage last season.

Russia/Ukraine: The Russia government is taking food inflation very seriously and has given itself the right to set price controls if it so desires.  It makes sense that the Russian government is nervous about food prices.  The Czar’s rule came to an end when World War I caused food shortages and inflation and the Soviet Union came to an end when the public became sick of standing in line to receive nothing.  However, history has shown on numerous occasions, in diverse countries, that “price fixing” is never a workable solution.  The Russian government should instead focus on supporting its farmers. 

 OCEAN FREIGHT MARKETS AND SPREADS

OCEAN FREIGHT COMMENTS                                                   

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: What new can we say? This week simply brought more of the same; lower values. We have an oversupply of vessels verses cargo demand and it is not going to change soon. The Chinese are preparing for their one-week lunar New Year holiday next week, and vessel owners are hoping that cargo demand will pick up a little after they return from the holiday. Demand may well pick up a little in the second half of February, but probably not enough to make vessel owners happy.

Markets are now down to levels not seen in almost two years. The last time the Baltic Dry-Bulk Panamax index was at these levels was April-May 2009. At that time Panamax rates to Asia were down to $45.00/MT and Pacific rates were at $20.00/MT . We are not yet back to those physical levels, but we have broken the physiological $50.00/MT barrier from the U.S. Gulf to Asia and will now have to see what happens. Will panic set in?

2011 looks to be rough sailing for vessel owners and, freight wise, a gift for international grain buyers. Last year the Capesize fleet grew by 200 vessels, or 22 percent, and the forecast for 2011 is similar. Thus far in 2011, 20 new Capesize vessels have joined the world fleet of an estimated 1000 vessels. With 200-230 new vessels scheduled to be delivered in 2011, the fleet will grow to about 1,200 plus Capesize vessels.

According to SSY “Including the cost of finance, most capesize vessels incur operating costs of at least $15,000/day; rates have dropped from US $46,284/day in October, to $10,285/day today, forcing ship-owners to start laying up vessels…Perversely, smaller panamax-size vessels, which usually transport 60,000-70,000 ton cargoes, are earning a premium, currently in the region of US $15,742/day, as the smaller vessels are considered more flexible.”

In 2010 the total world Dry-Bulk fleet grew by net growth of 830 ships or 77 million DWT. This equated to a 12.7  percent jump in the number of ships and a 17.7  percent increase in total DWT. As of 1 January the dry bulk fleet (above 10,000 dwt) stood at 7,365 ships or 511 million DWT. The current order book and delivery schedule for 2011 is 1,600 additional ships totaling 138 million DWT. Even with higher than normal slippage, new vessel deliveries in 2011 should exceed 1,000 new vessels. The current order book calls for 3,453 new dry bulk vessels to be delivered through the end of 2014. We’ll have to see where that money comes from.

Korea Line Corp., South Korea’s second-largest operator of dry-bulk ships, filed for receivership after a global oversupply of vessels caused rates to tumble to the lowest in almost two years. Korea Line owned 51 vessels at the end of September.

Brazilian mining giant Vale may singlehandedly impact world freight costs when, in 2011, it takes delivery of the first of more than 30 400,000-tonne iron ore bulk carriers. These ships, to be delivered through 2013, will surpass the largest bulk carrier now in operation, the 365,000-tonne MS Berge Stahl.

Below is a recent history of freight values for Cape size vessel shipments of Iron-Ore from Western Australia to China:

Four weeks ago:           $8.50-$8.95

Three weeks ago:         $8.10-$8.50

One week ago:             $8.10-$8.60

This week:                    $6.50- $6.80

In dollar terms, the current spot and 30-day U.S. Gulf to China Panamax market is currently near $48.00/mt.  The 30-45 day Panamax rates from the PNW to China are approximately $26.00/mt. The PNW/Gulf freight spread to Asia is approximately $22.00/tonne (.56/bushel for corn and .60/bushel for wheat and soybeans).

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NTEREST RATES