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CHICAGO BOARD OF TRADE MARKET NEWS

Outlook:

Last week it was noted that USDA’s January 12th reports may not be bullish for corn, and they were not. However, the data was not extremely bearish, either. Consider that USDA is forecasting a slight reduction in ending stocks for the current 2011/12 season.

The primary reason for yesterday’s strong limit-down move is because of panic selling as technical chart patterns became unexpectedly negative. That sell-off may be a gift to smaller ethanol and feedlot operators who had failed to hedge sufficiently prior to the last price rally and were struggling with tight margins. The longer-run outlook is for prices to rebound going into USDA’s March 30th Planting Intentions report.

The following bullet points are a summary of key contents within USDA’s January 12th reports:

• Global coarse grain supplies remain basically unchanged.
  • Increases in U.S., EU and FSU grain production is offset by lower Argentina corn and reduced U.S. sorghum.

• Argentina’s current corn crop (2011/12 season) was reduced by 3 MMT (29 MMT to 26 MMT) due to poor weather in December.
• Despite poor weather in southern Brazil, Brazilian corn production was left unchanged as reduced yields in their first corn crop are expected to be offset by increases in their second crop.
• U.S. corn production was increased by 48 million bushels due to increases in yield and acreage.
  • U.S. corn yield was increased by half a bushel, from 146.7 bushels to 147.2 bushels per acre.
  • U.S. corn harvested acreage was increased from 83.9 million acres to 84 million acres.

• U.S. ending stocks for the 2011/12 season declined by 2 million bushels (848 million bushels to 846 million bushels) as the 48 million bushel production increase was more than offset by a 50 million bushel increase in exports.
  • U.S. exports increased to compensate for reduced Argentine production.

• U.S. sorghum production (214 million bushels) was reduced by 13 percent from the December estimate (246 million bushels) and 38 percent below that of 2010 (346 million bushels).
• Sorghum exports were reduced 10 million bushels due to sluggish export sales.
• Sorghum ending stocks (27 million bushels) were only 1 million bushels fewer than the December estimate (28 million bushels) and unchanged from last year. Consequently, the estimated price range for sorghum was reduced by 10 cents per bushel.
• The only changes to barley were a 10 million-bushel increase in domestic production and a 5-cent reduction to the estimated price range.
• USDA estimates the farm price of corn to be from $5.70 to $6.70; sorghum from $5.60 to $6.60; and, barley from $5.15 to $5.65

CBOT MARCH CORN FUTURES

Current Market Values:

U.S. WEATHER/CROP PROGRESS

U.S. Drought Monitor Weather Forecast: A wetter pattern is welcome in the northern states, where the lack of rain and snow has begun to take its toll. For the next U.S. Drought Monitor period, the outlooks show a potential for above normal precipitation in the northern states, from the Pacific Northwest to the Great Lakes and Midwest. Below normal precipitation for the week is forecast in the southern states, primarily from Arizona to Texas and north to Nebraska, and across the southern tip of Florida. This could exacerbate, or at least maintain, much of the drought in that region. Temperatures from Washington state to Michigan are projected to be below normal. Warmer than average conditions will likely prevail across much of the rest of the nation, from Nevada to Maine and southward to the Gulf coast. 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 321,500 MT for the 2011/12 marketing year resulted as increases for Mexico (243,900 MT, including 30,500 MT switched from unknown destinations and decreases of 4,200 MT), China (119,700 MT, including 120,000 MT switched from unknown destinations and decreases of 3,400 MT), Japan (107,700 MT, including 86,600 MT switched from unknown destination and decreases of 80,300 MT), Canada (22,800 MT) and Colombia (22,400 MT, switched from unknown destinations), were partially offset by decreases for unknown destinations (219,600 MT). Net sales reductions of 23,000 MT for 2012/13 were reported for Canada. Exports of 748,200 MT were up 30 percent from the previous week, but down 19 percent from the prior four-week average. The primary destinations were to Mexico (218,800 MT), Japan (204,700 MT), China (116,600 MT), South Korea (66,000 MT), Taiwan (34,700 MT) and Costa Rica (29,500 MT).

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

Sorghum: Net sales of 100 MT resulted as increases for Japan (12,100 MT, including 12,000 MT switched from unknown destinations), were partially offset by decreases for unknown destinations (12,000 MT). Exports of 12,300 MT were reported to Japan (12,100 MT) and Mexico (200 MT).

FOB

DISTILLERS DRIED GRAINS WITH SOLUBLES (DDGS)

The DDGS market is being impacted by corn and soymeal futures. Prices are down hard after the surprising USDA stocks reports. Markets are off about $8-20/MT with some increased demand starting to come in, but a number of buyers still expecting more downside.

DDGS prices in Mexico are currently down $7-8/MT, but could continue to slide if SBM presents a better value than DDGS in rations. Eyes remain on South American weather and how much corn production will be cut from initial estimates. If crop conditions don’t improve there, we could retrace to values seen before the January 12th USDA report.

Comments and Trades reported:

Local Trade:

• 5,000 MT traded for Chicago trucks on Tuesday at $204, and then another 2,000 MT traded Thursday at $196

Ethanol Comments:

Secretary of Agriculture Tom Vilsack was recently in Hawaii to recognize the U.S. Navy’s increased use of biofuels. The highlighting of successes and positive developments is important to maintain public support for the Renewable Fuel Standard that directs 36 billion gallons of biofuel to be produced annually by 2022. To make sure that happens, the Environmental Protection Agency (EPA) may want to follow USDA’s example of focusing on the positives.

A recent article called “Oil Companies Fined for Not Buying Nonexistent Cellulosic Ethanol” has a title that is largely self-explanatory. The article notes that EPA will require refiners to purchase “credits” because they are unable to buy a nonexistent product. Such actions by EPA could attract strong public ridicule. Instead, lawmakers should consider allowing existing ethanol producers to temporarily fill the empty void of cellulosic ethanol while that technology develops. After all, corn-based ethanol produces a co-product that is in strong demand.

COUNTRY NEWS

Argentina: USDA reduced its estimate for Argentina’s 2011/12 corn production from 29 MMT to 26 MMT. As a result, USDA reduced its estimate from Argentina’s exports from 20 MMT to 18.5 MMT. USDA anticipates that the United States will meet the global demand by increasing exports from 40.64 MMT to 41.91 MMT. The United States total corn production of 313.92 MT is about 12 times larger than Argentina’s 26 MMT production, but U.S. exports are only twice as large.

Brazil: USDA left Brazilian corn production unchanged at 61 MMT, since reductions in the first corn crop are expected to be offset by increases in the second crop. Brazil’s 2011/12 exports of 8.5 MMT are substantially below Argentina’s exports of 26 MMT. However, Brazilian production is three times the production of neighboring Argentina. Brazil vies against the EU for the title as the world’s third-largest corn producer, behind the United States and China.

China: USDA forecasts that China will increase its corn imports in the 2011/12 season from 3 MMT to 4 MMT. Even though China’s 2011/12 production is well above the prior two seasons, USDA estimates that the country’s current imports will also be above the 2010 imports of 0.98 MMT and the 2009 imports of 1.30 MMT. The two primary reasons for the larger import forecast seem to be the desire to rebuild stocks and to supply a growing meat sector.

Japan: Japan purchased 90 percent of its corn need from the U.S. in 2010, but it has recently stepped up corn purchases from Ukraine, Romania and Hungary. Japanese corn purchases have topped 1.5 MMT from the Black Sea region for November to March shipments, according to a story by Bloomberg. The stronger dollar is one factor allowing Europeans to price their corn $20 per MT cheaper than the Americans.

Mexico: USDA estimates that Mexico will import 9.8 MMT of corn in 2011/12, mostly from the United States. Mexico is a substantial corn producer of 20.5 MMT, which is equivalent to production in Ukraine (22.50 MMT) and Southeast Asia (24.75 MMT). However, the vast majority of Mexico’s corn production is white varieties for human consumption. Mexican policy is being adjusted to allow testing of GMO varieties in northern parts of the country

OCEAN FREIGHT MARKETS AND SPREADS

OCEAN FREIGHT COMMENTS

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting:

Happy Friday the 13th. I’m not superstitious so this does not bother me, but it may be a bad omen for vessel owners.

This has been a dramatic start to the New Year. The Baltic Panamax indices are sinking rapidly. The P2A Atlantic/Gulf index dropped to 21,183, which is its lowest level since May 18, 2011 (an eight-month low). The P3A Pacific Panamax index dropped to 7,398, its lowest level since April 3, 2009 (a 20-month low). The BPI is at a 20-month low as well. And we haven’t even hit the Lunar New Year holiday lull in Asia yet.

I read a freight article this week that stated, “BIMCO's advice towards dry bulk ship owners is they should expect the unexpected.” My 2012 advice to them is that they should expect the expected and listen to the market fundamentals. Go with the odds. The odds say that the vessel fleet will continue to grow faster than cargo demand. This is not bullish for freight values. Do not get stubborn in this market. As more vessels ballast from the Pacific to the Atlantic we may run into a temporary tight vessel situation in the Pacific, but the market will always rebalance. This will be a good year for freight buyers, not for vessel owners. 2012 will be a year of increased bankruptcies in the freight world as freight revenues fall short of the monthly payments and operating costs of new vessels. Next to come will be layups and increased scrapings. Freight buyers will enjoy the economic environment of 2012 as long as they are careful not to get entwined in a charter with an owner/operator who has gone under. You do not want your cargo on a vessel that is not going anywhere.

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

The charts below represent total (MT) month-to-month Hong Kong container shipments for Jan.-Sept. 2009, Jan.-Sept. 2010 and Jan.-Sept. 2011.

INTEREST RATES