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CHICAGO BOARD OF TRADE MARKET NEWS

Outlook:

Few U.S. farmers seem to be hedging at current levels because most are convinced that better prices are on the horizon, due to the fact that many do not know what their crop insurance revenue coverage will be and because there seems to less certainty about continuing with consistent corn on corn planting. As a result, farmer marketing is slow and cash basis has been strong at terminal elevators. The short-term outlook is for the current strong basis to act as a support to corn futures, and further price declines are expected to be limited.

U.S. grain producers are already juggling multiple factors going into spring planting. Of course, the soybean to corn price ratio is always a major consideration. The prospects for improved South American weather next week could apply some pressure to soybean futures. A decline in soybean futures (and corn futures supported by a stable basis) would maintain the incentive to plant corn.

Various fertilizer prices are above that which they were a year ago, but have declined for the past few weeks. Input costs just seem reluctant to follow grain prices lower. Of course, fertilizer prices, seed prices, and land rental rates seem comfortable following grain prices higher. The farmer must eventually lock in all of these variables without any certainty about planting season weather.

Weather has been blamed by some individuals as the primary catalyst for recent difficulties with corn on corn planting. Planting in wet soil could result in some compaction and the resulting negative consequences. However, average U.S. corn yields have been below trend for the past two years. U.S. farmers must determine if they should remain optimistic and consider that a fluke of bad luck is unlikely to repeat itself for a third time.

The long-term outlook is that a sound marketing strategy is likely to become increasingly important to grain producers. Consider that 2012 is an election year in the United States, as well as a year when a new Farm Bill is supposed to be created. There is some chance that the Farm Bill could be delayed until 2013, but there is a strong desire by both Congress and the Executive branch to show initiative and some form of fiscal austerity. As a result, there is some possibility that direct payments could be cut and support reduced for programs such as Crop Insurance and Conservation Reserve

CBOT MARCH CORN FUTURES

Current Market Values:

U.S. WEATHER/CROP PROGRESS

U.S. Drought Monitor Weather Forecast: The outlook is encouraging for snow seekers as a large-scale pattern has finally shifted into a wetter regime for many states over the next several days. Forecasts are projecting 10-15 inches of rain over the next five days along the Pacific coast of northern California and Oregon. At least a few feet of snow is possible in the mountain ranges of the northwest states to include the Cascades, Rockies and Sierra Nevada. Lesser amounts of snow and rain are projected across the eastern half of the Lower 48. Widespread totals over the five day period could amount to about an inch, with localized areas possibly reporting more than two inches in the southern Appalachians. Warmer than normal temperatures may build over much of the contiguous U.S. by the end of the next U.S. Drought Monitor period. 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 759,900 MT for the 2011/2012 marketing year resulted as increases for Mexico (388,900 MT), South Korea (189,200 MT,), China (132,200 MT, including 139,900 MT switched from unknown destination and decreases of 7,800 MT), Japan (124,900 MT, including 48,800 MT switched from unknown destinations and decreases of 14,500 MT), Venezuela (78,900 MT), and Cuba (52,400 MT, including 25,000 MT switched from unknown destinations), were partially offset by decreases for unknown destinations (142,400 MT), Colombia (49,300 MT), Costa Rica (39,100 MT), and Guatemala (21,000 MT). Exports of 753,800 MT were up 1 percent from the previous week, but down 16 percent from the prior 4-week average. The primary destinations were to Mexico (244,700 MT), Japan (205,200 MT), China (137,700 MT), South Korea (68,500 MT), Taiwan (51,900 MT), and Cuba (27,400 MT).

Barley: Net sales of 200 MT were reported for Taiwan. There were no exports reported during the week

Sorghum: Net sales of 11,100 MT were reported for Mexico (6,000 MT) and unknown destinations (5,100 MT). Exports of 16,600 MT were reported to Mexico.

FOB

DISTILLERS DRIED GRAINS WITH SOLUBLES (DDGS)

DDG prices started the week soft, and continued to slide this week after USDA’s surprisingly bearish report. Later in the week we saw the first signs of life when prices started to have a firmer tone. Buyers have been pretty cagey and are not buying further out front than a couple of weeks. On the offer side, prices did perk up a few dollars per ton. Domestically, the Chicago market feels a bit firmer.

Internationally, Chinese buyers are basically in hibernation during the Chinese New Year holidays. There is likely to be a spike more toward the second week of February. South of the boarder, the exchange rate in Mexico is working back into the Mexican buyers’ favor, going from 13.99 toward 13.40. This is still a historically high exchange rate, but for the moment represents a significant drop from recent highs.

Comments and Trades reported:

Local Trade:

• $225 traded for trucks delivered to Chicago.

Trade bids/offers:

• $248/MT traded to Mexico.
• 1,000 MT to Shanghai at $294/MT.

Ethanol Comments:

British Petroleum (BP) is predicting that biofuel consumption will increase over 8 percent per year going into 2030. Biofuels are forecast to gain market share on crude oil, which is expected to grow annually at 0.7 percent. As noted by Bloomberg, BP forecasts that by 2030 biofuels will supply 7 percent of global energy use.

Total global energy use is expected to increase about 1.6 percent per year, which when calculated from 2010 to 2030 will be a 39 percent increase. That increase is roughly equivalent to adding one more United States and China to the world’s energy demand. As a result, it may not be the most opportune time for Florida legislatures to pull away from their state’s participation in the Renewable Fuel Standard (RFS) program. If left undisturbed, this national standard will require that the United States use at least 36 billion gallons of biofuel by 2022. Success from such a mandate is not without precedence.

COUNTRY NEWS

Argentina: Argentina’s current corn crop is called a disaster with enormous loss in a recent story by Bloomberg. Some of the more pessimistic estimates are for production to be about 20 MMT, which would be well below USDA’s current forecast of 26 MMT. However, weather forecasts have improved and rain is expected in the next few days. That precipitation is too late for some of the crop but could help regions that were replanted.

South Africa: White corn is a primary food that is eaten by many South Africans and prices have recently increased to record levels in Johannesburg due to unexpected shortages. The price of white corn has increased 65 percent over a year ago on the South African Futures Exchange in Johannesburg. A quarter of South Africans are unemployed and there are accusations of irresponsible exporting that is causing significant food inflation. Fortunately, South Africa is coming into the end of their crop-year, which begins on May 1. In the meantime, South Africa is importing corn to make up for their deficit. Just a little further north, Zambia has ample corn stocks and is ready to make up the void. It may take several years for Africa’s feed grain sector to work out its growing pains.

Russia/Ukraine: Former Soviet states seem poised to become agricultural powerhouses as they increasingly adopt free-market techniques. Ukraine alone has 30 percent of the world’s black soil. Last season, Ukraine produced its largest grain harvest in twenty years and their exports started to balloon once they removed export taxes and quotas. Additionally, Russia, who until recently was a significant importer of poultry, forecasts that they will be able to export 400 thousand tons of poultry by 2015. Much of their feed grain needs could be supplied by neighboring Ukraine, who would gladly trade grain for energy needs. Ukraine has become the world’s largest barley exporter and surpassed Brazil as the world’s third largest corn exporter.

OCEAN FREIGHT MARKETS AND SPREADS

OCEAN FREIGHT COMMENTS

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

HURRY, HURRY READ ALL ABOUT IT—Headline— Ocean Freight Markets Sink in Rough Seas!

If you have been reading this weekly report for very long you know that I have been bearish on ocean freight rates for many months. But boy has this year started out dramatically on the down side! The Baltic indices and physical ocean freight rates have fallen faster than anyone could have predicted. There has not even been ample time for some market mariners to abandon ship; the market is sinking too fast. Additionally, the Cape market declined farther and faster than the Panamax. One Maritime news source that I follow stated that the vessel industry has been surprised and caught off-guard by this; they did not realize the oversupply of ships would have this affect. Perhaps they must have been living a very delusional existence, or maybe that is the nature of the freight industry?

For all the reasons previously stated I am still not bullish on rates, but I have to think things will hit a bottom soon and maybe bounce a little. At daily hire rates of $9,000-$8,000 per day we are now below operating cost for many carriers. Over the past 6 weeks we have seen the Baltic Panamax index (BPI) drop by 675 points or 39 percent. All in all we are now back to index levels not seen since February of 2009. It is funny how the Baltic indices do not mirror the physical rates or maintain a good correlation with the physical markets. Back in February of 2009 the BPI was 1128 and USGulf to Japan was trading at $38.00/MT. Today the BPI is 1058 and the USGulf rate is close to $50-$51.00/MT.

Markets should remain quiet and defensive as we go through the Chinese/Lunar New Year holiday this weekend.

Bankruptcy rates and industry consolidation will increase. Be careful who you charter with out there!

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