Download in PDF

CHICAGO BOARD OF TRADE MARKET NEWS

Outlook:

The December 2012 corn contract seems likely to continue defining a trading range for the next four or five weeks, prior to the March 30 Perspective Plantings report (a trading range is a channel of high and low prices through a specified period of time). That channel of prices can also have a trend, higher or lower. Even though somewhat of a bearish expectation seems to currently exist among different commodity analysts for harvest 2012 corn prices, the most realistic expectation is for any near-term trading channel to drift higher for reasons such as the following:

• Too much uncertainty still exists prior to planting and pollination.
• Recent declines in bulk ocean shipping rates could spark export sales.
• U.S. farmers are not intimidated by recent sell-offs in futures contracts and basis remains strong.
• Adverse weather has reduced Argentina’s corn crop.
• Black Sea feed grain exports are now in decline.
• South Africa seems to have oversold its corn stocks.
• Ethanol producers can make up any lost demand from a declining U.S. cow herd (despite the elimination of the 45-cent tax credit, ethanol production remains strong and USDA may need to increase its estimated ethanol usage).
• China has stated its intent to rebuild corn stocks if prices fall toward $5.00.
• Large speculators seem to be patiently rebuilding a long position in corn.
• Commercial traders have become much more patient in selling short when probabilities are not strongly in their favor.

Of course, USDA’s Perspective Plantings report could surprise the market with larger than expected acreage. If exports are mediocre and weather conditions across the Corn Belt are forecast to be favorable for early planting, then corn futures could decline from the pre-report high. However, that risk of a potential sell-off seems dwarfed by the potential upside if this combination of factors does not materialize. Consequently, it seems advantageous to follow this limited discussion about the near-term prospects of a developing trading range with discussion about factors that are likely to influence U.S. corn planting. That discussion will take place next week.

CBOT MARCH CORN FUTURES

Current Market Values:

U.S. WEATHER/CROP PROGRESS

U.S. Drought Monitor Weather Forecast: A moisture-laden storm system will provide widespread, locally heavy rain from central and eastern Texas into the Delta and Southeast, although rain is expected to diminish as a trailing cold front sweeps across Florida. Rain will also fall in the Mid-Atlantic and Northeast, with snow likely in northern New England. Meanwhile, the last in a rapid succession of Pacific storms will bring additional rain and mountain snow to the Northwest as well as the central and northern Rockies. Generally dry weather is expected to return to California and the Southwest. The NWS 6- to 10-day outlook for January 31- February 4 calls for above-normal temperatures over much of the contiguous U.S., with cooler than normal conditions confined to southern Florida. Drier-than-normal weather is expected from the central and southern Rockies into California and from the southern Delta into the southern Atlantic Coast. Meanwhile, above-normal precipitation is anticipated from the central Corn Belt into the Great Lakes Region. 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 958,100 MT for the 2011/12 marketing year resulted as increases for Japan (311,900 MT, including 113,600 MT switched from unknown destinations), Mexico (264,100 MT), South Korea (186,600 MT), Egypt (120,000 MT), Costa Rica (78,100 MT, including 1,300 MT switched from Guatemala), and China (72,800 MT, including 60,000 MT switched from unknown destinations and decreases of 3,700 MT), were partially offset by decreases for unknown destinations (151,200 MT), the Dominican Republic (10,500 MT), and Guatemala (5,900 MT). Net sales of 82,500 MT for delivery in 2012/13 marketing year were reported for Mexico (45,000 MT), Japan (32,500 MT), and Nicaragua (5,000 MT). Exports of 940,700 MT were up 25 percent from the previous week and 24 percent from the prior four-week average. The primary destinations were to Japan (214,000 MT), Mexico (193,300 MT), South Korea (126,700 MT), China (120,200 MT), Saudi Arabia (70,200 MT) and Taiwan (48,700 MT).

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

Sorghum: Net sales of 14,000 MT resulted as increases for Mexico (14,000 MT) and Japan (4,500 MT switched from unknown destinations) were partially offset by decreases for unknown destinations (4,500 MT). Exports of 17,300 MT were reported to Mexico (12,800 MT) and Japan (4,500 MT).

FOB

DISTILLERS DRIED GRAINS WITH SOLUBLES (DDGS)

DDGS prices rebounded this week to the tune of $5 to $10 per MT, mainly following the strength in corn. China is on holiday, but secured solid quantities before going home for their New Year. We will have to wait until they come back to their offices to see if their buying spree continues. Mexico continues to see steady demand. Severe drought covering most of the country will provide demand support until late spring or early summer, when the rainy season typically starts.

Comments and Trades reported:

Local Trade:

• Prices - $270 February/March for Laredo, TX.

Trade bids/offers:

• No trade bids/offers to report.

Ethanol Comments:

President Obama’s State of the Union address called for continued support of renewable energy industries through tax breaks and a repeal of similar incentives for the petroleum industry. The president announced that the Pentagon will increase its usage of biofuels. The prospect of this additional demand is promising news for ethanol producers, whose margins have recently fallen back to breakeven levels.

The recent decline in ethanol margins may be attributed in part to the demise of the 45-cent Blender’s Tax Credit on December 31, but demand for both ethanol and DDGS remains relatively strong and the industry is doing well. As a matter of fact, ethanol production is strong enough that USDA may eventually need to increase the corn usage estimate from the current 5 billion bushels. Ethanol is already the largest consumer of U.S. corn and any prospect of increased demand reducing the current old crop stocks-to-use ratio is likely to heighten market anxiety. This factor, along with others that are listed in the Outlook Section, are some reasons that the December 2012 contract is likely to have limited downside prior to the finalization of spring planting.

The ethanol industry seems poised to regain full confidence as ethanol prices are already trading at a steep discount to gasoline, due largely to abundant domestic stocks. Yet, export demand is growing fast. According to a story by Reuters, ethanol exports grew 300 percent in 2011 and are likely to top 1 billion gallons. The largest international buyers of U.S. ethanol are Brazil, Canada and the EU. While Brazilian demand may not remain constant, general global demand seems to be growing fast.

COUNTRY NEWS

Argentina: Weather conditions have improved in Argentina. However, the Argentine government estimates that their corn crop will only be 23 MMT, well below their earlier expectation of 30 MMT. Only 1 percent of the total corn crop is rated in very good shape, while a full quarter is rated as poor. The global market counts on Argentinean corn production, 80 percent of which is exported. It is no great consolation to many feed buyers that Argentina’s better than expected wheat crop could offset a limited portion of their poor corn crop.

Australia: It is interesting to note that a Dow Jones story reports that Australia has become the world’s largest beef exporter. The United States (along with Russia, Japan and South Korea) is one of their largest buyers. The Americans buy Australian beef to supplement their shrinking cow herd that is used to produce increasingly popular low-cost hamburger. Once the Australians and Brazilians corner the globe’s low-cost beef market, they are then likely to see greater margins in the high-end beef production, a market that has been dominated by the United States. Of course, their feed grain consumption will increase in turn.

Brazil: Automobiles in Brazil are almost all flex fuel and can run on various combinations of ethanol and gasoline. Brazil’s ethanol mix runs anywhere from 20 percent to 100 percent of their transportation fuel. Brazilian consumers are still recovering from recent high ethanol prices. Normally, Brazil has no difficulty producing ethanol from its sugar crop that has consistently increased for the past 10 years. Last season’s poor cane crop caused ethanol prices to skyrocket, which resulted in importation of U.S. ethanol.

China: It makes U.S. feed grain producers somewhat uncomfortable to hear increasing trade rhetoric about China. President Obama plans to create an enforcement unit to crack down on unfair trade practices by China, as reported by Reuters. Direct negotiations with China are important, but trade wars benefit neither consumers nor producers on either side of the Pacific. China has recently suspended imports of certain animal feedstocks (rapeseed meal) from India due to contamination. It would be advantageous for all if American DDGs could fill that void

Russia/Ukraine: The Russian Statistical Service estimates that they will produce almost 17 MMT of barley and over 6.5 MMT of corn in 2011. However, (as noted in the Outlook Section) their feed grain exports are expected to fade in the second half of the year due to strong domestic demand. Additionally, Ukraine looks like it may have a substantial reduction in its total 2012 grain production due to poor weather during fall planting of winter crops. Currently, a third of Ukraine’s winter crop is reported in poor condition. Of course, some of the reduced winter crop could be replanted into corn but that production is likely to be exported to neighboring Russia.

OCEAN FREIGHT MARKETS AND SPREADS

OCEAN FREIGHT COMMENTS

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

This market reminds me of two seafarer songs: “Hooray and Up She Rises” and “15 Men on a Dead Man’s Chest.” This market resembles the latter, though both involve drinking: “Hooray and up she rises, what shall we do with a drunken sailor,” and “15 men on a dead man’s chest yo ho yo ho and a bottle of rum.” This is the way the freight industry must feel — driven to drink. It has, and continues to be, a dramatic start to 2012. As with any market that has gone down for 32 straight business days, as the BPI has, one has to wonder when it will hit bottom and stop. The BPI index is now back to levels not seen since February 2, 2009. However, at 815 it had not yet matched the December 2008 low of 440.

In January 35-plus new Capesize vessels were delivered. This has helped to push Pacific rates down as most all the new builds start out from Asia. Values have dropped to levels that are below operating cost and therefore are encouraging lay-ups and scrapping. Rumors have it that there are currently 50 Capes laid-up in Asia. I cannot confirm that number, but it sounds logical. The job of the market is to push vessels to lay-up and into retirement.

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 $6,700-$7,500 per day we are now below operating cost of $7,550 per day for many carriers. Let’s see if anything changes next week when Asia returns from their Lunar New Year holiday. 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 Philippines container shipments for Jan.-Nov. 2009, Jan.-Nov. 2010 and Jan.-Nov. 2011.

INTEREST RATES