Market Perspectives - May 23, 2014

1. Chicago Board of Trade Market News

Week in Review

Outlook: After selling off about 45 cents, the nearby July corn contract seems to have found support around $4.75 per bushel. Speculators’ exiting of more long positions has the potential to drive this contract down another 10 cents, but continuously lower prices seems unlikely because of the near-term influence of higher soybean prices, delayed corn planting in the northern corn belt and normal uncertainties prior to corn pollination.

 The prospect for ample moisture and warmer weather in the central United States is favorable for corn development. South American prices are also becoming increasingly competitive against U.S. corn as harvest in that region progresses. Such fundamental factors can make commercial end-users reluctant to chase prices higher. However, the actions of speculators to influence prices in the short-term should not be underestimated. Speculators presently hold long positions in soybean contracts that are making new highs. As well, wheat contracts seem to be in the process of completing their seasonal move downward prior to the winter wheat harvest. Lastly, corn contracts have sold off over the past couple of weeks according to expectations. This Outlook section discussed that prospect over the past month.

The outlook for future price action is dependent upon current market conditions, which is as follows: There is common market talk that soybean prices “must” be driven to higher levels in order to cut off demand. Such talk is the building of a consensus in hopes of taking action to drive prices higher. The influence of such talk seems to also be generating some discussion about the relatively tight old crop U.S. corn stocks. Due to that development, the prospects that USDA could further reduce old crop stocks (even if it is actually non-threatening), and the prospect that the U.S. Environmental Protection Agency (EPA) could backtrack regarding reduced ethanol production (even if it actually means no increase in ethanol production), could combine as catalysts to momentarily enable speculative traders who are still long corn contracts to initiate a pre-pollination rally that goes beyond what many experienced traders consider realistic. Of course, such developments are not certain – but successful grain traders are those who know how to plan for uncertainty. 




2. CBOT Corn Futures

CBOT Table

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

Planting Progress

U.S. Drought Monitor Weather Forecast: During the May 23-26 time period, precipitation is expected across the Plains, from South Dakota to northern Texas and into eastern Colorado and Wyoming. Additional precipitation is expected around the Great Lakes and into the Mid-Atlantic and Northeast. Precipitation is estimated to approach two inches in select locations during this time period. At the same time, below-normal temperatures are expected in the Southwest, east of the Rockies and into the Southern Plains. Above-normal temperatures are expected along the West Coast, through the central U.S. and into the Southeast.

 For the period of May 27-31, the odds favor normal to above-normal temperatures across the entire contiguous U.S., with the exception of the western Gulf Coast. Below-normal temperatures are favored along the aforementioned area around the Gulf of Mexico. Above-normal precipitation is likely across the eastern half of the US and in the far northern Plains. Below-normal precipitation is expected in the southern Plains and the Pacific Northwest. Follow this link to view current U.S. and international weather patterns and the future outlook: Weather and Crop Bulletin.

4. U.S. Export Statistics

Export Sales and Exports Table
USDA Grain Inspections

Corn: Net sales of 507,900 MT for 2013/14 were up 48 percent from the previous week, but down 1 percent from the prior four-week average. Increases were reported for South Korea (508,200 MT, including 188,000 MT switched from unknown destinations), Mexico (158,000 MT), Colombia (108,900 MT, including 89,000 MT switched from unknown destinations and decreases of 1,000 MT), Taiwan (79,600 MT, including 60,000 MT switched from China), the Dominican Republic (45,600 MT) and Guatemala (27,800 MT, including 22,800 MT switched from unknown destinations). Decreases were reported for Japan (186,400 MT), unknown destinations (173,000 MT), Egypt (62,800 MT), China (60,100 MT) and the French West Indies (5,000 MT). Net sales of 62,500 MT for 2014/15 were reported for Mexico (60,000 MT) and Nicaragua (5,000 MT). Decreases were reported for Guatemala (2,500 MT). Exports of 1,159,100 MT were up 13 percent from the previous week, but down 12 percent from the prior four-week average. The primary destinations were South Korea (312,300 MT), Japan (230,200 MT), Colombia (209,400 MT), Mexico (187,300 MT), Taiwan (83,200 MT), Egypt (65,200 MT) and Guatemala (22,800 MT). Optional Origin Sales: For 2013/14, outstanding optional origin sales total 123,000 MT, all South Korea.  

Barley: Net sales reductions of 6,000 MT for 2013/14 were reported for South Korea. Exports of 100 MT were reported to South Korea. 

Sorghum: Net sales reductions of 5,500 MT for 2013/14 were reported for China (5,000 MT) and unknown destinations (500 MT). Net sales of 60,000 MT for 2014/15 were reported for China. Exports of 61,600 MT were reported to China. Export Adjustments: Accumulated exports to China were adjusted down 13 MT for week ending May 8. The correct destination is Taiwan and is included in this week’s report. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: The week ending Friday, May 23 has seem additional declines in DDGS markets as offers presently outnumber bids for June delivery. Market demand has backed away as buyers wait for a more definitive bottom to develop in corn futures contracts. A number of domestic DDGS buyers have the expectation that weakened export demand could continue to weigh down prices. The result is that most of the buying ideas seem to be $10-$20/MT below current offers. Of course, that bid-ask spread is likely to quickly come together if it becomes evident that corn futures have found a near-term bottom.

The Chicago container market is reported to be trading in the low $230s, and there could be short-term opportunities to secure even lower prices. Prices also traded at $230 FOB Buffalo. There are reports of even lower offers in the third and fourth quarter of 2014. However, price weakness is not uniform and has seemingly plateaued in the regions of Kansas City and Minneapolis/St. Paul while prices in the Channahon/Elwood region are supported by strong local demand.

Ethanol Comments: The Environmental Protection Agency (EPA) is expected to announce their ethanol targets for 2014 before the end of June, and there is growing market anticipation that the corn ethanol target will be increased from the November estimate of 13 billion gallons to 13.6 billion gallons. This can be a favorable development for ethanol producers if it does not contribute to a temporary exaggeration in corn prices; please see the preceding Outlook section for additional discussion.

The fact that U.S. ethanol stocks have recently declined from 17.3 down to 17 million barrels for the week-ending May 16, while production increased during that same period from an average daily rate of 922,000 barrels per day (bpd) up to 925,000 bpd, seems to be evidence of sufficient demand to justify EPA increasing the amount of mandated ethanol consumption for 2014. That decline in U.S. ethanol stocks would have been even larger if there had been no ethanol imports at an average rate of 11,000 bpd. (The rate of such ethanol imports is primarily dependent upon the prices of South American sugar and freight rates rather than changes in corn prices).

The recent decline in corn prices has enabled U.S. ethanol producer margins to improve and remain well above year-ago levels. Present prices of CBOT corn futures contracts may offer an opportunity for ethanol producers to currently lock in favorable margins through the summer and avoid the prospect of an unforeseen bump in mid-summer corn prices. The present favorable margin for U.S. ethanol producers is implied in the differential between the price of corn and processed co-products that are reported from significant locations across the corn belt:

  • Illinois differential is $3.83 per bushel, in comparison to $3.45 the prior week and $2.48 a year ago.
  • Iowa differential is $3.62 per bushel, in comparison to $3.27 the prior week and $2.10 a year ago.
  • Nebraska differential is $3.44 per bushel, in comparison to $3.10 the prior week and $2.34 a year ago.
  • South Dakota differential is $3.97 per bushel, in comparison to $3.74 the prior week and $2.18 a year ago.


7. Country News

EU: A study conducted by Stanford University has predicted that European barley production may fall more than 20 percent by 2040 due to an expected warming of the climate by 3.6 degrees Fahrenheit, according to Bloomberg News. Barley is sensitive to warm temperatures and negatively impacts yields. Corn production reduction is expected to be 10 percent, but the study found that improved irrigation practices could lessen this.

South Africa: Yellow corn has fallen to its lowest level in 15 months due to a combination of declining U.S. corn prices and the rand strengthening against the dollar, which has made imported corn a cheaper alternative, according to Bloomberg News. Yellow corn for July delivery fell by 1 percent to $192/MT.

Russia: Russian research firm Ikar has indicated that Russian grain exports will likely be unaffected by potential future sanctions from the EU or U.S., reports Bloomberg News. The EU sources less than 10 percent of its grain from Russia, while the U.S. imports no Russian grain. USDA has predicted that Russia will export 3.5 MMT this year, which would make it world’s fifth largest corn exporter.

8. Ocean Freight Markets and Spread

Bulk Freight Indices for HSS

9. Ocean Freight Comments

Vessel owners liked the way the week started out but were disappointed with the way it ended. Monday and Tuesday showed promise with daily hire rates advancing from where they left off on the previous Friday. However, by Wednesday, the market lost its support and began to fall back. The reasons for the market’s inability to sustain a rally are all the same as previously reported, the S&D balance simply has not shifted yet.

Baltic Panamax Dry-Bulk Indices
Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China:
Freight values for capesize vessels of iron ore
U.S. - Asia Market Spreads

The charts below represent January-December 2013 annual totals versus January-February 2014 container shipments for Vietnam.

Vietnam 2014
Vietnam 2013
International Freight Rates for Feed Grains

10. Interest Rates

Interest Rates