Market Perspectives - June 6, 2014

1. Chicago Board of Trade Market News

Corn contracts traded lower this week as speculators exited losing long positions in corn. The prospect of a pre-pollination bounce seems unappealing to speculators who realize they are likely to end up with a loss no matter what. As a result, a number of traders holding losing long positions seem to be throwing in the towel as gracefully as possible, which can be hard for those traders holding large positions.

As the exiting of losing long positions slows down, the probability of further downside in either July or December corn contracts does not seem great at this point in time. This is especially the case when one recalls that back when both of these contracts were making their absolute lows the December 2013 WASDE report was projecting an estimated corn ending stocks figure of 1.792 billion bushels. That prior projection is larger than USDA’s present estimate of 1.146 billion bushels for either 2013/14 or the 1.726 billion bushel estimate for 2014/15. Also recall that USDA’s prior December estimate of 1.792 billion bushels was given after harvest was complete and production uncertainty was minimal. In contrast, the present sell-off has occurred prior to pollination.

The U.S. corn crop is rated as 76 percent good to excellent, with 2007 being the only year in recent history that corn conditions were better. However, there is normally some decline in crop conditions as the growing season progresses. Consider that the final average U.S. corn yield in 2007 ended up being 3 bushels per acre below the prior 10-year trend.

Of course, if current crop conditions for U.S. corn remain unchanged until year-end then the final corn yields could exceed USDA’s current trend estimate of 165.3 bushels per acre. Larger yields could increase ending stocks, but aggressively selling the December 2014 in the first week of June seems rather premature. For that reason, the present outlook is that this week’s lower prices present an excellent opportunity for corn end-users to acquire favorable pricing for throughout the summer period.

3. U.S. Weather/Crop Progress

Moderate-to-very heavy rain is expected across large parts of the dry areas in the central and south-central Plains, the Tennessee Valley and the southern Appalachians during June 6-9. Generally one and a half to three and a half inches are forecast across the entire dry area from north Mississippi and west Tennessee eastward through the southern Appalachians. Farther west, precipitation may be heavier and even more widespread. Amounts near or over two inches are anticipated from western Nebraska, Kansas, southern Iowa, Missouri and western Illinois southward through the northern half of Arkansas, almost all of Oklahoma and the north-central and eastern Panhandle portions of Texas. The heaviest amounts, ranging from three to five and a half inches, are expected in the southwestern half of Missouri, central and eastern Kansas central and northeastern Oklahoma and adjacent Arkansas. Elsewhere, the forecast is for half an inch to one and a half inches of rain in south Florida and south-central Virginia, plus most of the High Plains, northern Great Plains, upper Midwest, southern Arkansas, central and northeast Texas and the west half of the Texas Panhandle. South of this area, anywhere from a few hundredths of an inch to near half of an inch is forecast in west-central, southern and eastern Texas as well as Louisiana and southern Mississippi, with amounts expected to decrease going southward to the Gulf of Mexico and Mexico. In sharp contrast, areas from the eastern Rockies westward to the Pacific Ocean are likely to get no measurable rainfall.

The period of June 10-14 features enhanced chances for above-normal rainfall across the dry area in the southern Appalachians, Tennessee Valley and upper Southeast once again. The odds also favor surplus rainfall in the lower Mississippi Valley, east Texas and from eastern Nebraska and most of Iowa northward through the dry areas in the northern Plains. On the other hand, most of the High Plains, the southwestern Great Plains, the eastern tier of the Rockies, central and northern Utah, the northern half of the Intermountain West, central and northern California and all but the northernmost tier of the Pacific Northwest seem more likely to end up drier-than-normal for the period. 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

Corn: Net sales of 550,700 MT for 2013/14 were down 5 percent from the previous week, but up 39 percent from the prior four-week average. Increases were reported for Japan (242,900 MT, including 178,000 MT switched from unknown destinations and decreases of 3,900 MT), Colombia (151,100 MT, including 40,000 MT switched from China, 30,000 MT switched unknown destinations and decreases of 5,300 MT), Egypt (130,800 MT, including 60,000 MT switched from unknown destinations), South Korea (72,800 MT), Vietnam (64,500 MT, including 63,000 MT switched from unknown destinations) and Portugal (55,800 MT, including 50,000 MT switched from Spain). Decreases were reported for unknown destinations (230,400 MT) and China (92,000 MT). Net sales of 19,600 MT for 2014/15 were reported for unknown destinations (10,000 MT), Mexico (7,600 MT) and China (2,000 MT). Exports of 1,159,500 MT were down 1 percent from the previous week and 3 percent from the prior four-week average. The primary destinations were Japan (207,400 MT), Colombia (188,100 MT), Mexico (152,800 MT), South Korea (132,800 MT), Egypt (130,800 MT), Taiwan (85,700 MT) and Vietnam (64,500 MT). Optional Origin Sales: For 2013/14, outstanding optional origin sales total 123,000 MT, all South Korea. Export Adjustments: Accumulated exports to Colombia were adjusted down 44,000 MT for week ending May 22, 2014, because this shipment was reported twice. 

Barley: Net sales of 900 MT for 2013/14 were reported for South Korea (500 MT) and Mexico (400 MT). Net sales of 500 MT for 2014/15 were reported for South Korea. Exports of 2,500 MT were reported to Japan (1,500 MT), South Korea (500 MT), Mexico (400 MT) and Taiwan (100 MT). 

Sorghum: Net sales of 52,400 MT resulted as increases for unknown destinations (54,000 MT), were partially offset by decreases for China (1,700 MT). Net sales of 60,000 MT for 2014/15 were reported for China. Exports of 142,000 MT were reported to China. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Declines this week in corn futures contracts at the Chicago Board of Trade (CBOT) has resulted in excellent pricing opportunities for DDGS end-users. Domestic prices for DDGS declined by $8-$9/MT and containerized prices to the export market declined from$8-$10/MT. As well, there is a substantial $7 decline from June to August in the domestic rail-delivered rates to the West Coast.

Buyers were dropping bids quickly and one DDGS merchandiser had to reduce his rate by $8/MT in order to confirm sales. This strategy of stepping away from the market can work for DDGS buyers as long as corn futures contracts are in decline. Futures traders at the CBOT seemed to hit a point at the end of this week where they simultaneously said “enough” to any lower prices and the corn contracts suddenly rebounded. Those traders recognize that there is more than a month before pollination starts to occur in most locations across the Corn Belt, and summer weather can change quickly in that length of time.  

The recent slowdown in buying has caused a backlog in DDGS inventory at multiple ethanol facilities. Buyers are expected to return in force once it becomes evident that a near-term bottom has been established in the corn futures contracts. Of course, DDGS merchandisers may then have their turn to be more selective as buyers simultaneously return. Container rates are also likely to react to any increased interest. In the meantime, DDGS buyers are presently being offered some of the best rates in the past few years.

Ethanol Comments: This week there was some discussion among grain market participants that increasing ethanol stocks was justification for this week’s declines in the price of corn futures contracts. While ethanol producers certainly appreciated seeing the lower corn contract prices, the reasoning that larger ethanol stocks was any justification for lower corn prices seems flawed.

The following data shows the spot market differentials between the price of corn and co-products that U.S. ethanol producers receive in different regions of the Corn Belt. In Illinois the differential is still 58 percent above a year ago, it’s 62 percent above a year ago in Iowa, 46 percent above a year ago in Nebraska and 71 percent above a year ago in the South Dakota region. (The weaker corn basis in South Dakota is presumably one reason for that region’s stronger differential.) Ethanol producer margins remain well in the black.

Lower corn prices may encourage active utilization of ethanol facilitates, but any builid-up in ethanol stocks, and a resulting decline in ethanol prices, should incentivize greater exports of U.S. corn-based ethanol. 

  • Illinois differential is $3.64 per bushel, in comparison to $4.12 the prior week and $2.31 a year ago.
  • Iowa differential is $3.49 per bushel, in comparison to $4.02 the prior week and $2.15 a year ago.
  • Nebraska differential is $3.38 per bushel, in comparison to $3.70 the prior week and $2.32 a year ago.
  • South Dakota differential is $3.91 per bushel, in comparison to $4.22 the prior week and $2.28 a year ago.

7. Country News

Argentina: Dry weather in the Pampas grain belt over the past week has enabled farmers to increase the pace of the corn harvest following an extremely wet May, reports Reuters. Argentine farmers are expected to bring in 24 MMT of corn this year.

Brazil: Fertilizer imports are reaching record levels due to lower prices, according to Bloomberg News. Brazil imported 8.8 MMT of fertilizer in the first five months of 2014, which is a 10 percent increase from the same period in 2013. Fertilizer prices are currently $324/MT, which is a 23 percent reduction from last year. An 18 percent reduction in corn prices over the last year has contributed to these reduced fertilizer prices.

Kenya: Kenya could produce 1 MMT of corn in the next month, which it is hoped will offset major supply shortages, reports Bloomberg News. Kenya currently faces a corn shortage of 720,000 90kg bags, which is expected to be covered by imports from the East African Community and the release of 500,000 bags from the country’s national reserve. Kenya consumes 3.72 million 90kg bags of corn each month, and each bag sold for $35.46 in April.

Russia: A Russian food safety agency has issued a warning that it has discovered western corn rootworm in insect traps along the border with Ukraine, reports Bloomberg News. Western corn rootworm is endemic to North America, and causes an estimated $1 billion of crop damage a year there.

South Africa: Yellow corn for July delivery has fallen to $185/MT, according to Bloomberg News. This is the largest drop in yellow corn prices since May 30. 

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: It was yet another dull and soft week in international ocean freight markets. The reported excuse of the week was that the lack of activity was caused by the annual “Posidonia” conference in Greece. In truth, it was a good time for ocean freight executives to take a vacation in Greece as there just wasn’t much going on back at the office, and there may not be sufficient budget to take a vacation next year. The Capesize market did exhibit some stability, but the Panamax markets took it on the chin. The Baltic Panamax index has reached its lowest level in 2014 and is now back to where it was on February 8, 2013. This certainly is not the direction vessel owners expected the market to take in 2014.

 The WSJ reported this week that investment funds are starting to pour money into ocean freight because they believe there is nowhere for rates to go but up. This may be fundamentally right, but, as always, timing is everything and it may take longer than they expect to generate an acceptable return.

 It does however seem that there can’t be much more down side potential (famous last words) and that we should at least bottom out at these levels. Slow steaming alone will not sufficiently help to cover operating costs at these levels. The current daily hire rates for Capesize Bulk vessels is $13,000/day and Dry-Bulk Panamax vessels are at just $6,200/day for long haul voyages.

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

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

10. Interest Rates