Market Perspectives - June 20, 2014

1. Chicago Board of Trade Market News

Outlook: The outlook for limited downside in current corn prices was noted in this section last week because developing market factors seemed to uniformly imply that was the most probable outcome. Probabilities proved to be correct. In relation to changing market conditions, it is interesting how the market’s general attitudes can seem to uniformly shift in such a consolidated amount of time. There is suddenly more market discussion about the fact that ethanol producer margins are still rather favorable and increasing ethanol stocks can increasingly be exported if they become burdensome. There is also increased discussion about the approach of USDA’s Acreage and Stocks report on June 30. After next week, there will also likely be discussions about developing weather patterns prior to pollination.

An additional factor that could influence the market’s short-term perspective is the increasing evidence that it has probably been premature to call for above-average trend-line yields so early in the planting season, as well as the fact that a weaker U.S. dollar is conducive for U.S. producers to receive better prices. Please note that it would be incorrect to interpret the preceding combination of factors to mean that the absolute low has been established for the present season because the prospects are good that any production of trend yields or above will result in the prior lows of the December 2014 contract being retested. However, the absolute downside in 2014/15 corn prices is unlikely to be as deep or as prolonged as some forecasters had predicted. In other words, the longer-term outlook is that the 2014/15 season is unlikely to see a prolonged period of sub-$4.25 per bushel corn pricing.

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: Hot, humid conditions along with scattered afternoon and evening showers and thunderstorms will persist from the central and southern Plains to the Atlantic Coast, while dry weather prevails from California into the Southwest. The best chance for moderate-to-heavy rain appears to be from northern Texas northward into the Great Lakes, with additional heavy downpours possible in some of the already-flooded areas of the western Corn Belt. Farther south, seasonal showers will persist in Florida, while spotty showers in the interior Southeast may afford localized relief from developing dryness. Out west, rain and mountain snow will diminish in northern portions of the region, while dry, cooler-than-normal weather lingers for much of the period from California into the Four Corners.

The NWS outlook for June 24-28 calls for above-normal rainfall in the Northwest and from the southern Plains to the central Atlantic Coast. Conversely, drier-than-normal conditions will prevail from northern California into the Four Corners and from the northern Plains into the Upper Midwest. Temperatures are expected to average above normal across much of the contiguous U.S., with cooler-than-normal weather confined to the east-central Plains. 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 109,000 MT for 2013/14 were down 73 percent from the previous week and 79 percent from the prior four-week average. Increases were reported for Japan (168,300 MT, including 91,100 MT switched from unknown destinations and decreases of 9,200 MT), Saudi Arabia (76,600 MT, including 70,000 MT switched from unknown destinations), Taiwan (64,200 MT), South Korea (59,600 MT, including 57,800 MT switched from Japan and decreases of 800 MT) and Peru (47,200 MT). Decreases were reported for unknown destinations (396,900 MT), Colombia (44,200 MT) and Costa Rica (1,100 MT). Net sales of 78,900 MT for 2014/15 were reported for Mexico (40,800 MT), unknown destinations (37,500 MT) and South Korea (600 MT). Exports of 1,123,000 MT were up 5 percent from the previous week, but down 1 percent from the prior four-week average. The primary destinations were Japan (357,900 MT), Mexico (258,700 MT), Taiwan (100,600 MT), South Korea (85,400 MT), Saudi Arabia (80,100 MT), Egypt (71,300 MT) and Colombia (67,500 MT). Optional Origin Sales: For 2013/14, outstanding optional origin sales total 123,000 MT, all South Korea. 

Barley: Net sales of 2,900 MT for 2014/1015 were reported for Japan (1,500 MT), South Korea (900 MT) and Taiwan (500 MT). Exports of 600 MT were reported to South Korea (400 MT) and Japan (100 MT). Export Adjustments: Accumulated exports to Japan were decreased 600 MT for week ending June 5, 2014. This shipment was reported twice.

Sorghum: Net sales of 62,200 MT for 2013/14 were reported for China. Net sales of 60,000 MT for 2014/15 were reported for China. Exports of 1,000 MT--a marketing-year low--were reported to China.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Reports of buying activity were mixed as the week started off generally slow. However, by mid-week the DDGS buyers who had been patiently waiting on the sidelines increasingly entered the market. Merchandisers initially had ample inventory for all takers, but by the end of the week prices of DDGS shipped by barge had rebounded a couple dollars above the prior week’s level. However, some buyers were still able to secure even lower prices than the prior week. For example, rail-delivered DDGS to the Pacific Northwest could be purchased for $5-$7/MT below the prior-week’s rate. As well, some substantial rate reductions were offered early in the week to the destinations of Vietnam and Thailand. Reduced rates were also being offered in the more distant months for delivery to Japan.

The availability of rock-bottom buying opportunities varied by location, but the number of opportunities seemed to decline as the week progressed and inventory was increasingly committed to various destinations. Merchandisers reported that as the week progressed there was even a sudden flurry of buying that caused Chicago DDGs prices to jump nearly $15 per U.S. short ton. At the end of the week, there were a number of Southeast Asian buyers who were unsuccessfully seeking to obtain the depressed prices of last week. Those Southeast Asian buyers who purchased in the early part of this week were rather successful in achieving their objectives while it appears that those who waited until the end of this week may have missed the best buying opportunity.

DDGS prices next week will be more heavily influenced by the price action of corn futures contracts because merchandisers now have less excess inventory pressing against them. Corn contracts closed out this week looking fairly strong. As a result, DDGS buyers should keep an eye on how corn contracts start next week.

Ethanol Comments: The fact that there was a decline in total U.S. ethanol stocks of 572,000 barrels while production increased to record levels seems to have quieted some of the recent ominous predictions about ethanol producer returns and production. Gasoline futures are presently holding about a dollar-per-gallon premium over ethanol and this section has noted in the past that exports can act as a relief valve for building U.S. ethanol stocks.

U.S. ethanol production for the week ending June 13 increased to an average daily rate of 972,000 barrels per day (bpd), which was up from the prior week’s average production of 944,000 bpd and about 11.4 percent above the same week a year ago rate of 873,000 bpd. U.S. ethanol imports remain zero. Strong demand is implied in the fact that stocks shrank while production reached a new record.

U.S. corn based ethanol producers are being encouraged by favorable margins to maintain ample production. Naturally, a limited rebound in corn contracts could cause spot margins to tighten up in the next few weeks. The differential between the cost of corn and the value of ethanol and DDGS at processing plants and facilities across the U.S. Corn Belt for the week ending June 20, 2014 are as follows:

  • Illinois differential is $3.16 per bushel, in comparison to $3.53 the prior week and $2.20 a year ago.
  • Iowa differential is $2.72 per bushel, in comparison to $3.33 the prior week and $2.06 a year ago.
  • Nebraska differential is $2.73 per bushel, in comparison to $3.23 the prior week and $1.95 a year ago.
  • South Dakota differential is $3.25 per bushel, in comparison to $3.76 the prior week and $2.04 a year ago.

7. Country News

India: While the monsoon is finally covering half of the Indian subcontinent, the amount of rain it’s producing is still lackluster, according to Reuters. Rainfall for the period ending June 18 was 45 percent below-average, and was 48 percent below-average last week. Meteorologists are predicting that the monsoon will strengthen over Central India in the next week. Additionally, India’s farm commissioner is confident that farmers will be able to tap into reservoirs that are up by 25 percent from last year to provide water if there is a rainfall shortage.

South Africa: Yellow corn for July delivery in Africa’s largest corn producing country has fallen to $182/MT, which is its lowest level in three weeks, reports Bloomberg News.

Tanzania: Tanzania is expected to have another good corn crop in 2014 that will total some 4.7 MMT this year, according to WPI. This is right in line with production totals for 2013. Because of the harvest, domestic corn prices have fallen by half from their March levels, and are below those seen at this time last year. 

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Every day this week I thought we were going to bottom out, but the Panamax market just went lower and lower. Even being the bear that I’ve been, I have to think we must be touching bottom. I’ll bet $1.00 that we are up a little next week. The Capesize market seems to have stabilized. Also note that the market is at a good carry, meaning that vessel operators want $2-$4 /MT more for August-September over July. For the year, BIMCO estimates dry-bulk fleet growth will reach 52 million DWT of new deliveries. Thus, the fleet will not shrink this year, but will actually grow by 5.3 percent. Just when you thought it safe to go back into the water…

The new vessel order book holds 1,989 ships (163.4 million DWT) and is heavily loaded on the Panamax side. So far, only 109 ships (6.6 million DWT) have gone to demolition. The Panamax segment is setting a new fleet size record every day, and is currently growing at 8.7 percent year-on-year and stands at 191 million DWT. According to BIMCO, at this rate, the 200 million DWT fleet size threshold is likely to be reached before year’s end. Capes are now getting $14,100/day and Panamax vessels about $5,100/day on long hauls. Some Panamax vessels are going out on short distance spot charters for no income other than fuel cost and others are already laying-up.

For those watching world crop weather – we went from a strong El Nino in 2009-2010 to a strong La Nina in 2010-2011, then a brief neutral period was followed by a moderate La Nina in 2011-2012. This year we have a 70 percent chance of experiencing an El Nino event in July-August and an 80 percent chance for the September-October period.

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 Indonesia. 

10. Interest Rates