Market Perspectives - November 7, 2014

1. Chicago Board of Trade Market News

Outlook: USDA will release the November WASDE report on Monday, November 10.  A U.S. corn yield of 175 bushels per acre (bu/acre) is the average of the analysts’ estimates for this report. In other words, the estimate is that the yield from U.S. corn will increase from 174.2 bu/acre in the October report to a new estimate of 175 bu/acre. How the actual number comes out in relation to that estimate will be a primary factor in determining if Monday’s report is considered bullish or bearish for corn and related feed grains.

The November WASDE will also contain important data for the soy complex and wheat markets, and that associated data can influence the intensity of the data for corn. For example: an average corn yield estimate below 175 bu/acre and no increase in ending stocks could be considered bullish for corn, but that could be negated by a substantial yield increase for soybeans that establishes an overriding bearish tone in the market. 

If soybean production data is bearish, the degree of near-term influence on corn contracts will depend upon other factors such as weather and demand. Cold weather is really no big deal, but any prospect for cold, wet and windy weather could make traders reluctant to press corn contracts too hard when 15 percent is still remaining in the field and a sizable amount is stored in open-air piles. As harvest is completed, demand will transition to become the dominant factor. A sizable drop-off in export sales and further reductions in petroleum prices, potentially weighing on ethanol producer margins, could be enough to enable corn contracts to trend lower. Such a composite of market factors will determine how low corn contracts can trend, but general interest in buying at prices below present levels will presumably limit the downside and establish a trading range into 2015.

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: During November 7-10, wet weather is forecast for the eastern third of the Nation, Pacific Northwest and parts of the southern Great Plains. Rainfall totals will probably exceed four inches across Texas as the moisture is likely to have a tropical source. Lake enhanced precipitation is also likely near the Great Lakes as a low-pressure system is forecast to move from the Great Lakes to the Canadian Maritime Provinces during the next three days. During the early to middle portions of next week, a cold front is forecast to traverse the contiguous 48 states, ushering in drier and cooler conditions.

For the ensuing period of November 11-15, odds favor below normal temperatures east of the Rockies, with above normal temperatures west of the Continental Divide. Below-median precipitation is favored for much of the contiguous 48 states, except near the Great Lakes, New England and South Texas. 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 478,200 MT for 2014/15 were down 2 percent from the previous week and 55 percent from the prior four-week average.  Increases were reported for unknown destinations (195,700 MT), Peru (76,500 MT, including 30,000 MT switched from unknown destinations), Mexico (69,100 MT), Colombia (60,200 MT, including 30,000 MT switched from unknown destinations), Canada (29,000 MT) and the Dominican Republic (20,000 MT). Decreases were reported for Guatemala (12,400 MT) and Japan (2,400 MT). Exports of 444,000 MT were primarily to Mexico (112,600 MT), Japan (95,700 MT), Egypt (54,400 MT), Costa Rica (38,800 MT), Colombia (32,100 MT), Peru (30,000 MT) and Guatemala (19,800 MT).

Barley: Net sales of 400 MT for 2014/15 were reported for South Korea (300 MT) and Taiwan (100 MT). Exports of 500 MT were reported to Taiwan (400 MT) and South Korea (100 MT). 

Sorghum: Net sales of 181,300 MT for 2014/15 reported for unknown destinations (113,000 MT) and China (71,100 MT), were partially offset by decreases for Japan (2,700 MT). Exports of 67,100 MT were reported to China (51,600 MT) and Japan (15,500 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: This past week there was a sizable reduction in the cost of DDGS that are sold FOB in the Gulf. Central American buyers of the co-product may find that there is a favorable pricing opportunity when buying DDGS in volume to load out a vessel. Multiple merchandisers have the ability to make that happen.

Asian buyers have similar opportunities too, but that also will presumably require some comparative shopping because of variability in logistical costs. That has become particularly evident in the domestic market as rail-delivered DDGS to the United States’ Pacific Northwest have recently declined, while rail-delivered DDGS to California have increased in cost.

Containerized rates to Asian destinations consistently increased this past week from $6 to $9/MT. The increase has caused some of the foreign buyers to momentarily step back from the market. It is interesting that the bid/ask levels are so firm in their resolve when agreeable terms appear to be only about $3 apart. More than likely, the price direction resulting from the USDA’s WASDE on Monday, November 10 will help clarify which side should comply. 

It will be far easier for merchandisers to accept a slightly lower bid if a combination of factors should allow for a limited setback in corn futures contracts next week. Of course, purchases in sufficient volume and time into the future can help facilitate more favorable freight cost negotiations, which is particularly important in relation to rail rates because there has recently been some stiff competition from other industries for rail space.

Ethanol Comments: Corn-based ethanol continued to be the world’s lowest-cost octane enhancer, as reported in a story by Dow Jones. That is a primary reason for the consistent export demand that is anticipated to range somewhere between 800 million to 1 billion gallons in 2015. Foreign demand is coming from neighboring destinations such as Canada and Mexico, Asian nations with pollution concerns, and even the oil-rich Middle East.

Brazilian sugar-based ethanol producers are the world’s second largest ethanol producers. The majority of Brazil’s ethanol production is consumed domestically, and the industry has struggled to expand into the global market because of their own government’s policies that have recently subsidized gasoline production at the expense of the ethanol industry. The recent re-election of Dilma Rousseff as Brazil’s president has raised concerns by the Brazilian Sugarcane Industry Association that their ethanol processors may continue to struggle. That is unfortunate.

There is ample U.S. corn-based ethanol as stocks increased slightly to 17.2 million barrels for the week ending October 31, 2014. That was up slightly from the prior week’s level of 17 million barrels. However, the percentage in relation to a year ago continues to decline, down from 13.9 percent the prior week to 13.2 for the most current week. That continued narrowing against year-ago production and the stable export demand are two factors that have allowed the differential between the cost of corn and the return for the co-products of ethanol and DDGS to significantly improve in all regions for week ending Friday, November 7, 2014:

  • Illinois differential is $3.26 per bushel, in comparison to $2.55 the prior week and $2.64 a year ago.
  • Iowa differential is $2.80 per bushel, in comparison to $2.41 the prior week and $2.28 a year ago.
  • Nebraska differential is $2.76 per bushel, in comparison to $2.58 the prior week and $1.88 a year ago.
  • South Dakota differential is $2.76 per bushel, in comparison to $2.51 the prior week and $2.88 a year ago.

7. Country News

Asia: Asian feed millers have been caught flat-footed by a surprise rally in corn prices, according to Reuters. Millers in countries including Indonesia, Vietnam and Thailand had previously ordered cargoes over the last few months by locking in premiums that must be paid over future and leaving the futures level to be determined later.

China: A drought on the North China Plain from May-August 2014 has reduced Chinese corn production for the first time in five years, reports Bloomberg News. SGS SA conducted interviews with 307 farmers and estimates that corn output is set to drop 3.6 percent to 210.6 MMT, which stands in contrast to an October 12 USDA estimate of 217 MMT.

Further on China: China’s official news agency, Xinhua, has released a report indicating that more than 40 percent of China’s arable land is suffering from degradation, according to Reuters. Soil pollution has impacted some 3.3 million hectares.

France: French farmers had harvested 57 percent of the country’s corn crop by October 27, according to Reuters. This is up from the 38 percent that had been harvested the prior week and significantly higher than the 30 percent brought in at this point in 2013. France is the EU’s largest corn producer and the harvest this year is expected to be a record harvest in a year when the EU is pulling in a large corn crop. 

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting:This week ocean freight rates appear to have topped out as the rally ran out of fuel and things sat back a bit. There is, however, getting to be more trade talk about Q4 2014 being the turnaround point for Dry-Bulk ocean freight rates. And many believe that, from a vessel owner’s perspective, 2015 will bring much better rates. It may be a lot of wishful thinking?

If we look back to the start of 2014 we see that Panamax rates from the U.S. Gulf to Japan began the year at about $58.00/MT and then slid to a low of around $42.00/MT before clawing back up to the current value of $46.00/MT. So, we did not experience all that much volatility during the past year and there is still considerable distance to cover just to get rates back close to where we started things in January. In that we still have a vessel oversupply situation and the world economy remains shaky, I’m not expecting to see a big rate jump soon. I do not believe that rates will be able to fully recover back to Q1 2014 levels in Q1 2015. Rates will most likely bounce around through the end of the North American grain harvest and then have to look for a new demand element to keep things buoyed.

On a different note, it looks like U.S. exporters are making very good FOB-ing margins at the Gulf with corn and soybean margins at 30 cents per bushel ($11.80/MT-plus), and sorghum margins at over $1.00 per bushel  ($40.00/MT) or more.

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 year-to-date 2014 container shipments to Indonesia.

10. Interest Rates