Market Perspectives - November 14, 2014

1. Chicago Board of Trade Market News

Outlook: The November WASDE report was published on Monday and the yield for U.S. corn was estimated to be 173.4 bushels per acre. That was below the average trade estimate of 175.2 bushels. The majority of analysts were expecting yields to continue increasing above the October estimate of 174.2 bushels and the results of USDA’s analysis was actually lower. While the estimate was bullish in comparison to expectations, market participants seemed uncertain about how to trade because corn contracts had already increased 50 cents prior to the report as they followed a rally in the soy complex. There was also a common assumption that the pre-report increase in corn contract prices was temporary. The result is that contracts have only worked moderately higher as market participants took several days to digest the unexpected news.

The reduced U.S. corn yield estimate caused ending stocks for the current 2014/15 season to decline to 2.008 billion bushels. This is a comfortable level of ending stocks, but not cumbersome. Global corn stocks of 191.5 MMT means that export competition will be stiff, but the United States does not need to have a fire sale because its own feed grain production is unmanageable. Therefore, the likelihood of corn contracts returning below $3.50 diminishes. That prospect alters the interest of traders from seeking selling opportunities, with more limited potential, to seeking buying opportunities. Such a change in the mindset can alter the bell-curve of the trading range of probable prices. For example, a month and a half ago the probability would have been remote of the December contract ever retesting the July 7 gap at $4.10 per bushel. Now, such price action is no longer out of the question.

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: During November 14-18, wet weather is forecast for the eastern third of the nation and from Oregon and northern California to the Central Rockies. Rainfall totals are likely to exceed 4.0 inches across Oregon, with lesser amounts elsewhere. Gulf moisture is likely to support rainfall of up to 2.4 inches from southeast Texas to Alabama. Lake enhanced precipitation is also likely downwind of the Great Lakes, as a northwesterly flow is expected to persist for a few days during the early portion of next week. Cold and dry conditions are likely across the Great Plains.
For the period of November 18-22, odds favor below-normal temperatures east of the Continental Divide, with above-normal temperatures west of the Continental Divide. Above median precipitation is favored from California to western Montana, and across the southeast from Louisiana to the Carolinas. Below-median precipitation is likely from the southern High Plains to the Upper Midwest and across the Mid-Atlantic and New England coast. 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: Buyers of DDGS should be alerted to the fact that Monday’s WASDE report was supportive for future corn prices. As a result, there may no longer be an opportunity to buy corn at price levels that were being offered a month ago. DDGS merchandisers reported that offers for the first quarter of 2015 went up by $15-20/MT after the November WASDE was published. However, DDGS buyers should note that there could still be a limited setback in corn futures contracts, if there is a near-term setback in soymeal prices. Corn is not expected to decline at the same rate as soymeal, but a setback in meal could momentarily create a window of opportunity to purchase DDGS.

A near-term opportunity may exist because there are still several ethanol plants with pent-up supplies of DDGS inventory that is being offered at favorable prices (FOB the plant). Those larger-than-normal inventories of DDGS at various ethanol plants have accumulated because of logistical issues. Those are the same logistical issues that have caused soymeal prices to escalate to the present high price levels. Those issues now seem to be in the process of being resolved. Consequently, that is the reason for the expectation that soymeal prices could soon experience a sudden setback.

The spread between the price of soymeal and DDGS has become extremely wide. Therefore, the price of corn and DDGS is not expected to decline in proportion to soymeal. As well, the correction of the logistical problems should start to allow DDGS inventories to begin flowing in a much more orderly manner in the next month or two. Overall prices could start to strengthen at that point, but in the short-term DDGS buyers still have opportunities if they shop around.

Ethanol Comments: The differential between the cost of corn and the return for the co-products of ethanol and DDGS has steadily improved for the past few weeks, and that trend has continue for the week ending Friday, November 14, 2014.

  • Illinois differential is $3.73 per bushel in comparison to $3.26 the prior week and $3.25 a year ago.
  • Iowa differential is $3.36 per bushel in comparison to $2.80 the prior week and $2.51 a year ago.
  • Nebraska differential is $3.50 per bushel in comparison to $2.76 the prior week and $2.33 a year ago.
  • South Dakota differential is $3.42 per bushel in comparison to $2.76 the prior week and $2.62 a year ago.

Unfortunately, the price favorability of ethanol to wholesale gasoline has come to an end in different regions of the United States. This fact could have an unfavorable impact upon ethanol exports, which has acted as a relief-valve for surplus stocks.

Present U.S. ethanol stocks are 17.7 million barrels, which is about 16.8 percent larger than the year-ago stocks level of 15.2 million barrels. Margins on ethanol production seem to noticeably decline when stocks exceed year-ago levels by more than 20 percent. It may not take much time to get to that point because ethanol production has recently been on the increase. Average daily ethanol production was 946,000 barrels per day (bpd) for during week ending November 11. The prior week’s production level was 927,000 bpd and the year ago level was 927,000 bpd.

7. Country News

Argentina: Rains across the Pampas grain belt will likely further delay corn planting, according to Reuters. Prior to this recent deluge, Argentina’s corn planting was already behind due to rain showers earlier in the month.

China: China Natioanl Grain and Oils Information Center has reported that China has increased the amount of corn it imports from Ukraine under the auspices of a loan for grain deal struck between the two countries in 2012, reports Reuters. An additional 1.14 MMT of corn has been purchased since October, which brings the total amount of corn purchased from Ukraine to 1.32 MMT.

France: The Agricultural Ministry announced that it is raising the estimate for this year’s corn harvest to a record high following favorable weather, according to Reuters. It is now believed that French farmers will bring in 16.95 MMT of corn, which is up from the 16.31 MMT estimated in October. The largest corn crop France has ever produced was 16.75 MMT in 1997.

8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Last week, I stated that ocean freight markets appeared to have topped out for the moment and looked as if they were going to set back a bit. As it turns out; this is just what happened. Markets trended lower all week and again ended the week on a soft note.

I don’t anticipate a much more of a drop in rates but certainly believe that it will be a while before rates will be able to rally back. Vessel owners will have to hope that their bankers are patient.

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