Market Perspectives - January 16, 2015

1. Chicago Board of Trade Market News

Week in Review

Outlook: The composite of USDA data that was published on Monday January 12 was neutral for feed grains. There was a 2.4 bushel per acre reduction in the average U.S. corn yield to 171 bushels, but the yield and production are still record large and global supplies are abundant. Domestic feed consumption was reduced by 100 million bushels because usage in the first quarter of the crop year (September-November) was less than expected. The reduced feed usage was partly offset by a 25 million bushel increase in corn for ethanol production, but that increase may be somewhat premature due to recent steep declines in ethanol producer margins. Alternatively, the export estimate for the 2014/15 season was left unchanged at 1.75 billion bushels and that could increase if there is any further decline in U.S. corn prices.

Sorghum exports have been particularly strong and are up 17 percent annually. Exports are expected to consume about 58 percent of total sorghum supplies during the 2014/15 season. Chinese buyers appreciate U.S. sorghum because their government places no import quota on it (unlike corn) and there is virtually no likelihood of rejection by customs authorities. This aggressive buying has created the rare occurrence when the average U.S. farm price of sorghum is above the price of corn.

The estimated farm price of U.S. sorghum at $3.80 per bushel is 15 cents above the average farm price of corn at $3.65 per bushel in 2014/15. USDA notes that the last time this happened was in the 2006/07 crop year. Prior to that year, there were only 10 other years when U.S. sorghum prices averaged above corn and most of those events were in the 1920’s and 1930’s.

In relation to barley, total barley supplies of the present 2014/15 season are estimated to be down about 7 percent. USDA data also indicated that total U.S. barley stocks on December 1 were down 7 percent from a year ago at 157.7 million bushels. A noteworthy comment by USDA is that Minneapolis feed barley prices have been steadily increasing since establishing a low in the first week of September.

Corn remains the dominant influence on price because it is expected to account for 93 percent of feed consumption in the 2014/15 seasonal. From present levels, substantial declines in the price of corn contracts seems unlikely because the yield reduction to 171 bushels per acre and ending stocks of 1.877 billion bushels means that any setback in the nearby corn futures contract below $3.70 is likely to be perceived as a buying opportunity by global end-users. Unfortunately, local basis in certain regions could be weak because of poor ethanol producer margins. 

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: The upcoming period of January 16 – 18 looks generally mild and dry across the contiguous 48 states. According to the Weather Prediction Center, heavy precipitation (2-7 inches) should be limited to northwest California and the Pacific Northwest along and west of the Cascades, with the largest amounts expected along parts of the immediate coastline and windward mountain slopes. Moderate-to-locally heavy precipitation (1.5-3.0 inches) is expected in parts of central and northern Idaho. Elsewhere, amounts of 0.5-1.5 inches are forecast across the remainders of northern California, the Pacific Northwest and Idaho, plus adjacent portions of western Montana and northwestern Wyoming. Farther south and east, totals above 0.5 inch should be limited to New England, the Outer Banks and the immediate central Gulf Coast. The rest of the East Coast, southern sections of the central Gulf Coast states and the upper Great Lakes regions are expected to receive light precipitation, with little or none anticipated elsewhere. Temperatures should average at least somewhat above normal from the Mississippi Valley westward, with daily highs averaging 9 degrees-18 degrees above normal from south-central sections of the Plains and Front Range northward to the Canadian border.

For the period of January 19 – 23, warmer than normal weather is favored across almost all of the 48 continental states, except parts of the central and northern High Plains and adjacent Rockies. Subnormal precipitation is anticipated throughout the West Coast states, western Arizona and most of Nevada while surplus precipitation is expected from the eastern edge of the Rockies eastward through the Great Lakes region, the middle Ohio Valley and the central Gulf Coast region. 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
US Export inspections
USDA Inspections

Corn: Net sales of 818,800 MT for 2014/15 were up noticeably from the previous week, but down 10 percent from the prior four-week average.Increases were reported for unknown destinations (374,100 MT), Mexico (190,300 MT), South Korea (136,000 MT), Algeria (45,000 MT) and Colombia (40,400 MT).Decreases were reported for the Dominican Republic (23,300 MT).Net sales of 25,200 MT for 2015/16 were for Japan (14,400 MT) and Mexico (10,800 MT). Exports of 400,200 MT were down 22 percent from the previous week and 40 percent from the prior four-week average.The primary destinations were Japan (186,700 MT), Mexico (129,900 MT), Colombia (30,700 MT), Peru (27,500 MT) and Taiwan (16,100 MT). Optional Origin Sales:For 2014/15, outstanding optional origin sales total 68,000 MT, all South Korea. 

Barley: There were no net sales reported during the week.Exports of 400 MT were up noticeably from the previous week, but down 20 percent from the prior four-week average.The destination was Japan. 

Sorghum: Net sales of 274,500 MT for 2014/15 were up 50 percent from the previous week, but unchanged from the prior four-week average.Increases were for unknown destinations (171,000 MT) and China (103,500 MT).Exports of 86,700 MT were down 50 percent from the previous week and 58 percent from the prior four-week average.The destination was China.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Substantial export demand for bulk volumes of DDGS through the Gulf of Mexico seems to be building because barge bids are pushing prices higher in the spot market. Barges are reported to be priced steady at approximately $265/MT through February. This action has temporarily elevated the local domestic prices of DDGS in relation to other feed ingredients. One of the leading merchandisers noted that this foreign buying could momentarily cannibalize some of the domestic demand, but other feed prices are also being affected by foreign demand. As discussed in the preceding Outlook section, the export demand has pulled sorghum prices above the price of corn.

Merchandisers report that while the nearby DDGS prices are well supported and more thinly offered, the deferred time periods have more volume available and prices have declined in unison with the recent action of corn futures contracts. However, that could soon change because the approval of MIR-162 by the Chinese Ministry of Agriculture (MOA) has resulted in many inquiries from Chinese buyers of DDGS for the March/April/May time period.

Ethanol Comments: Crude oil contracts appear to have recently leveled off and that may give some stability to ethanol contracts that have recently traded down to record low levels. Please recall that the point was noted within this section last week that the decline in petroleum contracts had temporarily caused the price of ethanol to be above gasoline, and those developments could in-turn slow ethanol blending and result in the building of ethanol stocks. This seems to have happened.

A pronounced increase in ethanol stocks was reported in this week’s data. Ethanol stocks increased by 7.3 percent in one week to 20.2 million barrels. This amount is 25.8 percent above the year ago level of 16.3 million barrels. The price of ethanol can be negatively influenced when ethanol stocks increase beyond 20 percent of the year ago level, but any further sizable decline may be negated by the fact that ethanol prices are already low and petroleum contracts appear to have plateaued.

The differential between the cost of corn and the return for the co-products of ethanol and DDGS did decline in different sections of the Corn Belt for the week ending Friday, January 16, 2015, but it was not in free-fall:

  • Illinois differential is $1.57 per bushel in comparison to $1.67 the prior week and $4.31 a year ago.
  • Iowa differential is $1.29 per bushel in comparison to $1.53 the prior week and $2.79 a year ago.
  • Nebraska differential is $1.22 per bushel in comparison to $1.53 the prior week and $2.98 a year ago.
  • South Dakota differential is $1.60 per bushel in comparison to $1.79 the prior week and $3.21 a year ago.

7. Country News

Argentina: The Rosario Grain Exchange’s monthly report estimates Argentine corn production to total 22.4 MMT, which is up from a previous prediction of 21.5 MMT, according to Reuters. The report also indicated that nearly 90 percent of the 2014/15 corn crop has been planted.

Brazil: While parts of Brazil are receiving rainfall, there are concerns that it is not nearly enough to offset the country’s worst drought in 80 years, reports Reuters. Southeastern Brazil, which accounts for 60 percent of the country’s GDP, was hit particularly hard by the drought and there are concerns about its ability to recover economically this year.

Russia: Russia has increased informal curbs on grain exports in the leadup to the implementation of a formal export tax on February 1, reports Reuters. These curbs include increased and more frequent quality monitoring inspections by food safety organization Rosselkhoznadzor and increased deleays in getting final port documents so that ships can get underway.This is being done in an effort to bring domestic prices under control.

South Africa: South African corn futures have fallen to their lowest level in over two months, according to Bloomberg News. Yellow corn for March delivery fell by 3.9 percent to $173/MT.

8. Ocean Freight Markets and Spread

Bulk Freight

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting:The Baltic Indices attempted a small bounce rally this week, but it did not hold up and by week’s end things were softening again. I think the market simply got tired of going down every day and needed some up as in addition to the down action. Physical rates have not really recovered and remain defensive. The Dry-Bulk market still requires a firm bid to determine an exact rate. Soybeans from the U.S. Gulf to Rotterdam are close to $15.00/MT freight with Brazil to Rotterdam at around $13.50/MT. Spot markets are cheaper than the deferred. We are starting to see Dry-bulk vessels from Asia ballasting to East Coast South America in anticipation of the developing harvest business from there. That will likely keep those markets cheap. The soybean harvest in Mato Grosso, however, is only 4 percent completed. We have to expect more vessels to decide to layup in Singapore harbor until things improve.

Capesize iron ore rates from Western Australia to China seem to have stabilized at very low levels ($4.25-30/MT). Keep in mind that we are approaching the Lunar New Year, which falls on February19, and this will lead to a full week holiday in many Asian countries.

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

 The charts below represent January-December 2014 annual totals versus year-to-date 2015 container shipments to China.

China 2015
China 2014
International Freight Rates

10. Interest Rates

Interest Rates