Market Perspectives - February 6, 2015

1. Chicago Board of Trade Market News

Week in Review

Outlook: The interest in buying the March corn contract below $3.75 acted as a price floor and caused a sudden bounce back up to the $3.85 per bushel range on Tuesday. Prices then consolidated at that range for several days. The spike higher and then consolidation has the appearance of a flag or pennant on the end of a pole, which consequently is the reason that particular technical formation is referred to as a flag or pennant. The upward development of such a technical formation normally indicates that prices will continue higher by approximately the same amount as the pole’s length. In this case, it would imply that the March contract could bounce back up toward $4.00 per bushel. However, there several additional factors to consider:

A supportive factor is that some premium could be purchased back into corn contracts due to uncertainty about U.S. corn acreage. As well, export demand for U.S. corn continues to be strong. Alternatively, South American is about to harvest a sizable soybean crop and U.S. farmers are expected to increase their own soybean acreage. Weakness in soybean prices could indirectly dampen any increase in bullish enthusiasm for corn contracts.

Growing uncertainty about whether or be bullish, and by how much, is what creates greater volatility in futures contracts. Price volatility in corn contracts can be particularly high in early spring as acreage intentions are being defined and then again later in the year during the time-period just prior to pollination. The outlook is that it will also be the case this season. 

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: Over the next week, the warm temperatures over the western half of the United States will continue. Much of the area with see daily high temperatures 6-12 degrees Fahrenheit above normal, with the greatest departure from normal high temperatures over eastern Colorado and western Kansas. Overnight lows are also expected to be above normal over most of the United States, with overnight lows 6-18 degrees Fahrenheit above normal. The greatest departures from normal are expected over the northern Rocky Mountains. The area around the Great Lakes and New England is expected to be cooler-than-normal during this time with departures of 3-6 degrees Fahrenheit below normal for maximum and minimum temperatures. Precipitation chances look impressive from central California north toward Oregon and Washington. Amounts are projected to be quite high at this time, but with the warm weather, much of this precipitation is expected as rain, except at the highest elevations. This system is expected to impact most of the northwestern United States and into the northern Rocky Mountains. Precipitation is also expected to impact the Gulf Coast and along the eastern seaboard, into New England. Amounts of up 1-2 inches are projected at this time.

The 10-day outlook has warm temperatures likely to continue over the western two-thirds of the country while the best chances for below normal temperatures is expected over New England, the Great Lakes region and along the East Coast. Precipitation projections are showing that the greatest chance of above normal precipitation is over the northern Plains and upper Midwest. The best chances for below normal precipitation take place over the southeastern United States, especially over the lower Mississippi valley and Gulf Coast as well as in California and the Great Basin. 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 844,900 MT for 2014/15 were down 12 percent from the previous week and 22 percent from the prior four-week average. Increases were reported for Mexico (297,000 MT), Colombia (158,400 MT, including 109,000 MT switched from unknown destinations and decreases of 47,900 MT), South Korea (116,100 MT), Japan (88,200 MT, including 30,000 MT switched from unknown destinations and decreases of 4,000 MT), Egypt (66,000 MT, including 60,000 MT switched from unknown destinations), the Dominican Republic (35,500 MT) and Honduras (28,900 MT, including 26,100 MT switched from unknown destinations). Decreases were reported for unknown destinations (46,800 MT), Guatemala (10,900 MT) and China (2,000 MT). Net sales of 7,100 MT for 2015/16 were reported for Mexico (7,600 MT) and unknown destinations (900 MT). Decreases were reported for Japan (1,400 MT). Exports of 714,800 MT were down 14 percent from the previous week, but up 14 percent from the prior four-week average. The primary destinations were Japan (185,900 MT), Colombia (175,100 MT), Mexico (135,400 MT), Costa Rica (39,500 MT), El Salvador (31,000 MT) and Honduras (28,000 MT).Optional Origin Sales: For 2014/15, outstanding optional origin sales total 68,000 MT, all South Korea. Export Adjustments: Accumulated exports to Japan were adjusted down 111,481 MT for week ending January 22, 2015. These shipments were reported twice. 

Barley: Net sales of 1,000 MT for 2014/15 were reported for Taiwan. Exports of 200 MT were reported to Taiwan.

Sorghum: Net sales of 223,600 MT for 2014/15 were down 4 percent from the previous week and 10 percent from the prior four-week average. Increases were for China (165,600 MT) and unknown destinations (58,000 MT). Net sales of 58,000 MT for 2015/16 were for unknown destinations. Exports of 80,600 MT were down 73 percent from the previous week and 52 percent from the prior four-week average. The destination was China. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Domestic prices for bulk DDGS averaged about $3.00/MT higher during this past week. The largest price increases were for DDGS delivered by rail to California. Those increases are presumably related to West Coast congestion and issues involving shipment execution. The East Coast of the U.S. has also had a few shipment issues.

In contrast, the price for containerized DDGS to foreign destinations declined on average by about $5.00/MT. There were some limited sales this week of 500 MT for both April and May to the Vietnamese port of Haiphong at $320/MT, CFR. Otherwise, several merchandisers reported that the markets was relatively quiet as various Asian buyers were hoping DDGS prices would be forced even lower in order to remain competitive with declining soybean meal and rape seed meal prices in China. Of course, those buyers presumably also recognize that a greater influence on DDGS prices results from the action of corn contract at the CBOT.

It is possible that buying of containerized DDGS will momentarily increase next week so that purchases can be arranged before the Chinese New Year begins on February 19. The reduced demand during Chinese New Year may create an opportunity for domestic U.S. buyers of DDGS and buyers from other foreign locations such as Japan, Mexico and Central America.

Ethanol Comments: There continues to be no more cost effective means to boost octane in gasoline than ethanol. So long as that remains the case, ethanol producer margins are expected to stay constant, but lower than a year ago. Stability in the ethanol market is likely to be derived from increased gasoline consumption resulting from an improved U.S. economy and lower petroleum prices at the pump.

There was a slight increase this past week in ethanol stocks from the prior-week’s level of 20.6 million barrels to the current level of 21 million barrels. Such increases do need to stop because total U.S. stocks are well above a year ago, however stocks can contract if consumption increases and production does not. Please note that recent production did decline from the prior-week’s average rate of 978,000 barrels per day (bpd) to a slightly lower average of 948,000 bpd.

Continued stability is reflected in the less than two cent average decline in the differential between the cost of corn and the return for the co-products of ethanol and DDGS for week ending Friday, February 6, 2015:

  • Illinois differential is $1.84 per bushel in comparison to $1.81 the prior week and $3.43 a year ago.
  • Iowa differential is $1.50 per bushel in comparison to $1.56 the prior week and $2.60 a year ago.
  • Nebraska differential is $1.41 per bushel in comparison to $1.43 the prior week and $2.60 a year ago.
  • South Dakota differential is $1.66 per bushel in comparison to $1.68 the prior week and $2.75 a year ago.

7. Country News

Argentina: Informa has raised its 2014/15 Argentina corn production estimate to 23 MMT, Reports Reuters. This is up from a January 6 estimate of 22 MMT.

Brazil: Informa has announced its corn production estimate latest in 2014/15 of 72.8 MMT, which is up 550,000 MT from a January 6 estimate, reports Reuters.

Russia: The Agricultural Ministry announced that Russia may export 20-30 MMT of grain in 2015/16, according to Reuters.

South Africa: A lack of rain in Free State province (which produces 43 percent of South Africa’s corn) could negatively impact corn yields, reports Bloomberg News. Yellow corn for July delivery now stands at $186.53/MT.

8. Ocean Freight Markets and Spread

Bulk Freight

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Just when you think the market cannot go lower, it does. It seems we have not actually reached bottom yet and the market wishes to continue to inflict pain on vessel owners and operators. The Baltic Indices were down more than the physical markets.

Maybe this is what is needed to motivate vessels owners to do what must be done; stop orders for new builds and scrap any vessel over 23-25 years old. The downward market slope on global freight does, however, seem to be flattening out. Regardless, importers of grain and oil seeds are certainly benefiting from the lower commodity prices and cheap dry-bulk ocean freight. Panamax freight from the U.S. East Coast (Norfolk, VA) is trading to China at a $4.00/MT discount to the US Gulf. The Handysize freight market from Norfolk, VA to the Caribbean and North Africa has been very competitive versus the US Gulf.

Container freight rates have not come down, and have even increased slightly, due to the West Coast’s labor issues. This unfortunate problem is likely to continue to haunt everyone for months to come.

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

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

Japan 2015
Japan 2014
International Freight Rates

10. Interest Rates

Interest Rates