Market Perspectives - May 29, 2015

1. Chicago Board of Trade Market News

Outlook: As the June 1 deadline approached, there was some anticipation that the biofuel announcement by the U.S. Government’s Environmental Protection Agency (EPA) could be construed as bearish for corn prices if mandated ethanol consumption were less than prior projections. That expectation proved to be somewhat correct, but only because the expectation for total gasoline use is down from earlier estimates. The current lower prices of gasoline are expected to stimulate increased gasoline consumption, and EPA is projecting such an increase in U.S. domestic consumption of conventional ethanol from 13.25 billion gallons in 2014, to 13.4 billion gallons in 2015 and 14 billion gallons in 2016. Please note that these amounts are not caps but minimums.

U.S. ethanol also has developed an export market. Recent declines in the price of corn are encouraging more ethanol production, and global buyers do take note when the price of ethanol is favorable in relation to gasoline. Present market conditions may stipulate that margins become thin for ethanol facilities, as is already the case for corn growers, but the overall outlook for both parties looks positive well into the future. 

3. U.S. Weather/Crop Progress

planting progress

U.S. Drought Monitor Weather Forecast: During the next five days, the western U.S. will experience a warming trend, while near- to above-normal temperatures will continue in the East. In contrast, very cool weather will cover much of the Plains and Midwest. Meanwhile, heavy rain (locally 2-4 inches) will lead to additional flooding across the southeastern Plains and western Gulf Coast region. A broader area of the Plains and Midwest will receive 1-2 inches, with locally higher totals. Similar amounts can be expected in the eastern U.S., except along the southern Atlantic Coast. Elsewhere, showers in the Rockies and Intermountain West will contrast with warm, dry weather in the Pacific Coast States and the Desert Southwest.

The NWS 10-day outlook calls for the likelihood of near- to above-normal temperatures and precipitation across much of the nation. Enhanced odds of cooler-than-normal conditions will be limited to parts of Texas, while drier-than-normal weather will be limited to the Pacific Northwest and the northern Intermountain West. 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 Grain Inspections

Corn: Net sales of 812,600 MT for delivery in 2014/15 were up noticeably from the previous week and 12 percent from the prior four-week average. Increases were reported for Japan (455,900 MT, including 107,800 MT switched from unknown destinations and decreases of 71,000 MT), Colombia (117,000 MT, including 65,000 MT switched from unknown destinations, 50,000 MT switched from Panama and decreases of 7,900 MT), South Korea (112,500 MT, including 80,000 MT switched from unknown destinations), Taiwan (57,000 MT), Mexico (42,200 MT) and Peru (39,000 MT). Decreases were reported for unknown destinations (52,500 MT), Panama (50,000 MT) and China (900 MT). Net sales of 80,700 MT for 2015/16 were reported for China (58,000 MT), Mexico (13,700 MT), El Salvador (8,000 MT) and unknown destinations (1,000 MT). Exports of 1,079,500 MT were down 3 percent from the previous week and 5 percent from the prior four-week average. The primary destinations were Mexico (267,800 MT), Japan (229,900 MT), Colombia (214,300 MT), Taiwan (133,600 MT), South Korea (91,000 MT) and Saudi Arabia (75,500 MT).

Barley: There were no sales reported during the week. Net sales of 200 MT for 2015/16 were reported for Japan. Exports of 200 MT were reported to South Korea.  

Sorghum: Net sales of 100,600 MT for 2014/15 resulted as increases for China (179,500 MT, including 82,000 MT switched from unknown destinations and decreases of 4,900 MT), were partially offset by decreases for unknown destinations (79,000 MT). Net sales of 271,000 MT for 2015/16 were reported for China (163,000 MT) and unknown destinations (108,000 MT). Exports of 147,300 MT were down 11 percent from the previous week and 23 percent from the prior four-week average. The destination was China.  

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS buyers from Korea and Vietnam were in the market this week and looking to potentially price shipments for the months of July and August. Their strategy makes great sense because of the favorable pricing that is currently being offered for that time period; bulk DDGS rates at the Gulf of Mexico are on average below the spot market by $9/MT for July and down $13/MT for August. In similar fashion, domestic rates for DDGS are averaging down $5/MT for July and $7/MT for August, while international containerized rates are down $4/MT below the spot price for each of those months.

In relation to rates for the nearby spot market, this week there were declines of $8/MT for both containerized and bulk DDGS being sent to foreign clients. Alternatively, there was no such decline in either domestic truck or rail rates for DDGS. The reason for this difference seems to be because domestic buyers primarily purchase only for their immediate needs while foreign buyers will often extend their purchases into the futures, which is something that DDGS merchandisers appreciate.

Foreign buyers have told several different DDGS merchandisers that they are waiting on prices to hit bottom before purchasing any more product. However, most traders know that predicting the actual bottom is easier said than done.         

Ethanol Comments: The Environmental Protection Agency (EPA) finally issued the mandated ethanol production requirements for 2014, which come about two years late, and directed that the amount of ethanol that was produced during that year be produced. Such a formality is influencing the price of Renewable Identification Numbers (RINs) but it is expected to have limited influence on the present-day price of ethanol.

Demand is the factor that will influence the current and future price of ethanol, and the EPA noted that the total U.S. gasoline consumption in 2015 and 2016 is likely to be less than was forecast several years ago. As a result, the amount of ethanol consumption is also expected to be lower than was initially projected. That is a logical conclusion, but it also seems reasonable to conclude that recent declines in the price of gasoline should also encourage a rebound in consumption.

Evidence of demand is seen in the fact that total U.S. ethanol stocks declined to 20.1 million barrels for the week ending May 22, which was down from the prior week’s total of 20.4 million barrels. This reduction occurred while there was a sizable increase in the average daily production rate to 969,000 barrels per day (bpd). That increase presumably contributed to this week’s decline in the differentials between the spot price of corn and ethanol co-products in primary regions of the Corn Belt. The differentials for the week ending May 29, 2015 are as follows:

  • Illinois differential is $2.39 per bushel, in comparison to $2.60 the prior week and $4.12 a year ago.
  • Iowa differential is $2.14 per bushel, in comparison to $2.35 the prior week and $4.02 a year ago.
  • Nebraska differential is $1.84 per bushel, in comparison to $2.11 the prior week and $3.70 a year ago.
  • South Dakota differential is $2.42 per bushel, in comparison to $2.57 the prior week and $4.22 a year ago.

7. Country News

France: The port of Rouen shipped 222,556 MT of grain for the week ending May 27, which is a five-week high reports Bloomberg News. Among these shipments was 128,005 MT of barley bound for China.

South Africa: Bloomberg News reports that the South African Crop Estimates Committee has raised its corn production forecast by 0.8 percent following weeks of reduced forecasts. Farmers may bring in 9.8 MMT of corn, which will be the smallest harvest since 2007. Drought conditions in the Free State and North West provinces (where 64 percent of the 2014 harvest was grown) are the primary culprits in the small corn totals this year.

Ukraine: UkrAgroConsult has predicted that the total grain harvest for 2015/16 could total 54.9 MMT, according to Bloomberg News. This is up from an earlier prediction of 52.3 MMT due to good weather in April.  

8. Ocean Freight Markets and Spread

Bulk Freight

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: It was another rather flat week in global dry-bulk freight markets. As mentioned previously; there really isn’t much reason for markets to move significantly in either direction and things are therefore pretty much range-bound for now. This is comforting news for freight buyers but not at all good for vessel owners and investors – and vessel owners are certainly feeling the pain. Vessel owner Golden Destiny has delayed the construction and delivery of 19 new vessels out to 2017. The company reported a loss of 15.3 million USD in the first quarter of 2015. It is easy to conclude that Golden Destiny is not alone in this situation and we should expect to see more of this as we go forward. The market turnaround is not in sight.

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 Taiwan.

Taiwan Shipments
Taiwan Shipments
Intl Freight Rates

10. Interest Rates

Interest Rate