Market Perspectives - June 19, 2015

1. Chicago Board of Trade Market News

Week in Review

Outlook: Corn contracts started off the week in decline as short traders attempted to trigger a collapse by punching through the prior June 1 lows in hopes of fracturing support. That did not happen and it challenged the resolve of bearish traders as they bought back some of their short positions, which caused prices to work about 10 cent higher over the next couple of days. At that point, bearish and bullish traders seemed to be in a standoff as they waited on the release of future price influencing data.

The first price influencing data to be released will likely be USDA’s Crop Condition ratings on Monday. Those conditions are expected to show another limited 1-3 percent decline for both corn and soybeans. Average U.S. corn conditions are favorable but weekly repetitive declines is not a development that instills confidence to continue selling at current price levels until more definitive data is released. Market participants will receive more substantive data on June 30.

USDA will update their acreage estimates for corn, sorghum, barley and oats in the Acreage report. The quarterly Grain Stocks report will also be released on that same day and it will give a snapshot of total U.S. grains stocks on June 1. As well, USDA will release their Feed Outlook report and it will discuss the U.S. feed supplies and recent consumption patterns. Shortly thereafter, USDA will release their first survey based yield and production estimates for barley and oats on July 10 Crop Production report. One month later, USDA will release yield and production estimates for corn and sorghum in the August 12 Crop Production report. This composite of summer reports from USDA consistently affects U.S. and global feed grain prices.

There is no reason to expect USDA’s data to be consistently bullish or bearish. For example, it is entirely possible that the Acreage report could be considered bullish for corn prices while the data within the Stocks report is considered more bearish for nearby contract corn contracts. Whatever the actual outcome, the outlook is that the uncertainty is presently a larger threat for bearish traders at current price levels and so an additional reduction in their positions is anticipated prior to June 30, and that action should enable corn contract prices to strength before month’s end.


3. U.S. Weather/Crop Progress

crop progress

U.S. Drought Monitor Weather Forecast: For the upcoming period of June 19-21, generally dry and significantly warmer-than-normal conditions are expected in the central Plains and from the Rockies westward to near the coast. Only isolated light rain is anticipated in areas south and west of Montana and the central sections of Wyoming, Colorado and New Mexico. Forecast totals in the eastern and northern parts of the Rockies are less than 0.5 inch. At the same time, daily high temperatures are expected to average 9-12 degrees F above normal in the Great Basin and central Rockies. The dryness and heat may quickly dry out the recent surface growth in that region, bringing ideal conditions for wildfires to develop and rapidly spread.

In contrast, remnants of Tropical Storm Bill should bring a swath of heavy rain across east sections of Texas and Oklahoma, southern Missouri, the Ohio Valley, the central Appalachians and (to a lesser extent) part of the lower Northeast. At least a couple inches of rain is expected, with peak amounts approaching 7 inches in southern Oklahoma and 4.5 to 5.5 inches in southern sections of both Illinois and Ohio.

In the broad area north of this swath, moderate rains of several tenths to almost 2 inches are expected. Drier conditions are forecast to prevail south and east of the band of heaviest rainfall, with only a few tenths of an inch anticipated in Florida, the central Gulf Coast States and southwestern South Carolina.

For the ensuing period of June 22-26, continued above-normal temperatures are favored in most of the West, the Rockies and the Southeast. The odds favor anomalous warmth in the mid-Atlantic, central Appalachians, middle and lower Mississippi Valley and south-central Plains as well. Enhanced chances for cooler-than- normal weather are limited to a swath from the northeastern most Plains eastward through the northern Great Lakes and much of the Northeast.

Enhanced chances for heavier-than-normal rain cover the Great Lakes and Northeast and a small area around the southern reaches of the Arizona/New Mexico border. However, dryness is favored to prevail from the south-central Plains eastward through the lower Mississippi Valley and the Southeast. The northwestern quarter of the contiguous states also has increased odds of abnormally light precipitation. 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 627,200 MT for delivery in 2014/15 were up 27 percent from the previous week and 3 percent from the prior four-week average. Increases were reported for Japan (182,300 MT, including 111,900 MT switched from unknown destinations and decreases of 7,000 MT), Mexico (136,400 MT, including 30,000 MT switched from unknown destinations and decreases of 2,400 MT), South Korea (129,400 MT, including 130,000 MT switched from unknown destinations and decreases of 600 MT), Peru (89,400 MT, including 60,000 MT switched from unknown destinations and decreases of 400 MT), Spain (60,000 MT, switched from unknown destinations) and Egypt (52,700 MT). Decreases were reported for unknown destinations (245,100 MT) and Saudi Arabia (1,200 MT). Net sales of 200,400 MT for 2015/16 were reported for unknown destinations (155,900 MT), Mexico (30,500 MT) and El Salvador (4,500 MT). Exports of 1,044,900 MT were up 27 percent from the previous week and 6 percent from the prior four-week average. The primary destinations were Mexico (283,400 MT), Japan (272,200 MT), Saudi Arabia (78,800 MT), Peru (75,900 MT), Taiwan (74,100 MT) and South Korea (65,500 MT).

Barley: There were no sales reported during the week. Exports of 300 MT were reported to Japan (200 MT) and Canada (100 MT).

Sorghum: Net sales of 59,800 MT for 2014/15 resulted as increases for China (60,000 MT) and Japan (9,500 MT, including 9,700 MT switched from unknown destinations and decreases of 200 MT), were partially offset by decreases for unknown destinations (9,700 MT). Exports of 10,100 MT--a marketing-year low--were down 82 percent from the previous week and 92 percent from the prior four-week average. The destinations were Japan (9,500 MT) and China (600 MT). 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Corn futures contracts bounced this week after being unable to close below the prior contract lows. As corn contracts bounced back, U.S. domestic DDGS prices increased on average by about $4/MT and the rate for bulk DDGS to the Gulf of Mexico also increased by about $7/MT. Prices being offered to domestic and bulk rate buyers of DDGS are unchanged out through August and September. In contrast, containerized buyers are being offered rates about $4/MT lower in August and September if they are willing to contract into that time period.

DDGS merchandisers seem to be offering their best pricing opportunities to clients who have reputations for dependability. It is more difficult for merchandiser to offer the same opportunities to clients who purchase exclusively in the spot market or those clients who may seek to back out of established pricing agreements. Of course, DDGS merchandisers are willing to work together with customers when periods of difficulty arise, but they will seek alternative clientele if the inability to meet agreements becomes habitual.

Pricing relationships between DDGS merchandisers and buyers are expected to become increasingly important once there are indications that a bottom has been established in Chicago corn futures prices. There is a little more than one more week before USDA releases important data about the current crop that will help determine if there is more downside in corn contracts or if a likely bottom has already been established. DDGS merchandisers are anxiously watching marketing developments and seem determined to keep their clients informed as conditions change.

Ethanol Comments: Ethanol production rates declined last week and could continue to decline in the near-term if producer margins continue to narrow and total stocks maintain current levels. Total U.S. ethanol stocks increased from 20.2 million barrels the prior week to 20.7 million barrels for the week ending June 12. During that same week-to-week time period, the average rate of daily ethanol production decreased from 992,000 barrels per day (bpd) the prior week to a lower rate of 980,000 bpd.

The narrowing of producer margins is implied in the consistent decline of the differentials between the spot price of corn and ethanol co-products across the Corn Belt. The differentials for week ending June 19, 2015 are as follows:

  • Illinois differential is $1.81 per bushel in comparison to $2.03 the prior week and $3.16 a year ago.
  • Iowa differential is $1.73 per bushel in comparison to $1.91 the prior week and $2.72 a year ago.
  • Nebraska differential is $1.51 per bushel in comparison to $1.64 the prior week and $2.73 a year ago.
  • South Dakota differential is $2.11 per bushel in comparison to $2.25 the prior week and $3.25 a year ago.

7. Country News

China: A construction plan released by China’s National Development and Reform Commission and the Ministry of Finance states the government will look to upgrade its grain silos nationwide between 2015-2020, according to Reuters. New storage facilities that will be able to store 50 MMT are slated to be completed by the end of 2015.

Further on China: Reuters reports that Heilongjiang Province, the top corn producer in the country’s northeast, has announced it will increase subsidies to corn processors to help keep them afloat. The subsidies were doubled earlier in the year to total 200 yuan/MT and will now be doubled again to 400 yuan/MT ($64.43/MT).

India: Almost 80 percent of India has received better-than-average or normal monsoon rainfall since June 1, which has allowed farmers to begin planting corn, according to Bloomberg News. Rainfall for June is 11 percent above average thus far, however July precipitation is considered the key to a good harvest and totals for July are expected to be about 12 percent below average due to a developing El Nino weather pattern.

North Korea: The FAO is reporting that North Korea’s main growing regions will likely see their production cut in half, which will further increase the country’s food shortages, reports Reuters. UN representatives visited the main growing regions of North Hwanghae and South Hwanghae provinces and discovered that the country’s barley crop is at severe risk due to drought.


8. Ocean Freight Markets and Spread

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Global ocean freight markets have supported a two-week rally in the Baltic freight indices.

This time there was fair support across the Capesize, Panamax and other Dry-Bulk sectors. In the last three weeks (just back to the beginning of the month) you will notice that the Baltic Panamax indices have risen by 47 percent in the Atlantic and by 42 percent in the Pacific. This is obviously a rather good jump for a previously sluggish and dull market. As is common, the physical voyage charter market has trailed the Baltic indices movement but it has gone up. I cannot detect any fundamental change occurring in these markets and therefore must conclude that this rally is temporary. Traders believe the increase in values is mostly a result of slightly improved grain business out of East Coast South America and “positional tightness” in the U.S. Gulf. As vessel operators continue to ballast over from the weaker Mediterranean market the U.S. Gulf market should loosen up.

Container freight for U.S. grain and oilseed commodities to Asia have remained depressed, but still attractive for U.S. Shippers and buyers. LA-Long Beach, CA to China freight is about $300-$325/TEU. (40 ft. container at 25 MT would equal $12.00-$13.00/MT or a 20 ft. unit at 18 MT would equal $16.00-$18.00/MT). Chicago to China = $1,100-$1,200/TEU. (40 ft. container at 25 MT would equal $44.00-$48.00/MT or a 20ft unit at 18 MT would equal $61.00-$66.66/MT).

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 Indonesia.

10. Interest Rates