Market Perspectives - July 10, 2015

1. Chicago Board of Trade Market News

Week in Review Table

Outlook: A subtle but important factor contained with USDA’s July WASDE report is the reduction of the ending stocks estimate below 1.8 billion bushels for the current 2014/15 marketing year that will soon end on August 31, 2015. The importance of this fact is that it raises the price floor for the nearby corn contracts and it reduces the beginning stocks estimate for next season.

Increased demand is what reduced the estimate for 2014/15 corn ending stocks from the June estimate of 1.876 billion bushels to the new estimate of 1.779 billion bushels. This adjustment is important first because it dampens any justification for shoving the nearby futures contracts back below $4.00 per bushel. Second, the reduced ending stocks for the current season become the beginning stocks for the approaching 2015/16 season that will begin on September 1. Naturally, the lower beginning stocks flows right through next season’s balance sheet to result in ending stocks for the 2015/16 season dropping from the July estimate of 1.771 to 1.599 billion bushels.

Please consider that the prospect of 2015/16 U.S. corn ending stocks being at least 1.6 billion bushels is dependent upon the average corn yield falling no further than the current estimate of 166.8 bushels per acre. The reason that USDA chose not to adjust their yield estimate in the July WASDE is because the normal protocol is to wait upon actual field surveys and make adjustment to yields in the August data. Holding all other factors constant, each one-bushel drop below the current corn yield estimate of 166.8 bushels will reduce the ending stocks of U.S. corn by more than 81 million bushels. In other words, a reduction of less than 2 bushels per acre from the current estimate will cause U.S. corn ending stocks to fall below 1.5 billion bushels. 

3. U.S. Weather/Crop Progress

Crop Progress
crop condition

U.S. Drought Monitor Weather Forecast: Over the next seven days, precipitation chances look to remain the greatest over the Midwest, where 2-3 inches of rain is forecast from Illinois to Ohio. Rain chances over the west, particularly over northern California, northwest Nevada, southern Oregon and central Idaho and into the Rocky Mountains, looks to increase, with up to 2 inches possible. The northern plains looks to remain on the dry side as well as the southeast and most of Texas. Rain chances along the Gulf Coast and into Florida look favorable, with amounts up to 1 inch over most areas. Temperatures are forecast to be cooler-than-normal over much of the West and Midwest while warmer-than-normal temperatures are expected on the Plains and in the Southeast.

The 10-day outlooks show that much of the country has high chances of above-normal temperatures. The greatest chances of above-normal temperatures appear to be over the Southeast and the northern Plains. Precipitation chances are greatest over the eastern third of the country and the northern Plains while the best chances of below-normal precipitation appear to be in the southern Plains. 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

Corn: Net sales of 535,200 MT for delivery in 2014/15 were down 10 percent from the previous week and 3 percent from the prior four-week average. Increases were reported for Japan (171,400 MT, including 107,200 MT late reporting and decreases of 9,000 MT), South Korea (125,000 MT, switched from unknown destinations), Saudi Arabia (70,800 MT, including 66,000 MT switched from unknown destinations), China (63,800 MT, including 58,000 MT switched from unknown destinations), Egypt (52,400 MT, including 40,000 MT switched from unknown destinations) and Colombia (43,600 MT, including 27,900 MT switched from unknown destinations). Decreases were reported for unknown destinations (139,500 MT) and Mexico (17,900 MT). Net sales of 149,000 MT for 2015/16 were reported for unknown destinations (50,800 MT), Mexico (47,100 MT), Colombia (40,000 MT), Japan (10,200 MT) and Honduras (1,000 MT). Exports of 966,200 MT were down 6 percent from the previous week and 4 percent from the prior four-week average. The primary destinations were Japan (208,200 MT), Mexico (141,800 MT), Peru (83,700 MT), Taiwan (76,100 MT), Egypt (71,400 MT), Saudi Arabia (70,800 MT) and South Korea (65,100 MT).Optional Origin Sales: For 2014/15, outstanding optional origin sales total 52,500 MT, all Egypt.

Barley: Net sales of 300 MT for 2015/16 were up noticeably from the previous week. Increases were reported for Taiwan. Exports of 900 MT were reported to Taiwan.

Sorghum: There were no sales or exports reported during the week. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: There was a modest decline this past week for rail-delivered DDGS to domestic buyers on the West coast, but DDGS prices increased for everyone else. Rate increases generally varied from $9-12/MT for containerized and bulk DDGS, but rates to Taiwan and Alberta, Canada increased well above those levels. Logistical costs are a key factor in determining rate variability to different destinations. Present logistical costs could be substantially different than will exist this fall when multiple crops are being simultaneously harvested. DDGS merchandisers can generally obtain more favorable rates from logistical companies by planning ahead.

A number of DDGS buyers are inquiring about DDGS prices in the October-November-December time period, but they seem reluctant to agree upon a price out of concern for missing a substantial setback in corn futures this fall. However, the preceding outlook section explains why any harvest decline in corn prices this fall is unlikely to be as large as many individuals were expecting even a month ago. Therefore, it is entirely possible that limited corn futures declines and higher transportation costs may not be much different than a combination of current corn futures contracts and prearranged freight rates for this fall. Consequently, any near-term limited sell-off in corn futures contracts is presumably an opportunity for DDGS buyers to work with merchandisers in order to investigate pricing possibilities for the October-November-December time period. 

Ethanol Comments: Gasoline futures attempted to break out of a month-long trading range and sell-off on Monday due to concerns about the Chinese economy and global demand. However, it quickly become evident that such bearish action was premature and gasoline futures reestablished themselves back into the horizontal trading range. U.S. domestic gasoline demand has been relatively strong and that is beneficial for ethanol demand. As a result, it makes sense that USDA increased their estimate for the amount of U.S. corn used in ethanol production during the current 2014/15 crop year by an additional 25 million bushels.

As noted in the Outlook discussion, the increase in both domestic and export demand for corn raises the price floor for U.S. corn before the fall harvest. The result of firmer corn prices and horizontal gasoline prices is the narrowing of margins for ethanol producers. At the same time, U.S. ethanol production remains at high levels in order to retain market share. The average daily ethanol production rate increased to 987,000 barrels per day (bpd) for the week ending July 3, which is above the prior-week’s level of 968,000 bpd and the year-ago level of 927,000 bpd. There was also an increase in the total U.S. ethanol stocks to 19.8 million barrels from the prior-week’s level of 19.5 million barrels. The natural result is an emphasis on increasing efficiencies at ethanol facilities.    

The need for improved efficiency due to narrower margins is implied by the differential between the cost of corn and the co-products that declined in three of the four primary locations across the Corn Belt for the week ending July 10, 2015:

  • Illinois differential is $1.62 per bushel, in comparison to $1.74 the prior week and $3.39 a year ago.
  • Iowa differential is $1.59 per bushel, in comparison to $1.52 the prior week and $3.09 a year ago.
  • Nebraska differential is $1.28 per bushel, in comparison to $1.37 the prior week and $2.95 a year ago.
  • South Dakota differential is $1.87 per bushel, in comparison to $2.12 the prior week and $3.43 a year ago.

7. Country News

France: The condition of French corn and spring barley have been hard hit by persistent dry weather, reports Reuters. The good/excellent score for barley has fallen by seven points in the last week to total 66 percent, with an overall decline of 17 points over the past month. The corn score has fallen by 10 points in the last week to now total 71 percent good/excellent, with an overall monthly decline of 13 points. The winter barley harvest was reported as 85 percent complete on July 6, with initial results indicating a good harvest largely unaffected by the hot and dry weather plaguing the country. French corn stocks remain high at 3.3 MMT in spite of recent exports within the EU.

South Africa: Africa’s largest producer imported 79,850 MT of corn from Argentina since April, according to Bloomberg News. Reuters further reports that South Africa intends to import another 50,000 MT of white corn from Mexico. The price of yellow corn has risen by 26 percent in 2015.

Ukraine: Agriculture Minister Oleksiy Pavlenko has stated that Ukraine might be forced to reduce its forecast for the 2015 grain harvest if hot weather continues, according to Reuters. An earlier June forecast projected Ukrainian farmers could harvest 60 MMT of grain with predicted exports at 34 MMT, however the minister has indicated that another week of hot weather could negatively impact late corn maturation and force a reduction. Further, the grain harvest has begun in most of the country and so far farmers have harvested 450,000 hectares of barley.

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 moved up this week and have been attempting to show some strength. However, there has again been some “separation or disconnect” between the paper and physical markets. Freight buyers are just not convinced there is a strong reason to chase the market up.

The Panamax and Supramax sectors have seen improved cargo demand in the North Atlantic with coverage of short term tonnage. Most of the action has been in the Atlantic with the Pacific lagging behind. Freight bids and offers are getting farther apart with Panamax rates to Japan bid at $31.00/MT and offered at $34.00/MT. This makes it a bit more difficult to place an exact dollar figure on just what rate is appropriate for is market. The higher offers for voyage charters have made some move to short term time charters for coverage. It is interesting to see sales of two-to-three cargoes of Brazilian corn into the U.S. East coast for August arrival.

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 Malaysia.

Malaysia 2015
Malaysia 2014
Intl Freight Rates

10. Interest Rates

Interest Rate