Market Perspectives August 14, 2015

1. Chicago Board of Trade Market News

Week in review

Outlook: The release of USDA’s August yield and production data was considered bearish for feed grains because the estimates exceeded pre-report expectations. The average corn yield estimate given by market analysts prior to the release of USDA reports was 164.4 bushels per acre in a DTN survey, moderately below USDA’s July estimate of 166.8 bpa. However, the average U.S. corn yield estimate within USDA’s August data was 168.8 bpa, slightly above USDA’s July estimate. As well, the estimate for harvested U.S. corn acreage was left unchanged. The result is that the ending stocks estimate for U.S. corn in the soon-to-arrive 2015/16 season (beginning September 1) increased from the July estimate of 1.599 billion bushels to 1.713 billion bushels. This surprising increasing in U.S. corn stocks resulted in a sudden, sharp sell-off in the price of corn futures contracts.

The August data was presumably a disappointment to a large pool of speculators who held long positions in corn and were looking for justification to drive prices higher. The exiting of their long positions could weigh upon corn contracts for a limited time; However, there is little other fundamental justification to drive corn contracts lower once that activity ends for the following reasons: First, USDA’s current corn ending stocks estimate for the 2015/16 season of 1.713 billion bushels is still below the ending stocks estimate for the current 2014/15 season of 1.772 billion bushels, which had a low price of $3.1825/bushel in the nearby corn futures contract on October 1, 2014. At that time, USDA was projecting an ending stocks estimate 2.002 billion bushels and a stocks-to-use ratio of 14.7 percent. Eventually, the ending stocks estimate for the 2014/15 season declined down to the present estimate of 1.772 billion bushels and the stocks-to-use ratio fell to 12.9 percent. However, the recently increased ending stocks estimate for the 2015/16 season of 1.713 billion bushel has a stocks-to-use ratio of 12.4 percent, both of which are still below last year’s final levels. Stated differently, there seems little reason for corn futures contracts to fall back to the depth of last season’s lows.

Secondly, the projected ending stocks among global corn exporters is projected to decline by approximately 13.5 percent in 2015/16, and the coarse grain ending stocks of major exporters is expected to fall by more than 20 percent in that same time period. Demand to acquire ownership of inventory will likely grow as such factors become increasingly apparent to feed grain end-users while prices are low. There are several influences to consider, but the current French corn crop is down substantially, and while a stronger U.S. dollar can benefit the returns of South American farmers by means of the exchange rate, such a condition does not help them cover their increased costs of production for a crop that requires substantial inputs such as corn. In summary, the long-term outlook is that perceptions may change considerably in global feed grain markets during the 2015/16 season.

2. CBOT Corn Futures

December Corn Futures

CBOT Table

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S Crop Condition

U.S. Drought Monitor Weather Forecast: Over the next 5-7 days, the monsoonal moisture in the southwest is anticipated to remain in place, bringing with it up to an inch of rain over portions of New Mexico and Arizona. Some of this moisture will push up into portions of the Great Basin as well as the central and northern Rocky Mountains where up to an inch of rain is anticipated in parts of Utah and Colorado. The active pattern will remain over the high plains and Midwest, where 2+ inches of rain are anticipated in portions of northeast Nebraska, southeast South Dakota and southwest Minnesota. The southeast will see more moisture, especially along the coastal regions where up to 3 inches is projected. Temperatures are expected to be above normal over the west, the southern plains, and the eastern third of the United States, with departures of 3-6 degrees above normal. The high plains and northern Rocky Mountains look to be 3-6 degrees below normal during the next week.

The 6-10 day outlooks show that most of the country has the potential to have good chances of above-normal temperatures, with the greatest probability over the west coast and from New England into the Mid-Atlantic. The exception to this is the high plains and Rocky Mountain region, where the best chance of below-normal temperatures is expected. The eastern half of the United States has the expectation of above-normal precipitation during the period while the area from California into the Great Basin is projected to have the probability of below-normal 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 and Exports
U.S. Export Inspections
USDA Grain Inspections for Export

Corn: Net sales of 29,200 MT for delivery in 2014/2015 were down noticeably from previous week and 87 percent from the prior 4-week average.  Increases reported for South Korea (108,400 MT, including 105,900 MT switched from unknown destinations and decreases of 6,300 MT), Egypt (67,200 MT, including 53,000 MT switched from unknown destinations), Venezuela (53,000 MT), Colombia (45,200 MT, including 31,600 MT switched from unknown destinations), and Honduras (33,600 MT, including 14,100 MT switched from unknown destinations), were partially offset by decreases for unknown destinations (282,200 MT) and Taiwan (115,800 MT).  Net sales of 501,900 MT for 2015/2016 were reported primarily for unknown destinations (206,300 MT), Mexico (157,500 MT), Japan (40,600 MT), and Costa Rica (39,800 MT).  Exports of 840,600 MT were down 16 percent from the previous week and 23 percent from the prior 4-week average.  The primary destinations were Mexico (218,800 MT), Japan (130,900 MT), Egypt (111,200 MT), South Korea (108,300 MT), Peru (58,000 MT), and Colombia (43,600 MT).

Barley: There were no sales reported during the week.  Exports of 300 MT were reported to Taiwan. 

Sorghum: Net sales reductions of 61,900 MT for 2014/2015 were reported for China (50,100 MT, including 112,000 MT switched from unknown destinations and decreases of 66,000 MT).  Decreases were reported for unknown destinations (112,000 MT).  Net sales of 166,500 MT for 2015/2016 were reported for China (114,000 MT) and unknown destinations (52,500 MT).  Exports of 180,900 MT were down 36 percent from the previous week, but up 13 percent from the prior 4-week average.  The destination was China.

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS merchandisers and buyers continue to discuss pricing opportunities within market conditions that have recently become more uncertain, due to factors such as bearish USDA data and Chinese government actions; namely, devaluation of the Yuan and increased documentation requirements by the Chinese Ministry of Commerce for feed imports. Of these two latter events, Chinese buyers seem more concerned about the consequences of a changing exchange rate rather than increased documentation.

After the release of USDA data on August 12, the price of containerized DDGS dropped about $10/MT and the price of bulk DDGS delivered to the Gulf of Mexico declined about $5/MT.  However, domestic prices were virtually unchanged and even increased slightly for DDGS that are transported by rail to the U.S. West Coast. Rail rates may remain firm as competition for freight will increase as the U.S. grain harvest gets underway. It seems that foreign buyers from Vietnam and China may be anticipating such developments as both are actively seeking offers for the September and October time period.

Ethanol Comments: The fact that crude oil contracts declined this past week to their lowest levels in more than six years has apparently not weighed too heavily on demand for ethanol. Rather, total U.S. ethanol stocks showed a rather sizable decline for week ending August 7 to 18.5 million barrels from the prior week’s level of 19.2 million barrels. This decline in total stocks occurred while there was a modest increase in the average daily rate of ethanol production to 965,000 barrels per day (bpd) from the prior week’s rate of 961,000 bpd. Additionally encouraging is the fact that the current total ethanol stocks are only 4.3 percent larger than the year-ago level. Such narrowing of the year-over-year change in total stocks occurred even though the present production rate ran 3.7 percent above year ago. 

Without additional increases in the price of corn, further increases in the average U.S. production rate of ethanol seems unlikely because the spot differential between the cost of corn and the co-products continues to weaken, as the following data shows: 

  • Illinois differential is $1.69 per bushel, in comparison to $1.84 the prior week and $3.55 a year ago.
  • Iowa differential is $1.74 per bushel, in comparison to $1.77 the prior week and $3.47 a year ago.
  • Nebraska differential is $1.41 per bushel, in comparison to $1.44 the prior week and $3.50 a year ago.
  • South Dakota differential is $2.18 per bushel, in comparison to $2.20 the prior week and $3.81 a year ago.


7. Country News

Brazil: The August crop report by the Ministry of Agriculture’s National Supply Company (Conab) increased its corn crop production estimate by 2.5 million tons over its July estimate to a total of 84.3 MMT. This year’s corn crop is 5.3 percent larger than last year’s production, according to Reuters.

China: If Beijing drops the price of corn to world market levels, sorghum may also be impacted: China may import as much as 10 MMT of sorghum this year, but Australian exporters report that sales are slowing as importers wait to see what will happen. Alternatively, there is concern that China could raise the import tariff on sorghum. Either way, sorghum imports are expected to fall off of their recent highs (Reuters).

Southern Africa: A record 27.4 million people in 15 southern African countries are in need of food aid according to the Southern Africa Development Community (SADC). The region had a surplus of corn, sorghum and other grains last year but adverse weather this year has reduced supplies to 40.23 MMT, an 11.8 percent decline (Bloomberg).

 Russia: Grain exports from Russia this year have been on a moderate pace. This past week (August 3-9), Russia exported 7,200 MT of corn and 42,100 MT of barley plus wheat with the leading importers comprised of Egypt, Kuwait and Turkey. As a result, Russian Deputy Prime Minister Arkadiy Dvorkovich said on 11 August that the government is not planning to introduce restrictions on grain exports.

8. Ocean Freight Markets and Spread

Bulk freight indices for HSS

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: Global ocean freight markets are a bit all over the place this week. I have seen rates booked on the same routes for the same size and positions that differed by more than $1.50/ton; it seems to be all about how and when you do your negotiating. It is August vacation month in Europe with many out. Nearby markets are, of course, cheaper than the deferred positions.

The Capesize market is considerably lower while the Dry-Bulk Panamax and Supramax markets are up a little. The devaluation of the Chinese Yuan has put a lot of uncertainty into market projections for Chinese raw material imports, and this will surely have a negative impact on ocean freight values longer term. Panama Canal draft reduction from 39 feet, 6 inches (12.04 meters) down to 39 feet (11.89 meters), effective September 8, 2015, means smaller grain cargo sizes from the U.S. Gulf until they get good rains in Panama. China will require importers of barley, DDGS, and sorghum to register details of their purchases under a new system to come into effect from September 1, the commerce ministry said. They may be trying to control imports and encourage use of domestic corn, with one advising firm stating that the future may hold a quota system.

Baltic-Panamax Dry-Bulk Indices
Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China:
Capesize iron ore
U.S.-Asia market spreads

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

China container shipments 2015
China container shipments 2014
International freight rates for feed grains

10. Interest Rates