Market Perspectives December 10, 2015

1. Chicago Board of Trade Market News

Week in Review

Outlook: As expected, USDA reduced U.S. corn exports, increased the volume used for ethanol and increased the carryout for corn both nationally and globally in the most recent WASDE: 

  • 25 million bushel increase in corn for U.S. ethanol to 5.2 billion bushels;
  • 50 million bushel reduction in U.S. corn exports to 1.75 billion bushels;
  • 25 million bushel increase in the U.S. corn carryout to 1.785 billion;
  • 1 million bushel increase in U.S. ending supplies for both barley and grain sorghum;
  • 1 MMT reduction in world corn production to 973.9 MMT;
  • 1 MMT reduction in world corn consumption;
  • 1.5 MMT reduction in world corn exports.

The boost in corn use for ethanol was smaller and the export decrease was probably larger than most expected, although not by enough to be called surprising. In fact, while USDA moved some numbers they were all quite modest and reinforced the market view that the December report each year is the “dullest and least important.”

Brazil’s corn export forecast was raised to a record 32 MMT and competition from other suppliers will grow stiffer for February-forward. This is why Tommy Grisafi of Advance Trading is quoted advising that U.S. corn will have to get marketed below the cost of production. At this juncture, farmers are holding on to the largest long position in the market. The problem is continuing limited demand out of Asia.

If there is a bright spot, it is the malt barley market. Rabobank projects that demand will grow 14 percent over the next five years, mostly in emerging markets as consumption of beer, and particularly higher quality beer, continues to rise. Prices have been volatile as malt quality premiums get bounced around by weather events, but major growth markets willing to spend the money include India, Brazil and Mexico. The question is how much lower prices for other crops tempt more farmers into growing malt barley, and if it does, will it reach a point where malt and feed barley prices converge?

2. CBOT Corn Futures

December Corn Futures

CBOT Table

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: During December 10-14, stormy weather should continue in the Northwest, bringing additional heavy precipitation to the climatologically-favored areas from the Cascades westward, as well as the Sierra Nevada. From the Washington Cascades westward, generally 2 to 5 inches of precipitation are anticipated while at least 4 inches are expected farther south into northern California. Coastal areas near the Oregon/California border should get 10 to 15 inches by mid-December. Farther east, a broad swath of moderate to heavy precipitation is forecast from the Great Lakes southwestward through much of the Mississippi Valley and eastern Texas. At least 1.5 inches are expected, with totals topping out near 5 inches in western Arkansas. Elsewhere, moderate precipitation is expected to the west and east of the wet swath in the central United States, specifically from the Plains to the Appalachians. Spotty areas in the central and northern Rockies and across Idaho can also expect moderate precipitation, with light amounts at best elsewhere.

The ensuing 5 days (December 15-19) bring enhanced chances for above normal precipitation to the Northwest and the northern half of the contiguous states from the Rockies to the Atlantic Ocean. Florida has increased odds for above normal precipitation as well. Odds tilting toward drier than normal conditions are limited to much of Texas and adjacent New Mexico.

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 1,095,300 MT for 2015/2016 were up noticeably from the previous week and 11 percent from the prior 4-week average. Increases were reported for unknown destinations (380,200 MT), Mexico (303,300 MT), Colombia (130,100 MT, including 38,000 MT switched from unknown destinations and decreases of 2,300 MT), South Korea (125,300 MT), Japan (66,000 MT), Peru (64,900 MT), and Honduras (19,400 MT, including 7,700 MT switched from unknown destinations and decreases of 1,100 MT). Reductions were reported for Costa Rica (2,000 MT), Nicaragua (1,800 MT), and Barbados (800 MT). Net sales of 1,800 MT for 2016/2017 were reported for Nicaragua. Exports of 549,800 MT were up 47 percent from the previous week and 41 percent from the prior 4-week average. The primary destinations were Mexico (250,500 MT), Japan (126,000 MT), Colombia (72,700 MT), Peru (27,500 MT), Jamaica (17,900 MT), and El Salvador (14,600 MT).

Optional Origin Sales: For 2015/2016, the current outstanding balance is 511,000 MT, all unknown destinations.

Barley: There were no sales reported during the week. Exports of 100 MT were reported to South Korea.

Sorghum: Net sales of 103,600 MT for 2015/2016 resulted as increases for China (156,900 MT, including 108,500 MT switched from unknown destinations and decreases of 2,700 MT) and the Republic of South Africa (7,200 MT, including 6,500 MT switched from unknown destinations), were partially offset by reductions for unknown destinations (60,500 MT). Exports of 283,100 MT were up 64 percent from the previous week and 46 percent from prior 4-week average. The destinations were China (262,500 MT), Mexico (12,800 MT), the Republic of South Africa (7,200 MT), and Indonesia (600 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: October exports of DDGS as reported by the U.S. Census show shipments to global destinations (aside from China) up 6 percent in October compared with a month earlier. Major buyers continue to be Mexico, Vietnam, Canada, Turkey and South Korea. In fact, U.S. DDGS exports for the year are forecast to hit a record 12.8 MMT. 

Notably, the Middle East/North Africa (MENA) is a market for DDGS (see below) as its expanding animal protein demand, particularly poultry, and lack of feed supply drive demand. DDGS imports by Middle East/North Africa from January-October 2015 (MT) are shown below (sourced from USDA/FAS/GATS). 

  • Egypt: 88,600
  • Israel: 106,500
  • Morocco: 93,500
  • Turkey: 81,400 

Vietnam continues to be an aggressive buyer, followed by Korea and Thailand with prices ranging in the low 200s. While containers into China showed a 14 percent increase in price for December delivery and a 12 percent increase for February, Malaysia was not far behind in showing strength. However, shipments out to March show softer prices all around. 

Ethanol Comments: The weekly ethanol production report through December 4 showed average daily production of 993,000 barrels/day, up 37,000 barrels/day from the prior week. Ethanol stocks declined slightly on increased demand. The EPA also announced that U.S. crude oil supplies actually dropped slightly last week, but stocks of distillates increased. Crude oil prices rallied briefly on the lower oil supplies before quickly turning lower again. 

U.S. ethanol exports totaled 70.1 million gallons in October, a 16 percent increase over September’s level. Notably, China was the top customer for U.S. ethanol for the first time, taking nearly half (32.6 million gallons) the total amount exported by the U.S. Year-to-date ethanol exports remain up 4 percent over last year. 

There were no ethanol imports reported for last week and imports were down in October to just 25 percent of the amount imported in September. Imports of ethanol are down for the year and October marked the 26th month in which the U.S. was a net exporter of the fuel. Meanwhile, for the week ending December 10, 2015 the differential between the price of corn and co-products for the four regions of the Corn Belt is as follows: 

  • Illinois differential is $1.67 per bushel, in comparison to $1.75 the prior week and $3.92 a year ago.
  • Iowa differential is $1.43 per bushel, in comparison to $1.43 the prior week and $3.58 a year ago.
  • Nebraska differential is $1.61 per bushel, in comparison to $1.59 the prior week and $3.71 a year ago.
  • South Dakota differential is $1.50 per bushel, in comparison to $1.56 the prior week and $3.83 a year ago.

7. Country News

Canada: StatsCanada estimates this year’s barley crop at 8.2 MMT, a 15 percent increase over 2014 though that year saw a smaller-than-trend crop.

China: China Grain Reserves Corp (Sinograin) may begin selling corn out of reserves as early as this month that is both out of condition and below the cost of acquisition. (Reuters)

India: Negative returns are starting to reduce poultry production though not before the downstream effect of some feed millers being unable to pay their input suppliers. (WPI)

South Africa: Some analysts are concerned that South Africa may lack sufficient infrastructure to handle the potential for 4 MMT of corn imports, on top of other incoming grains. Complicating the drought is the sluggish South African economy, which caused the rand to drop against the dollar. A weak rand spiked the value of white corn up 3.2 percent to $256/MT; yellow corn rose 1.3 percent. (Bloomberg)

Ukraine: The Minister of Agriculture signed a non-binding agreement with the trade on the amount of exports to be allowed. The campaign will involve 16 MMT of corn and 3.9 MMT of barley. Through luck or some other factor, the previous year’s agreement pretty much matched the actual trade.

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: Are we just playing the beach game of Limbo now, where we try to see how low everyone can go before falling to the ground? I’m thinking that this is how the global ocean freight industry feels at the moment. Capesize vessel daily hire rates are currently $10,300/day while Panamax daily earnings are only $5,600/day. The one-year Capesize time-charter rate is even lower at $8,100/day. With demurrage rates higher than this the best situation for a vessel owner is to sit on demurrage somewhere. I know I have said this before but it does feel like we have found, or are finding, a bottom in this market. At least things seem to have stabilized for the moment.

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 year-to-date 2015 versus January-December 2014 annual totals for container shipments to the Philippines.

Container Shipments 1
Container Shipments 2
International Freight Rates for Feed Grains

10. Interest Rates

Interest Rates