Market Perspectives December 29, 2016

1. Chicago Board of Trade Market News

Week in Review

Outlook: Bears have won the directional battles for corn in recent days, except for Tuesday’s bullish pop. Prior to Tuesday, resolution of Argentina’s dryness and pre-holiday aversion to building positions left the market with a decidedly weaker tone. Tuesday’s trading, however, featured a 9 ¼ cent rally as a high-pressure ridge over Brazil implied hot, dry weather for the world’s second largest soybean producer. This, of course, sent soybean futures sharply higher and the corn market became caught up in the excitement. The current weather has little implication for Brazil’s corn crop but if it persists long enough it could impact the yet-to-be-planted safrinha crop. While the weather news is far more relevant for the soy markets, it was one of the few interesting news pieces uncovered this week. 

Historically high ethanol production continued this week even though production figures slipped slightly from the week prior. Ethanol exports must have been solid in pre-Christmas trading as production, stocks, and gasoline supplied (a measure of ethanol consumption) all fell. The only factor that could have produced such an event is strong ethanol exports. U.S. ethanol exports are up 13 percent YTD on a value basis and up 21 percent on a volume basis. The strong ethanol program has been helpful for U.S. corn markets and USDA will likely raise their forecast of corn used in ethanol in the January WASDE. 

March corn is miraculously still holding above the bullish trendline formed from the September 1 contract low and the intraday low on December 1. Pre-holiday trading briefly sent the contract below the trendline but Tuesday’s rally pulled prices above it once again. Funds are still short the contract but the Brazilian weather situation ushered in some short covering buying. At these prices, commercials are becoming opportunistic buyers and a pattern of buying price breaks is emerging. While it’s still tough to be “bullish” the corn market, there appears to be more upside potential than downside risk at this point.

2. CBOT Corn Futures

CBOT March Corn Futures

CBOT Corn Futures Graph

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: On December 29-30, a significant snow storm will unfold across the Northeast, with wind and snow extending southward through the Appalachians. The heaviest snow should fall in the Adirondacks and much of New England. Late in the week, heavy rain can be expected in parts of the Southeast, with freezing rain possible in the Mid-Atlantic States. Five-day precipitation totals could reach 1 to 3 inches or more in New England and parts of the Southeast. Meanwhile, disorganized Western storminess could result in local totals in excess of an inch, especially in the Pacific Northwest. Generally dry weather will prevail during the next 5 days across the northern and central Plains and the western Corn Belt. 

The NWS 6- to 10-day outlook for January 3-7, 2017, calls for the likelihood of above-normal temperatures along the Atlantic Seaboard, while colder-than-normal conditions can be expected across the remainder of the country. Meanwhile, odds will be tilted toward wetter-than-normal weather across most of the U.S., but below-normal precipitation should occur in much of Texas, northern California, and the Northwest. 

Follow this link to view current U.S. and international weather patterns and future outlook: Weather and Crop Bulletin.

4. U.S. Export Statistics

US Export Inspections
USDA Grain Inspections for Export

Due to the Christmas holiday the next U.S. export sales report will be released Friday, December 30, 2016. The January 5, 2017 edition of Market Perspectives will feature updated U.S. export sales data. 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: It’s been a quiet week for DDGS trading and prices are mixed. Prices for product delivered to the PNW and California held their value the best this week, with January delivery prices steady to $2/ton higher. FOB plant prices were strongest for producers in Nebraska, Kansas, Iowa, and Minnesota while Chicago area prices were weaker. International prices had a softer tone this week because of holiday-reduced demand. 

This week’s drop in ethanol production and the seasonal decline expected in January should be supportive for FOB prices in the near term. Add to that the potential for increased Midwest feed demand motivated by cold January weather and the outlook is for prices to remain steady to higher for the near future. 

Ethanol Comments: Ethanol margins were sharply down this week across all four reference markets. Producers in Illinois saw their margins slip the most this week as they fell $0.61/bushel. Ethanol producers are still enjoying comparatively good margins, which are up $0.95/bushel over last year on average, despite this week’s deterioration in margins. Ethanol production fell this week to 1.028 million barrels/day (-0.8 percent) while stocks dropped 377,000 barrels (-2 percent) to 18.683 million. Production is expected to fall seasonally heading into the new year but will remain well above historic norms. 

  • Illinois differential is $2.06 per bushel, in comparison to $2.67 the prior week and $1.29 a year ago.
  • Iowa differential is $2.21 per bushel, in comparison to $2.59 the prior week and $1.12 a year ago.
  • Nebraska differential is $2.20 per bushel, in comparison to $2.62 the prior week and $1.33 a year ago.
  • South Dakota differential is $2.51 per bushel, in comparison to $2.88 the prior week and $1.45 a year ago.

7. Country News

Argentina: Drought replaced by excessive wetness will cause late corn seeding. Some dry spots persist but encompass less than 10 percent of the corn area. (Reuters) 

Brazil: It remains dry in the northern part of the country but rains are benefiting the larger corn production areas in Central Brazil. Favorable conditions for corn are expected to persist over the next two weeks. (Reuters) 

China: The cost of sorghum, DDGS and other animal feed ingredients have risen recently, hurting the profits of pig farmers already finding greater competition from poultry. Meanwhile, to drive down the large stockpiles of corn, the state grain bureau says it will support its increased use in feed, ethanol and biodegradable plastic. The Ministry of Finance announced it may adjust import tariffs on ethanol. (Reuters) 

Russia: The agriculture agency Rosselkhoznadzor announced that 227 KMT of corn have been shipped to Japan thus far this season, versus just 13 KMT the whole of last year. (Bloomberg) 

South Africa: The corn crop will benefit from an expected upturn in rains next week. (Reuters)

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: The Holiday season is upon us. The Baltic Exchange is closed for the week and the shipping market is extremely quiet. I presume everyone is simply enjoying the holidays and trying hard not to think much about business. Given this situation, and the fact that I normally do not publish a report for this holiday week, this will be an abbreviated report. About the only thing that can be said for the markets is that they are indeed thin this week and continue to be soft. I am expecting rates to continue on a lower path when most return to the office next week. 

We must also consider that we will soon transition from our Western holidays into the Lunar New Year on January 28. China will be on holiday (Chinese New Year, and Golden Week from January 27 to February 3). This obviously will not aid market liquidity and will keep things uncertain until we return to a normal work schedule. The Baltic Indices and ocean freight rates are unchanged from last week due to the closed markets. U.S. export grain demand from Asia and rail and ocean freight rate spread advantages are increasing vessel lineups in the PNW.

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 Vessel Pricing
US-Asia Market Spreads

The charts below represent year-to-date 2016 versus January-December 2015 annual totals for container shipments to Japan.

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

10. Interest Rates

Interest Rates