Market Perspectives April 13, 2017

1. Chicago Board of Trade Market News

Week in Review

Outlook: The corn market’s reaction to the April USDA WASDE report was “we knew that.” The USDA failed to make any substantive changes to the U.S. corn balance sheet, keeping the key ending stocks figure unchanged at 2.32 billion bushels. Feed and residual use was decreased by 50 million bushels, equally offsetting a 50 million bushel increase in corn used for ethanol production. The USDA gave the market little to trade on until it releases its initial forecast of the 2017/18 balance sheet in May. 

As uninteresting as the U.S. balance sheet was, however, more exciting changes were noted in South American balance sheets. The USDA increased Brazil’s production by 2 MMT to 93.5 MMT and increased the country’s exports by 1 MMT to 32 MMT. The global supply situation is weighing on Brazil too, as the USDA increased the nation’s ending stocks to 8.5 MMT (9.3 percent ending stocks/use ratio). 

Similarly, Argentine corn production was increased by 1 MMT to 38.5 MMT and exports were increased by the same amount. Argentina’s corn export forecast now stands at 26 MMT, a 20 percent increase from the prior year. Rains in the country may cause challenges exporting this crop, however. If rains continue much longer, farmers will switch from harvesting corn to soybeans, which may delay exports and put upward pressure on local prices. However, Argentina will still be forced to remain competitive versus Brazil on the global market and upward price potential is limited. 

From a technical standpoint, May corn is starting a short-term uptrend in the middle of a longer, very shallow uptrend. The contract recently found support at $3.54 and $3.57 and is now above it’s 10, 20, 40, and 100-day moving averages. Commercial value-buying has been noted recently and basis levels have started to show signs of strength. Minor resistance lies at $3.72 and more substantial resistance at $3.88. 

With only 90 million acres expected to go into corn production this year and given the weather problems in South America, few market participants are likely to be significantly bearish. Tomorrow’s CFTC data is likely to show fund’s net position as nearly flat, though a bullish lean is possible. The corn market has found both technical and fundamental support and upward price pressure is anticipated. However, this trend will be working against huge global supplies and gains will be slow and hard-won.

2. CBOT Corn Futures

CBOT May Corn Futures

CBOT Corn Futures Graph

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Crop Planting Progress

U.S. Drought Monitor Weather Forecast: During the next five days (April 13-17), the Weather Prediction Center (WPC) predicts 1.0-2.5 inches of precipitation from the southern High Plains northeastward across the mid-upper Mississippi Valley and into the western Great Lakes region. Heavy precipitation (3-4 inches, liquid equivalent) is expected across the Coastal Ranges of the Pacific Northwest and northwestern California, the Cascades of the Pacific Northwest, and the California Sierras. However, these areas are no longer in drought or dryness. 

For the ensuing five-day period (April 18-22), there are elevated odds for above-median precipitation across most of the northern and central thirds of the CONUS, while near- to below-median precipitation is favored across the southern tier of states. 

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 Sales and Exports
US Export Inspections
USDA Grain Inspections for Export

Corn: Net sales of 738,000 MT for 2016/2017 were down 35 percent from the previous week and 33 percent from the prior 4-week average. Increases were reported for Japan (230,900 MT, including decreases of 1,300 MT), Mexico (160,600 MT, including 52,700 MT switched from unknown destinations and decreases of 39,900 MT), Colombia (85,600 MT, including 83,000 MT switched from unknown destinations and decreases of 3,400 MT), Taiwan (74,700 MT, including 65,000 MT switched from unknown destinations), and Saudi Arabia (67,600 MT, including 65,000 MT switched from unknown destinations). Reductions were reported for unknown destinations (112,700 MT) and Indonesia (1,700 MT). For 2017/2018, net sales of 50,000 MT were reported for Japan. Exports of 1,076,300 MT were down 33 percent from the previous week and 27 percent from the prior 4-week average. The primary destinations were Mexico (245,800 MT), Japan (224,400 MT), Taiwan (154,000 MT), Colombia (120,800 MT), and Saudi Arabia (67,600 MT). 

Optional Origin Sales: For 2017/2018, new optional origin sales of 58,000 MT were reported for unknown destinations. The current optional origin outstanding balance for 2016/2017 of 402,000 MT is for unknown destinations (203,000 MT) and South Korea (199,000 MT). 

Barley: Net sales of 1,000 MT for 2016/2017 were reported for South Korea (600 MT) and Taiwan (400 MT). Exports of 1,000 MT were reported to Japan (900 MT) and South Korea (100 MT). 

Sorghum: Net sales of 75,000 MT for 2016/2017 were down 42 percent from the previous week and 18 percent from the prior 4-week average. Increases were reported for China (108,500 MT), Japan (19,500 MT), Mexico (7,500 MT), and Indonesia (100 MT). Reductions were reported for unknown destinations (60,500 MT). Exports of 97,800 MT were down 56 percent from the previous week and 6 percent from the prior 4-week average. The destinations were China (58,500 MT), Japan (30,500 MT), Mexico (7,900 MT), Indonesia (600 MT), and Taiwan (300 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Trading has been quiet this week though the bid/ask spread is reportedly narrowing for domestic product. Domestic prices are largely steady while international prices are $5-7/MT higher, with baseline demand pulling product through the supply chain. Merchandisers are reporting inquiries from South Korea and Malaysia but few trades have been executed. Reported interest from other Asian countries is light. 

Falling cash soybean meal prices have put pressure on the protein competitiveness of DDGS in recent weeks. The per-protein unit cost of DDGS FOB ethanol plants rose slightly to $4.07 this week as did soybean meal, which reached $6.12, giving DDGS a $2.05 per protein unit advantage over soybean meal. Pricing strength was noted in rail-delivered product, where prices for DDGS delivered to the PNW, California, and Laredo, TX were up $2-3/MT this week. 

On the export market, DDGS retained a $1.32 per protein unit advantage over soybean meal, based on FOB NOLA prices. FOB NOLA DDGS were quoted at $147/MT, essentially steady with last week. Prices for 40-foot containers bound for Southeast Asia were mixed, some steady and others gaining $3/MT this week. Prices for South Korea, the Philippines, and Thailand showed the greatest strength. 

February DDGS exports were up 36 percent from last year, according to data from the U.S. Census Bureau. Over 1.07 MMT of DDGS were exported in February, which represents a 14 percent month-over-month increase and the highest monthly total in six months. Mexico solidified its role as the top destination for U.S. DDGS again and imported 241,000 MT, or 23 percent of total U.S. exports. Turkey, in line with its expanded feed manufacturing role, purchased 152,000 MT. 

Ethanol production was sharply lower this week which should work to limit DDGS supplies, giving near-term price support. In the long run, however, it remains to be seen whether ethanol plants will increase production to “normal” levels due to improving margins, or whether they will operate at lower levels with steady DDGS prices and a weaker fuel outlook. The February export data should be encouraging as a signal of improving international demand. The most realistic view for the near-term is for steady to slightly higher DDGS prices. 

7. Country News

Brazil: Poultry producers hurt by a food safety scandal are finding some relief in the drop in their feed costs. Corn prices have fallen 28 percent thus far this year on the prospects of greater production. Moreover, corn prices could fall further. (Bloomberg) USDA/FAS/Brasilia says that corn prices could fall below the government support level when the second crop is harvested in June/July as ending stocks will have jumped 70 percent. 

Chile: USDA reports that the U.S. is now the number one supplier of corn to Chile. As a result of falling domestic production and a 13.3 percent increase in demand, U.S. supplies of high quality, low cost corn enabled a 56 percent market share (840 KMT) in 2015/16. Other suppliers were Argentina and Paraguay. Chilean demand is expected to increase by 13 percent to 1.697 MMT in 2016/17. (USDA/FAS via Agrifish) 

China: Corn prices rose RMB 13/MT ($1.89/MT) to RMB 1,605/MT ($232.95/MT). Prices are rising based on government subsidies to processors and declining farmer inventories. Meanwhile, food price inflation fell again in March by 4.4 percent year on year, marking two months in a row of declines after consistently inflating since 2009. (WPI) 

India: Other meat exporting countries may benefit from meat and currency changes in India. The rupee has appreciated nearly 7 percent since the government imposed demonetization and this makes exporting more difficult. At the same time, Uttar Pradesh and other states are cracking down on animal slaughter. (WPI) 

Turkey: Animal feed production continues its strong growth, increasing 55 percent in five years. Total production is at 20.4 MMT and is expected to hit capacity of 30 MMT in 2023. By contrast, domestic corn production is up just 22 percent over the past five years. (WPI) 

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 Capesize Dry-Bulk markets took a breather and closed slightly lower this week after the paper traders noticed that the physical markets were not following their lead. The Dry-Bulk Panamax market, however, believed that demand is looking strong and both paper and physical markets decided to move on upward for the week. We have witnessed a substantial Panamax Dry-Bulk market rally over the last 13 months as rates from the U.S. Gulf to Asia have climbed from a low of $22.50 up to near $40.00/MT. The last time we saw $40.00/MT from the U.S. Gulf to Japan was back in December 2014. 

It should be noted that the forward curve for all Dry-Bulk market sectors remains inverted and therefore indicates that traders are not as optimistic about rates remaining at these levels out into the third and fourth quarters of 2017.

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 YTD 2017 versus 2016 annual totals for container shipments to South Korea. 

Container Shipments 1
Container Shipments 2
Freight Chart 1
Freight Chart 2
Freight Chart 3

10. Interest Rates

Interest Rates