Market Perspectives February 25, 2016

1. Chicago Board of Trade Market News

Week in Review

Outlook: USDA held its annual Outlook Conference where it forecasts crops for the year ahead. The agency expects corn production area in the U.S. to expand to 90 million acres (versus 88 million last year), partially offset by a 1.7-million-acre decline in minor feed grain production area, and resulting in a season average corn price of $3.45/bushel. Global corn production will outstrip demand for the fifth year in a row, though ending stocks remain 40 percent below their peak in the late 1990s.

On the bullish side, U.S. corn exports are beating expectations (up 20 percent last week over the four-week average) and should remain strong for a few more weeks. Argentine suppliers are slow to reduce premiums despite cheaper feed wheat in the market. Weather is the only foreseeable change variable and extraordinarily warm temperatures in the U.S. upper Midwest poses a risk to an emerging winter wheat crop should a cold snap return. Otherwise, the world is awash in wheat, so much so that Black Sea feed wheat is being offered into the North Africa market at parity to corn, giving it a marketing edge. In fact, the situation has made popular a wheat/corn spread in the future for those recognizing that wheat has to get cheap enough to sell into feed demand.

Monday, February 29 is first notice day for deliveries against the March futures contract. 

2. CBOT Corn Futures

March Corn Futures

CBOT Graph

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: Stormy, occasionally cold weather in the East will contrast with warmth and dryness across much of the west. A potent winter storm will march northeastward across the Great Lakes, producing additional locally heavy showers across the Atlantic Coast States as well as moderate to heavy rain and snow in the Midwest. In the storm’s wake, briefly chilly conditions east of the Mississippi will give way to a rapid warm up by early next week. Generally tranquil weather will prevail from the Plains into the upper Midwest, though here, too, increasingly warm conditions will develop into next week. Unfavorably warm, dry weather will persist from California and the Great Basin into the lower Four Corners Region, while periods of rain and mountain snow continue farther north from the Northwest into the northern and central Rockies. The NWS 6- to 10-day outlook for March 1-5 calls for above-normal temperatures across the western and central U.S. as well as much of the Northeast, with cooler-than-normal conditions confined to the upper Midwest. Meanwhile, below-normal precipitation is anticipated from the central and southern Pacific Coast eastward onto the High Plains and upper Midwest.

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 934,400 MT for 2015/2016 were down 11 percent from the previous week, but up 10 percent from the prior 4-week average. Increases were reported for Japan (334,800 MT, including 58,000 MT switched from unknown destinations and decreases of 5,300 MT), unknown destinations (170,500 MT), Costa Rica (125,200 MT), Colombia (123,000 MT, including 35,000 MT switched from unknown destinations and decreases of 2,500 MT), and Mexico (118,700 MT). Reductions were reported for the Dominican Republic (31,000 MT) and the French West Indies (2,000 MT). For 2016/2017, net sales of 131,800 MT were for unknown destinations (105,200 MT) and Japan (26,700 MT). Exports of 870,700 MT--a marketing-year high--were up 19 percent from the previous week and 36 percent from the prior 4-week average. The primary destinations were Mexico (353,200 MT), Japan (248,600 MT), Colombia (182,300 MT), South Korea (58,100 MT), and Taiwan (11,700 MT).

Optional Origin Sales: For 2015/2016, the current outstanding balance is 340,000 MT, all unknown destinations.

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

Sorghum: Net sales of 43,200 MT for 2015/2016 were down 78 percent from the previous week and 73 percent from the prior 4-week average. Increases for China (119,700 MT, including 100,300 MT switched from unknown destinations and decreases of 6,600 MT) and Pakistan (29,000 MT, switched from China), were partially offset by reductions for unknown destinations (105,500 MT). Exports of 216,400 MT were up 24 percent from the previous week and 27 percent from prior 4-week average. The destinations were China (211,700 MT) and Mexico (4,600 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: There are conflicting reports about current market trends but one report says that data published on February 22 by China's General Administration of Customs indicates that imports of DDGS surged in January, 2016 to 290,653 tons. Reuters quotes a Chinese buyer saying that "Companies are still buying to benefit from low U.S. prices…" The article quotes the average shipment value at $235.40/MT. Traders expect China’s DDGS imports to continue for a few more months. These imports follow a record volume of DDGS and sorghum imports by China in 2015. Meanwhile, Shanghai JC Intelligence Co. Ltd. asserts that China’s January sorghum imports also remained solid at 923,941 MT, versus 733,590 MT a year ago.

Overall, the trade indicates a firming of prices (average +$4/container) this past week for April/May delivery to destinations such as China and Japan, but an average decline of $1.50/container with Thailand as the destination.

Ethanol Comments: The U.S. Energy Information Administration (EIA) expects petroleum prices to move back towards equilibrium and average $40/barrel for Brent crude in 2016, though the market doesn’t look that way at the moment. Nonetheless, the U.S. ethanol industry plans to double its exports over the next six years based on world demand for octane to reduce pollution. Green Pool Commodity Specialists forecast global ethanol demand to expand by 0.9 percent in 2016 to 118.7 billion liters, against 117.9 billion liters in production. They conclude that Asia will be buying more ethanol from the U.S. – which may be driven in part by a decision in some markets against allowing energy demand to compete with their own domestically produced supply of food.

U.S. ethanol production this past week rose to 994,000 barrels per day, up from 975,000, but in an indication that perhaps the seasonal peak in supply building has occurred, surplus stocks fell for the first time in several weeks – though by just 100,000 barrels to a total of 23 million.

Meanwhile, the margin between the corn price and the value of ethanol and coproducts continued to push higher last week in Iowa and South Dakota, and remains higher than a year ago in Nebraska (see below). 

  • Illinois differential is $1.36 per bushel, in comparison to $1.36 the prior week and $1.73 a year ago.
  • Iowa differential is $1.28 per bushel, in comparison to $1.26 the prior week and $1.43 a year ago.
  • Nebraska differential is $1.47 per bushel, in comparison to $1.48 the prior week and $1.37 a year ago.
  • South Dakota differential is $1.52 per bushel, in comparison to $1.50 the prior week and $1.58 a year ago.

7. Country News

China: Corn imports in January were the lowest since 2013 whereas wheat imports for the month were up by 209.7 percent. (Bloomberg)

Europe: European livestock are consuming increasing volumes of imported corn as a result of that grain’s attractive pricing. Dairy cattle feed rations reached 29 percent corn content last year and now are at 30 percent. (Bloomberg)

India: Total coarse cereal production is estimated at 38.40 MMT, versus 42.86 MMT in 2014/15. The rabi season corn crop is estimated at 5.41 MMT, down from 7.16 MMT last year. (WPI)

South Africa: Makenosi Maroo of the Department of Agriculture says that maize with unapproved GM traits will be allowed into designated storage in order to speed up imports. Normally such product must go straight to processing. (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: Last week’s attempt to rally ocean freight values is fading. The Dry-Bulk Capesize market looks to be in even worse shape than before with west Australia iron ore to China trading down to $2.75/MT. Panamax rates in the grain trade look to be moving mostly sideways and struggling to maintain stability. Smaller vessels are holding up a little better in this market.

With weak export volumes and slow farmer grain movement, U.S. Export Fobbing (loading) margins (with the exception of grain sorghum) are terrible; in some cases, near zero. With the continued weakness in global stock markets and slowdown in demand for raw materials, machinery, and maybe even consumer goods, we are not building sufficient new cargo demand. I don’t believe dry-bulk ocean freight rates can go much lower but that doesn’t mean that we are out of the freight crisis and that more drama will not occur; it will. It is going to be a very rocky 2016 – hold on to your hats.

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 2016 versus January-December 2015 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