Market Perspectives March 24, 2016

1. Chicago Board of Trade Market News

Week in Review

Outlook: Weekly corn sales and export shipments were below market expectations. The trade expected 900,000 MT to 1.1 MMT in old crop sales but USDA only identified 803,200 MT. A 260,000 MT sale to Taiwan was a positive for corn and the holiday shortened week gave May corn a 3-cent boost. Still, the U.S. has sold 15 percent less corn this year than during the same period during the last marketing year, which is bound to show up in next week’s stocks report.

The soybean/corn price ratio ($2.38/1.00) has flipped in favor of soybeans but weather over the next six to eight weeks will have greater influence over what actually gets planted. Informa has projected 89.5 million acres will get planted, a 1.5 million-acre increase over last year.

In addition to next week’s USDA Planting Intentions report, the market will be looking at the March quarterly stocks report. At this juncture, the market doesn’t know precisely how much supply has actually been going to feed use.

Deciphering the corn production number out of Argentina requires some deciphering. The Argentine government forecasted this week a 2015/16 corn crop of 37 MMT. That number is substantially higher than the 27 MMT projected by USDA. The reason is because the government is both optimistic, and it includes silage in its estimate. The government thinks the crop will be nearly 12 percent larger than last year. Meanwhile, traders are making big export sales though there is now the expectation of equally large demurrage charges as logistics swamp the current port infrastructure.

2. CBOT Corn Futures

May Corn Futures

CBOT Graph

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: During the next 5 days, from March 24-28, an active weather pattern will cover many parts of the nation. A spring storm will cross the Midwest on Thursday and northern New England on Friday. Heavy snow will end early March 24 across the upper Midwest but continue across parts of Wisconsin and Lower Michigan. Meanwhile, locally severe thunderstorms can be expected across the South through March 24, possibly as far north as the Ohio Valley. During the weekend, a new storm system will emerge from the Rockies and begin to develop across the nation’s mid-section, trailed by a surge of cold air. The track of the second storm is expected to be farther south than the earlier system, possibly resulting in beneficial precipitation across the south-central U.S. In contrast, dry weather will prevail through March 28 in southern California and the Desert Southwest. 

The NWS 6- to 10-day outlook for March 29-April 2 calls for the likelihood of near- to above-normal temperatures across the eastern half of the U.S. and in the Pacific Northwest, while colder-than-normal conditions can be expected across the remainder of the West. Meanwhile, near- to above-normal precipitation in most of the country should contrast with drier-than-normal weather across the southern High Plains, northern California, and the Pacific Northwest.

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 803,200 MT for 2015/2016 were down 35 percent from the previous week and 27 percent from the prior 4-week average.  Increases were reported for Japan (350,400 MT, including 121,700 MT switched from unknown destinations and decreases of 101,700 MT), Colombia (142,100 MT), Saudi Arabia (73,700 MT, including 70,000 MT switched from unknown destinations), Taiwan (70,400 MT, including 60,000 MT switched from unknown destinations and decreases of 100 MT), South Korea (62,500 MT, including 63,000 MT switched from unknown destinations and decreases of 500 MT), and Peru (60,900 MT, including 33,000 MT switched from unknown destinations and decreases of 1,500 MT).  Reductions were reported for unknown destinations (209,500 MT).  For 2016/2017, net sales of 99,900 MT were reported for unknown destinations (65,000 MT), Costa Rica (56,500 MT), and Nicaragua (12,000 MT).  Reductions were for Japan (33,600 MT).  Exports of 997,500 MT were up 14 percent from the previous week and 13 percent from the prior 4-week average.  The primary destinations were Mexico (297,300 MT), Japan (284,300 MT), Peru (93,900 MT), Saudi Arabia (73,700 MT), South Korea (62,500 MT), and Colombia (35,800 MT). 

Optional Origin Sales:  For 2015/2016, new optional origin sales totaling 58,000 MT were reported for unknown destinations.  The current outstanding balance totals 398,000 MT, all unknown destinations. 

Barley: There were no sales reported during the week.  Exports of 200 MT were reported to South Korea. 

Sorghum: Net sales of 57,600 MT for 2015/2016 resulted as increases for China (108,000 MT), South Africa (37,500 MT, including 35,000 MT switched from unknown destinations), Japan (10,100 MT), and Mexico (1,000 MT), were partially offset by reductions for unknown destinations (96,500 MT) and Pakistan (2,500 MT).  Exports of 143,300 MT were down 5 percent from the previous week and 1 percent from prior 4-week average.  The destinations were China (67,000 MT), South Africa (37,500 MT), Pakistan (26,500 MT), Japan (10,100 MT), and Mexico (2,200 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Indications are that the market was off this past week, especially the barge market. The river opened early but the reality of plenty of physical barge applications but no business to apply against them weighed on the market. There are anecdotal reports of steeper declines but average prices were down $2/container nearly across the board, with a larger decline for product delivered by rail in Illinois. The contrarian was FOB Gulf prices, which were up $2/container for April and May, and up $1/container for June. 

One trader described the markets as being in a state of confusion due to strong ethanol production but slower export sales. This has placed emphasis on nearby shipments, including pushing hard on April shipments. 

Ethanol Comments: This past week’s ethanol production was down 4,000 barrels per day to 995,000 bpd, and U.S. weekly ethanol stocks were off 334,000 barrels to 22.52 million barrels. However, assuming ethanol production follows its seasonal pattern, it should begin to pick up pace in the weeks ahead leading to a peak in July. Moreover, the amount of corn being used to produce ethanol is on a pace to meet USDA’s projection. 

Meanwhile, U.S. ethanol exports to China soared to 111,426,533 liters in January from 40,099,685 liters (+178 percent) at an average price of $0.38 per liter ($482.69/MT)). This is a high-water mark for January and the second-highest in the last twelve months. These exports had hit a record 123,677,115 liters in October at an average price of $0.46 per liter ($590.19/MT). As there are only four state-owned entities in China that are licensed to produce ethanol, the nation’s high domestic corn prices have made U.S. ethanol quite attractive, particularly when the firms’ operating margins have deteriorated so significantly in the past year. The following tables compare U.S. ethanol exports worldwide with those specifically to China (see tables below). 

India should be in the market in 2016/17 to nearly triple its ethanol imports over 2015/16 as less sugarcane bumps up against a mandated 10 percent fuel blending requirement. But, New Delhi imposes excise and value added taxes in a manner that prevents U.S. sales.

The margin between the corn price and the value of ethanol and coproducts was up this past week in all four market basket states: 

  • Illinois differential is $1.33 per bushel, in comparison to $1.30 the prior week and $2.05 a year ago.
  • Iowa differential is $1.27 per bushel, in comparison to $1.22 the prior week and $1.83 a year ago.
  • Nebraska differential is $1.48 per bushel, in comparison to $1.38 the prior week and $1.68 a year ago.
  • South Dakota differential is $1.48 per bushel, in comparison to $1.44 the prior week and $1.79 a year ago.

7. Country News

Argentina: According to the Buenos Aires Grain Exchange report of last Thursday, the corn harvest was at about 4 percent, but quick progress should be made in coming days if good weather conditions materialize as forecast. Yields could be slightly higher than expected, and production could be close to 27 MMT even though the Buenos Aires Grain Exchange is still forecasting 25 MMT. (WPI)

China: Plunging prices are causing Chinese grain farmers to rethink about planting corn, which is unprofitable. Corn stocks are large and farmers may cut production area but seek to use better quality seed for what they do produce. The new government support policy will be issued in the coming days but it is already clear that it will place less emphasis on production volume and more on farmland improvement and technology application. (Xinhua News Agency)

Kenya: Maize production will rise about 2 percent to 2.85 MMT and imports will rise 10 percent to 1 MMT as production continues to fall short of demand due to problems with disease and soil conditions. (WPI)

Saudi Arabia: Corn imports will rise about 15 percent in 2016/17 to 3.5 MMT with the U.S. supplying about 40 percent of it. (WPI)

Zimbabwe: With the purchase of 469 KMT completed, Harare is expected to contract for at least an additional 230 KMT. (Bloomberg)

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 bounced around this week but ended up doing little more than sailing in circles. Markets were a little weaker for the first three days of the week and on Thursday seemed to bounce a bit in an attempt to gain back a little of the lost ground. I guess that is all the excitement we can expect out of this type of market. As expected, the smaller size vessels weathered the market better than the Cape and Panamax sizes. There is additional talk of growing operational difficulties with financially troubled vessel owners, and shippers will have to be mindful of this. Chinese soybean buyers have shifted a good portion of their business to Brazil but all-in-all, and with the singular exception of Paranagua, logistics there seem to be moving fairly well. The added efficiencies of the new Northern Brazilian ports are greatly aiding in the smoother movement of soybeans out of Brazil. A number of Chinese soybean buyers I’ve spoken with say they are only covered for the next 75 days and that they have been bearish on prices and waiting on the market to fall. Now that they have been disappointed by this strategy we will have to see how fast they come in to cover. Comments by speakers at the JCI conference in Shanghai this week may help motivate them to action – at least mine might?

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 China. 

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

10. Interest Rates

Interest Rates