Market Perspectives November 10, 2016

1. Chicago Board of Trade Market News

Week in Review

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Outlook: The market survived two major surprises this week between Trump winning the U.S. Presidential election and the USDA coming out with an unexpectedly bearish WASDE report. Earlier in the week, commodity markets and their equity counterparts confidently closed higher on Tuesday, sure of a Clinton victory. Tuesday night, however, the overnight trading quickly turned negative as the prospects of a Trump Presidency became increasingly clear and were then confirmed. Despite the initial shock, markets rebounded in the morning and recovered much of their losses. It was at that point, however, when the USDA announced that there is even more corn out there than was originally thought. Corn futures tanked immediately and closed just barely above their daily low on Wednesday.

Perhaps the biggest surprise in the WASDE was the 1.1 percent increase in the U.S. corn yield. Traders had expected a slight reduction in the yield but USDA increased the figure by 1.9 bushels per acre to 175.3. Of course, the increased yield translated to larger production and the previously forecast record high production was increased 169 million bushels to 15.226 billion bushels. All in all, total corn supplies in the U.S. are up 10 percent from last year. Remember, the December WASDE does not include any yield updates so the November numbers are “it” until the final production numbers are published in January. 

The USDA also gave the market some surprises on the demand side, specifically, leaving the corn export forecast unchanged from September. Most market participants anticipated at least a mild increase due to the strong export pace observed so far this marketing year. However, USDA left the figure unchanged due in part to larger exports forecast for Ukraine and Russia. Corn used for ethanol was increased 1.3 percent from the last report while feed and residual use was left unchanged. In total, U.S. corn use for the 2016/17 MY is forecast at 14.610 billion bushels, up 7 percent from the prior year. Production, of course, is outpacing demand this year and ending stocks were pegged at 2.403 billion bushels, up 3.6 percent from the September forecasts and up 38 percent from one year ago. The ending stocks to use ratio stands at 16.45 percent, up nearly 4 percent from one year ago. Despite larger production and ending stocks, the USDA left its farm-gate price forecasts largely unchanged for 2016/17, citing the higher-than-expected prices already received so far this marketing year. 

December corn futures are one month away from rolling off the board and are largely predestined to trade sideways until then. The election/WASDE chaos pulled corn futures from their recent highs but failed to make notable penetration of the uptrend underpinning recent price activity. Thus, it is difficult to say this week’s news will turn corn to a bear market, though the fundamentals are hardly bullish. December corn now has little reason to trade above $3.60 and a test of this point is unlikely Also unlikely is any downward move to $3.35 or lower and the December contract will largely be a swing trading market with rallies promptly sold and breaks promptly bought.

2. CBOT Corn Futures

CBOT December Corn Futures

CBOT Corn Futures Graph

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: The National Weather Service medium range forecast calls for continued warmth and dryness over much of the interior U.S. The highest temperature anomalies are expected over the western and central states while East Coast temperatures are forecast to return to more seasonable values. The highest probabilities for precipitation once again are found in the Northwest. Forecast models also indicate a possibility for rain along parts of the Gulf and East Coast. 

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 1,233,800 MT for 2016/2017 were down 16 percent from the previous week, but up 19 percent from the prior 4-week average. Increases were for Mexico (709,300 MT), Japan (152,200 MT, including 102,300 MT switched from unknown destinations and decreases of 200 MT), Taiwan (138,000 MT), Colombia (72,200 MT, including 58,700 MT switched from unknown destinations and decreases of 100 MT), and South Korea (55,300 MT). Reductions were for unknown destinations (52,000 MT), Costa Rica (2,100 MT), and Chile (400 MT). Exports of 892,600 MT were up 3 percent from the previous week and from the prior 4-week average. The primary destinations were Mexico (308,800 MT), Colombia (143,900 MT), Japan (142,300 MT), Peru (80,600 MT), Chile (44,600 MT), Morocco (33,000 MT), and Costa Rica (29,600 MT). 

Optional Origin Sales: For 2016/2017, new optional origin sales totaling 204,000 MT were reported for South Korea. The outstanding balance totals 549,000 MT, and is for unknown destinations (280,000 MT), South Korea (204,000 MT), and Taiwan (65,000 MT). 

Barley: Net sales of 300 MT for 2016/2017 were reported for Vietnam. Exports of 800 MT were reported to Japan. 

Sorghum: Net sales of 351,500 MT were down 13 percent from the previous week, but up noticeably from the prior the prior 4-week average. Increases were reported for China (292,500 MT, including 58,000 MT switched from unknown destinations and 114,000 MT late reporting), unknown destinations (51,500 MT), Japan (6,500 MT, including 1,500 MT switched from unknown destinations and decreases of 100 MT), and Mexico (1,000 MT). Exports of 89,300 MT were up noticeably from the previous week and from the prior 4-week average. The destinations were China (84,500 MT), Mexico (3,300 MT), and Japan (1,500 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS prices have worked their way into feed rations by remaining competitive with corn and soybean meal. The drop in CBOT corn prices has stimulated competition in the feedstuffs sector and ethanol plants and DDGS merchandisers are finding ways to move product. On a per protein unit cost basis, DDGS are still over $2.20 cheaper than competing soybean meal which has seen upward price pressure in recent weeks. Most buyers have secured product for immediate needs and some merchandisers are turning their focus to other commodities. Prices for Lethbridge, Alberta were higher this week, leading the North American market. 

Internationally, spot shipments are continuing to hold their value as pre-December demand remains strong. December shipment prices are largely flat due to holiday-induced demand reductions before they rise again in January. Prices for 40 foot containers destined for Southeast Asia increased $3/ton this week with prices for the Philippines increasing $7/ton. With the forward curve in its current shape, the average $196/ton price to Asian destinations could be upwards of $205 by February. 

Ethanol Comments: Continued strength in ethanol margins was created as production fell 20,000 barrels from the prior week to 1.002 million barrels per day. Ethanol demand increased 2 percent last week, reaching 20.191 million barrels per day, which drew down ethanol stocks to 19.229 million barrels, a 3 percent decrease from one week earlier. 

The latest WASDE forecast increased corn used for ethanol by 25 million bushels with the new total reaching 5.3 billion bushels. The figure is slightly ahead of the 5.026 billion bushels used during the previous marketing year. The corn use estimate is on-track with the higher-than-expected ethanol grind that has occurred so far this year.

While an army of analysts will continue to figure out what a Trump Presidency means for agriculture at large and specifically for ethanol, initial reactions are positive for the industry. Ethanol refiners are hopeful the new administration will ease Renewable Fuels Standard requirements for blending ethanol with gasoline or purchasing RIN credits. However, any changes are likely to be slow to appear and take effect as Trump will walk a policy tightrope between his Iowa-corn-farming and oil-and-refining-industry supporters. 

The margin between the corn price and the value of ethanol and coproducts was higher this past week in three of the four reference markets (see below). Compared to this same week last year, the spread is roughly $0.54 higher in all reference markets. 

  • Illinois differential is $2.17 per bushel, in comparison to $2.15 the prior week and $1.70 a year ago.
  • Iowa differential is $2.05 per bushel, in comparison to $2.06 the prior week and $1.47 a year ago.
  • Nebraska differential is $2.22 per bushel, in comparison to $2.16 the prior week and $1.71 a year ago.
  • South Dakota differential is $2.27 per bushel, in comparison to $2.24 the prior week and $1.67 a year ago.

7. Country News

Brazil: While the word “Safrinha” means “little crop,” this second crop has been getting larger each year for five straight years, and the planting of this crop in January is expected to be the largest ever. (Bloomberg) Separately, Brazil was a net importer of 5.7 million liters of ethanol in October, down significantly from being a net exporter of 93 million liters in September. The U.S. was the supplying country. (Platts) 

China: China National Grain and Oils Information Center reported that U.S. corn prices for January delivery at 432 yuan/ton ($63.50) lower than domestic corn. It estimated 2016-17 corn consumption at 199 MMT, versus 176 MMT in 2015-16. Corn exports for 2016-17 are estimated at 30 KMT, versus 4 KMT in 2015-16. Sorghum imports are estimated at 3.5 MMT, up from the 3 MMT forecast in October but down from the 8.3 MMT imported in 2015-16. Barley imports in the year starting in June are estimated at 4.6 MMT versus the 3 MMT estimate a month ago, and down from the 8 MMT imported in 2015-16. (Bloomberg)

France: AgriMer lowered estimated 2016-17 corn production to 11.8 MMT from the 12.2 MMT forecast a month ago, and the 12.8 MMT predicted a month before that. (Bloomberg) 

South Africa: Cool and wet conditions are expected to create favorable crop conditions over the next ten days and the country expects to return to being a net exporter of maize in the coming year. (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: After losing value Monday and Tuesday, the Baltic Freight indices clawed back up to October 31 levels. It feels like we are once again in a market that is steaming in circles and looking for direction. The North American fall harvest is coming to an end, but we should continue to see good grain export volumes through February or March 2017. 

October was a record month for U.S. grain export ports. The Mississippi River shipped 8.91 MMT of grain in a single month. Soybeans were the commodity that made it happen, as beans were the only commodity to have a record single month. Corn experienced it eighth-highest month on record, wheat came in with its 17th and sorghum with its 18th biggest loading month. However, the weather was excellent and logistics were perfect; together with soybean demand this led to a record single month of export loadings. For cargo demand, that is about as good as it gets.

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 Indonesia.

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

10. Interest Rates

Interest Rates