Market Perspectives December 1, 2016

1. Chicago Board of Trade Market News

Week in Review

Outlook: Corn markets have turned decidedly more bearish this week as commercial demand remains light in the December contract. Moreover, commercial selling was heavy earlier this week as firms sold off the remnants of last week’s rally. Despite commercial selling, however, no deliveries have been made against the December contract. The lack of deliveries thus far likely indicates the cash and futures markets are in balance, which is further evidenced by a 1-penny increase in the national average basis today. Ethanol production has continued to impress and exports have been stable the past two weeks, both of which have lent support to cash prices. 

U.S. corn remains competitive on the global market with Gulf basis bids at +0.45H, which is cheaper than almost any other origin, including Argentina’s new-crop offers. A continued strong U.S. export program is needed to keep the market from collapsing under the weight of huge stocks. The market is doing what it needs to move corn across U.S. borders and into the hands of international consumers. 

U.S. exports have been just sufficient to keep the market on track with where it needs to be. Export inspections totaled 800,000 MT (31.5 million bushels) this week and YTD totals stand at 185 percent of the prior year. Export sales this week were 39 million bushels which exceeded USDA’s projected pace of 26 million while reported exports were 31.8 million bushels, below the 43.6 million needed in this week’s report. Overall, the latest figures are neutral for corn and show that exporters are remaining competitive and moving product. However, the broader market remains vulnerable to any export slowdown. 

Technical conditions for December corn futures are deteriorating quickly. The contract, now roughly two weeks away from expiration, has fully broken below the uptrend that began at the end of August. Moving averages (10, 20, and 40-day) are showing bearish trends in both the December and March contracts while momentum indicators are flashing sell signals. The implication of all this is that last week’s rally is over and fresh news will be needed to lift markets out of their doldrums. 

The break at the CBOT is likely to reduce farmer selling and have a modest tightening impact on the cash market. Furthermore, it will lower elevation costs for exporters and, combined with today’s lower U.S. Dollar Index, will likely spur additional exports. Overall, the outlook for corn futures is decidedly sideways. Prices likely won’t test harvest lows but the market lacks any news to move much higher. For now, exports, ethanol, and farmer selling will determine the direction of corn prices. 

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: In the days since the Tuesday morning cutoff time of this week’s USDM, the cold frontal passage dropped an inch to locally over 3 inches of rain from parts of Louisiana northeastward to western Virginia, and over parts of the Northeast. For November 30-December 5, a series of fronts and low pressure systems are forecast to drop an additional 1-2 inches of precipitation across the South from Texas to Virginia, and parts of the Northeast, with locally 3-plus inches from Texas to Mississippi. One to 3 inches is forecasted for parts of the coastal Northwest and Northern Rockies. A tenth to half of an inch is expected across the Midwest, extreme northern Plains, and much of the central and northern portions of the West. No precipitation is forecast for southern California or much of the Southwest to central Plains. 

Temperatures should average warmer than normal in the East and cooler than normal in the West. For December 6-14, odds favor wetter-than-normal conditions for the northern tier states and drier than normal for the Southwest to southern Plains, with the Southeast transitioning from wet to dry. Temperatures are expected to be colder than normal in the West to Plains. The East Coast will transition from warmer than normal to cooler than normal as an upper-level trough migrates east through the period. 

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 761,600 MT for 2016/2017 were down 55 percent from the previous week and 50 percent from the prior 4-week average. Increases were for Japan (228,300 MT, including 41,100 MT switched from unknown destinations and decreases of 1,000 MT), South Korea (140,900 MT, including 131,000 MT switched from unknown destinations), Mexico (77,800 MT, including decreases of 1,800 MT), Taiwan (66,700 MT, including decreases of 2,600 MT), and Honduras (63,400 MT, including 12,400 MT switched from unknown destinations and decreases of 6,100 MT). Reductions were for the Dominican Republic (158,200 MT), Guatemala (17,100 MT), and Morocco (10,000 MT). Exports of 808,800 MT were up 40 percent from the previous week and 12 percent from the prior 4-week average. The primary destinations were Mexico (186,700 MT), South Korea (141,900 MT), Japan (119,100 MT), Colombia (61,400 MT), and the Dominican Republic (53,300 MT).  

Optional Origin Sales: For 2016/2017, the current optional origin outstanding balance of 611,000 MT is for unknown destinations (274,000 MT), South Korea (272,000 MT), and Taiwan (65,000 MT).  

Export Adjustments: Accumulated exports of corn to Honduras were adjusted down 14,172 MT for week ending November 17th. The correct destination is Nicaragua and is included in this week’s report. 

Barley: No net sales were reported for the week. Exports of 100 MT were reported to South Korea.  

Sorghum: Net sales of 227,000 MT were down 22 percent from the previous week and 34 percent from the prior 4-week average. Increases were reported for China (162,500 MT, including 56,000 MT switched from unknown destinations) and unknown destinations (64,500 MT). Exports of 59,200 MT were down 48 percent from the previous week and 6 percent from the prior 4-week average. The destinations were China (56,500 MT), Nigeria (1,800 MT), and Mexico (900 MT). 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Despite a quiet week of trading, the market is feeling some support. The soybean market was highly supportive early in the week while cold weather in the Midwest is helping accelerate feed demand. FOB DDGS values are at approximately 123 percent of corn futures and are competitive against soybean meal in livestock rations. International demand is picking up from the holiday-quieted trading last week and vessels have been sold to several Asian destinations including Japan, South Korea, and China. 

The fundamentals are directly supporting DDGS prices. Prices were slightly higher for barges CIF NOLA this week, adding an average of $1/ton while for rail delivery to the PNW, prices rose $3/ton for December shipment and California-destined DDGS gained $1/ton. International prices saw broad strength as well, with 40-foot containers to Southeast Asia gaining $7/ton on average. Interestingly, prices for January shipment increased $5/ton while February shipment prices increased $8. The trend may be indicative of future strength in international DDGS demand. 

Ethanol Comments: Ethanol production remains well above year-ago levels despite slipping 3,000 barrels from the prior week. Since the marketing year began, cumulative production is up 4 percent YTD while stocks have fallen 8 percent. The implication is that export and domestic demand have both been robust and likely exceed USDA’s projections. By some estimates, USDA’s current projection for corn used in ethanol production may be 25-50 million bushels too low. 

Ethanol margins were broadly higher again this week and increased in three of the four reference markets. Ethanol producers in Iowa saw the only decrease in margins, losing $0.08/bushel this week. Margins in other states were higher, with South Dakota seeing the largest increase at $0.17/bushel. Margins remain extremely strong against year-ago levels, averaging $0.63/bushel higher across the Midwest. 

  • Illinois differential is $2.17 per bushel, in comparison to $2.09 the prior week and $1.75 a year ago.
  • Iowa differential is $2.04 per bushel, in comparison to $2.12 the prior week and $1.43 a year ago.
  • Nebraska differential is $2.14 per bushel, in comparison to $2.07 the prior week and $1.59 a year ago.
  • South Dakota differential is $2.49 per bushel, in comparison to $2.32 the prior week and $1.56 a year ago.

7. Country News

Argentina: Martin Lopez, of the Buenos Aires Grain Exchange, says that rain could delay planting of the corn crop and unless there is drier weather soon it could threaten the forecasted record crop of 36 MMT. (Bloomberg) 

Brazil: The corn crop is under some concerns of drought but it is too early to make substantive projections as to production losses. However, the situation does warrant caution when forecasting production for the 2016/17 crop year, especially since the safrinha crop would be primarily hit by any coming drought. The possibility of drought is eliciting caution in forecasts of Brazil’s production, which is not set to mildly decline year over year. 

China: A government crackdown on overloaded trucks has caused a spike in demand for sorghum ($240/MT) and barley ($219/MT) from the U.S. and Australia. It has caused corn prices to rise 16 percent ($298/MT) since early October. (Note: U.S. corn to China is estimated at $181/MT C&F) A trucking priority is also being given to coal in advance of heating needs. Sorghum imports will be lower than last year but higher than expected this year. (Reuters) Note: China’s feed imports in October were down 46 percent from a year earlier but margins remain attractive. 

China: Large grain stockpiles will enable the government to reduce the amount of land used in farming by 5 million hectares by 2020, according to Wu Xiao of the National Development and Reform Commission. The land will be diverted to grassland or environmental use and although it will reduce grain production by 75 MMT, that is only 2.5 percent of annual production. (Bloomberg) 

China: More than 900 companies have applied for low tariff corn import permits in 2017. Corn imports could be 7.2 MMT in 2016/17. (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: Well, it isn’t over yet. The Panamax and Handymax market rally somehow continues. There is no denying the fact that global Dry-Bulk ocean freight indices and rates have experienced a big leap in value over the past month. Baltic Indices are now up to levels not seen since February 2014. Physical markets, however, are greatly lagging these past equivalent levels. In February 2014 U.S. Gulf-Panamax prices to Japan were $53.00/MT versus $37.00/MT today. The question now is whether this rally is fully justified, and can it be sustained? 

When you look at the forward curve in the freight futures market it looks like a fair amount of skepticism exists. Nearby daily hire rates for Panamax vessel have moved from $6,000/day up to $9,000-plus/day (up 66 percent). The Panamax BPI has jumped up 42 percent, yet I do not see a 30 percent or 40 percent improvement in cargo demand. So, someone must be holding back. Given that we still have an imbalance (a surplus) of ships versus cargo, I wonder what will happen when all the surplus vessels want to capture the benefit of these higher markets? Bankers will certainly twist the arms of vessel owners to grab this opportunity. The Capesize market has already begun to adjust back down a bit. 

This bump up in Dry-Bulk rates will also make containerized grain shipments more competitive to Asia and provide motivation for container shipping lines to raise their rates. These are certainly interesting times and will be somewhat fun to watch.

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 the Philippines.

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

10. Interest Rates

Interest Rates