Market Perspectives December 8, 2016

1. Chicago Board of Trade Market News

Week in Review

Outlook: Active trading pushed the March corn contract 11 cents higher this week as continued export strength and ethanol demand keep the market afloat. Last week’s break at the CBOT did indeed stimulate additional export buying and three days of a lower U.S. dollar supported the effort. Excellent ethanol exports are turning margins across the Midwest higher still, and margins in some areas are nearly $1/bushel higher than this time last year. The ethanol industry is certainly supporting cash corn prices and doing its part to work through the massive 2016 U.S. corn crop. 

The latest USDA export data is bullish for corn, exceeding what was needed to reach USDA’s demand projections. Weekly export sales for the 2016/17 crop totaled 63.2 million bushels while shipments totaled 53.8 million. Shipments were 10 million bushels above what was needed this week. Year to date exports are 80 percent higher than at this point in the 2015/16 crop year, indicative of just now aggressive U.S. exporters have been and how competitive U.S. prices are. 

The cheapest FOB corn available still comes from the U.S. Gulf, though Argentina and Brazil are gaining competitiveness. The spread between U.S. Gulf corn and Argentina (upriver) and Brazilian quotes narrowed this week to roughly -$17/ton, down form -$20/ton last week. In the coming months, U.S. corn will undergo its seasonal loss of competitiveness, especially as the Brazilian crop comes to market. However, the large discount present in the market today provides exporters with plenty of opportunities to move U.S. product to the world. In the near term, international demand is the most variable factor for U.S. exporters with supply competition becoming more relevant in the spring. Fortunately, demand is typically the more slowly moving portion of the export equation and U.S. exports should remain robust in the short run. 

Both managed money funds and commercial firms are now net short the corn market, and both added to their bearish bets last week per the CFTC. However, fund short covering has been prevalent this week (indicated by a contraction in March CBOT open interest) and the CFTC data to be released Friday will likely show that funds are becoming more neutral rather than purely bearish. 

The March CBOT contract has settled into a decidedly cyclical trading pattern, relegated to a 20-cent trading range. The Relative Strength Index (RSI) and stochastic indicators are neutral while the 10, 20, and 40-day moving averages are consolidating. No trend is underway, nor does one appear to be emerging, and trading will likely continue as selling rallies and buying breaks.

2. CBOT Corn Futures

CBOT March Corn Futures

CBOT Corn Futures Graph

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Drought Monitor Weather Forecast: During the next five days (December 8-12), moderate precipitation (0.5-1.5 inches) is anticipated from Tennessee through the Great Lakes region, which will at least help preclude additional deterioration for the Tennessee and Ohio Valleys. For most other areas east of the Rockies, precipitation amounts are expected to be less than a half-inch. Locally heavy amounts of precipitation (liquid equivalent of 2-4 inches) are predicted for the higher elevations of the Rockies. Most of the expected precipitation for the Pacific Coast states is forecast to fall in areas that are not currently in drought, except for the Sierras where up to 7 inches (liquid equivalent) is anticipated. 

For the ensuing five-day period (December 13-17), odds favor above-median precipitation across approximately the northern and eastern halves of the contiguous U.S., while odds favor below-median precipitation from Arizona eastward to the southern Great Plains. 

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 1,495,400 MT for 2016/2017 were up 96 percent from the previous week and 12 percent from the prior 4-week average.  Increases were for Peru (426,000 MT, including decreases of 7,700 MT), Japan (320,800 MT, including 147,900 MT switched from unknown destinations), Mexico (218,800 MT, including 28,000 MT switched from unknown destinations, 20,000 MT switched from Canada, and decreases of 12,800 MT), South Korea (206,100 MT), and Saudi Arabia (182,000 MT, including 176,000 MT switched from unknown destinations and decreases of 1,600 MT).  Reductions were for unknown destinations (469,800 MT) and Canada (16,400 MT).  For 2017/2018, net sales of 1,000 MT were reported for Nicaragua.  Exports of 1,366,400 MT were up 69 percent from the previous week and 94 percent from the prior 4-week average.  The primary destinations were Japan (292,000 MT), Mexico (256,700 MT), Taiwan (214,000 MT), Saudi Arabia (182,000 MT), and Peru (72,800 MT). 

Optional Origin Sales:  For 2016/2017, options were exercised to export 65,000 MT to Taiwan from the United States.  The current optional origin outstanding balance of 546,000 MT is for unknown destinations (274,000 MT) and South Korea (272,000 MT). 

Barley: No net sales were reported for the week.  Exports of 900 MT were reported to Japan. 

Sorghum: Net sales reductions of 10,400 MT for 2016/2017--a marketing-year low--were down noticeably from the previous week and from the prior 4-week average.  Increases reported for China (44,600 MT, including 55,000 MT switched from unknown destinations and decreases of 17,300 MT) and Nigeria (100 MT), were more than offset by reductions for unknown destinations (55,000 MT) and Mexico (100 MT).  Exports of 232,900 MT--a marketing-year high--were up noticeably from the previous week and from the prior 4-week average.  The destinations were China (210,200 MT), Mexico (22,100 MT), and Nigeria (700 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: The DDGS market has a decidedly mixed tone this week: Prices in the Eastern Corn Belt have retreated modestly while Chicago, IL prices are up $10/ton. Western Corn Belt prices were steady this week but could see an increase next week with some cold weather. The cold front across the Rocky Mountains and Midwest plains this week will certainly increase feeding demand for DDGS and Western Corn Belt producers stand to see demand increase. The 11-cent weekly gain in CBOT corn prices will also encourage the purchase of DDGS which now stand at 34 percent of corn prices. DDGS are also remaining very competitive against soybean meal, priced $2.32/protein unit under their soy-derived competitor. 

The latest grain crushing’s report from the USDA noted that October DDGS production was down slightly from September. October production came in at 1.93 MMT and the continued strength in ethanol production means monthly DDGS supplies will be near 2 MMT for November and likely December also. 

The latest export data also shows exports of U.S. DDGS increased in October, gaining 1 percent to total 1.005 MMT. Mexico was the largest destination for DDGS in October, buying 131,000 MT – an increase of 7 percent from September. 

Ethanol Comments: Ethanol production continues to impress, gaining 11,000 barrels per day (1.1 percent) this week to total 1.023 million. This marks the sixth straight week production has exceeded 1 million barrels per day, the longest such streak in history. The added production expanded ethanol stocks this week which totaled 18.53 million barrels, up 0.4 percent from the week prior. Cold weather in parts of the country and the end of the Thanksgiving holiday travel season left gasoline consumption down 3 percent this week. Ethanol stocks were up only slightly while gasoline consumption was down, implying exports remain strong for U.S. ethanol producers. 

The strength of the U.S. ethanol export program this year is especially evidenced by the five-year record high that was achieved in October. Earlier this week, the USDA noted October ethanol exports totaled 131.6 million gallons, up 32 percent from September and 69 percent from August. Shipments to Brazil and Canada were especially strong with Brazil importing an additional 25 million gallons from September’s baseline and Canadian imports climbing 25 percent. To date, Canada, Brazil, and China are vying for the top export destination for U.S. ethanol. 

Ethanol margins were broadly higher again this week and increased in three of the four reference markets, though gains were smaller than last week’s. Ethanol producers in South Dakota saw the only decrease in margins, losing $0.08/bushel this week, though their margins are nearly $1.00/bushel higher than last year. Margins in other states were higher, with Nebraska seeing the largest increase at $0.11/bushel. Margins remain extremely strong against year-ago levels, averaging $0.69/bushel higher across the Midwest. 

  • Illinois differential is $2.23 per bushel, in comparison to $2.17 the prior week and $1.67 a year ago.
  • Iowa differential is $2.07 per bushel, in comparison to $2.04 the prior week and $1.43 a year ago.
  • Nebraska differential is $2.25 per bushel, in comparison to $2.14 the prior week and $1.61 a year ago.
  • South Dakota differential is $2.41 per bushel, in comparison to $2.49 the prior week and $1.50 a year ago.

7. Country News

Brazil: USDA may lower its estimate for Brazilian corn exports this year given that its export pace is below the trend necessary to meet the projection. However, Conab estimates new crop production at 83.8 MMT, up 25.9 percent. The average estimate of traders indicates an 89.2 MMT crop in 2016/17. Corn exports are seen rising to 24 MMT. (Bloomberg) 

Canada: Rain and snow are delaying the oat harvest and the rest is lower production (-13 percent), poorer quality and higher prices. Since the end of September, oat prices have rallied from seven-year lows to the larges harvest rally in a decade. Meanwhile, U.S. oat production was harvested earlier than usual and is generally better quality. (Bloomberg) 

China: The Ministry of Agriculture’s outlook committee has lowered the forecast 2016/17 corn crop by 1 MMT to a total of 214.6 MMT. Corn starch and alcohol refineries have boosted output on higher profits via lower priced corn. (Bloomberg) China National Grains and Oils Information Center has already lowered projected corn consumption in the new marketing year because prices have risen due to recent new rules on trucking and the consequent increased use of imported sorghum and barley. Projected sorghum imports were raised by 1 MMT to 4.5 MMT. (Reuters) 

China is now aiming to double ethanol output from the current 2.1 MMT to 4 MMT by 2020 in order to have 15 percent of energy derived from non-fossil fuel sources. However, it will still control the amount of grain used for ethanol unless it is unfit for human consumption. (Reuters) China’s Commerce Ministry has proposed and the National Development and Reform Commission is receiving public comment on allowing foreign investment in edible oils processing and fuel ethanol production. (Bloomberg) 

Peru: USDA reports that Peru was the single largest purchaser of corn this past week, 426 KMT, which was that country's largest single-week purchase on record. (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: The market rally of the past month is not totally over, but it does seem to be losing momentum. The Baltic Freight Futures appear to be adjusting downward to better mirror what is happening in the physical markets. The Capesize vessel market took the biggest hit this week and now the 2017 outlook is looking gloomier for the capes. It was the Capesize and Panamax markets that led the recent market rally. The Handysize and Supramax vessel markets are holding up better than others as these are thinner and more specialized markets. 

However, when you look at the forward curve for all Dry-Bulk vessel types you notice a distinct inverse relationship to current spot rates. So, there is obviously a lack of market confidence in the ability of rates being able to sustain current values. I hope vessel owners take full advantage of what they can extract in the near-term.

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 Thailand.

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

10. Interest Rates

Interest Rates