Market Perspectives December 22, 2016

1. Chicago Board of Trade Market News

Week in Review

Outlook: Being bullish the corn market is getting increasingly difficult these days and the pricing outlook continues to dip lower. South American crop prospects are weighing against the market even as U.S. exports remain brisk. However, there is increasing risk that the USDA could increase ending stocks in its January WASDE while funds are turning bearish and adding to short grain positions. 

Almost everyone in the corn business has become an expert on Argentinian weather this month as it has been one of the few notable news stories. The area south of Buenos Aires received significant attention due to very dry conditions and drought earlier this month. Earlier this week, however, the area received some rain and is expected to receive additional precipitation in the coming week. Such rains should put the crop back to normal condition and usher in concerns of global oversupply if Brazil and Argentina’s forecasted production is achieved. In the last WASDE, USDA pegged Brazil’s production at 83.5 MMT and Argentina’s at 36.5. Since then, private forecasters have increased their expectations for Brazil’s crop and the production risk is decidedly to the upside right now. While South American weather will continue to be monitored ad nauseam, it is becoming a non-issue that is leaving a bearish trend in its place. 

U.S. corn exports were sufficient to exceed USDA’s projections this week. Gross sales totaled 56.3 million bushels for the current marketing year and YTD exports reached 579 million bushels, up 73 percent from one year ago. Additional evidence of the strong export demand is the 76 percent increase in YTD bookings. The U.S. export program is starting to run into headwinds, however, given the increasing U.S. dollar and the narrowing time window before South American exports start. In the near term, look for exports to remain strong while late-winter/early-spring exports could be diminished. 

USDA’s current ending stocks/use ratio forecast of 16.4 percent may not stand the test of time and upward revisions are possible. USDA typically relies heavily on the December 1 crop stocks report to guide its January estimate of U.S. ending stocks and, given the large U.S. crop and slow farmer selling, it is likely these stocks will be big. Some private forecasters have the ending stocks/use ratio above 17 percent which would be the largest in over 10 years. Such a figure would clearly be bearish for corn and could send prices down to $3.25 or even lower. 

From a technical perspective, March corn is at a pivotal point. With today’s holiday-reduced trading volume, prices are hovering immediately above the trendline formed from the September 1 contract low at $3.25 ½ and the intraday low on December 1 at $3.41 ¾. Should prices manage to stay above the line, it would maintain some bullish outlook for the market. However, a close below the line and any subsequent lower closes would usher in substantial bearish sentiment. The Relative Strength Index is neutral, as are the stochastic oscillators, which would imply more range bound trading. Funds have been active sellers this week and are building their short positions. However, today marks the third consecutive day of fund selling which, once completed, may leave the door open for more bullish action. While pre-Christmas trading will provide much needed directional information, it will take a decisive close during normal, post-holiday volume to fully clarify the market’s direction.

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: Mild weather will continue in many areas of the U.S., following the recent cold snap. During the weekend, however, colder air will engulf the West and return to the northern High Plains. For Thursday, precipitation highlights will include light snow spreading into the Northeast and rain developing in the Southwest. Precipitation associated with the Southwestern storm will overspread portions of the southern and eastern U.S. by Saturday. Meanwhile, a much more potent storm should arrive in northern California on Friday and reach the central High Plains by Christmas Day. Significant precipitation, including high-elevation snow, should occur throughout the West. Wind-driven snow can be expected late in the holiday weekend across the northern and central Plains and upper Midwest. The NWS 6- to 10-day outlook for December 27-31 calls for the likelihood of below-normal temperatures in the West, while warmer-than-normal weather should prevail across the South, East, and lower Midwest. Meanwhile, near- to above-normal precipitation in most of the country will contrast with drier-than-normal conditions across the lower Southeast and portions of the Rockies and High 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 1,251,000 MT for 2016/2017 were down 18 percent from the previous week and 8 percent from the prior 4-week average.  Increases were for Japan (535,800 MT, including 133,400 MT switched from unknown destinations and decreases of 10,700 MT), Mexico (372,200 MT, including decreases of 46,300 MT), South Korea (125,000 MT, including 65,000 MT switched from Taiwan), Chile (89,000 MT, including 44,000 MT switched from unknown destinations), and Saudi Arabia (74,800 MT, including 70,000 MT switched from unknown destinations).  Reductions were for unknown destinations (176,400 MT), Egypt (33,100 MT), and Vietnam (300 MT).  Exports of 781,000 MT were down 7 percent from the previous week and 13 percent from the prior 4-week average.  The primary destinations were Japan (239,600 MT), Mexico (194,100 MT), Saudi Arabia (74,800 MT), Egypt (58,900 MT), and Chile (44,000 MT). 

Optional Origin Sales:  For 2016/2017, sales totaling 50,000 MT were switched from unknown destinations to Japan.  Options were exercised to export 48,800 MT to Japan from the United States.  Decreases totaling 1,200 MT were reported for Japan.  The current optional origin outstanding balance of 828,000 MT is for South Korea (604,000 MT) and unknown destinations (224,000 MT). 

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

Sorghum: Net sales of 89,700 MT for 2016/2017 resulted as increases for China (142,000 MT, including 49,300 MT switched from unknown destinations and decreases of 9,800 MT) and Japan (4,200 MT, including 4,600 MT switched from unknown destinations and decreases of 400 MT), were partially offset by reductions for unknown destinations (56,600 MT).  Exports of 264,400 MT--a marketing-year high--were up noticeably from the previous week and from the prior 4-week average.  The destinations were China (249,100 MT), Mexico (11,000 MT), and Japan (4,200 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Trading this week was light due to the coming holidays but developments that will be long-term positive for DDGS were noted. Few trades were executed this week as sellers are defending prices but buyers, having reached almost maximum inclusion rates of DDGS in feed rations, are content to post low bids. With short-term needs met and little ability to increase usage, buyers are bidding $10 below offers in a “wait and see what happens” strategy. Accordingly, the majority of traded prices were lower this week and Gulf prices fell $6/ton on average. Demand in the PNW appears strong as spot prices were stable and February/March shipments gained $2-3/ton. Additionally, Lethbridge, Alberta prices were higher. 

Despite a low volume week, positive market developments were noted. In China, the ever widening spread between the U.S. dollar and the Chinese yuan has prompted Chinese importers to lock down soybean prices and book freight. The dollar/yuan dynamics are reflective of other currencies and should be prompting importers to start buying DDGS before the dollar moves higher. Given the U.S. stock market’s recent rally, the Fed’s rate hike, and solid GDP numbers, the U.S. dollar will likely continue its upward trajectory. International buyers would be wise to book shipments and fill needs sooner rather than later. Additionally, current FOB export prices should be attractive to international buyers and buying interest is expected to increase substantially in Q1 2017. 

The export market has a significant carry right now as exporters are anticipating freight rate increases. Spot prices for international shipment unconvincingly drifted lower this week on a lack of inquiries with containers to Southeast Asia falling $3/ton on average. 

Ethanol Comments: Ethanol plants are taking advantage of prime money making opportunities by continuing to run at a breakneck pace. Ethanol production slipped only slightly this week (down 0.4 percent) to 1.036 million barrels/day, still the second highest production week on record. Demand for product remains strong, however, and ethanol stocks across the U.S. fell just 0.1 percent to 19,06 million barrels as gasoline supplied (a measure of consumer demand) increased 13 percent from the prior week. The holiday season will boost American’s driving and should see gasoline/ethanol demand remain strong in the coming two weeks. Production will likely slip in the coming weeks as plants close for a few days but will soon revert to current production levels. The outlook for ethanol remains strong in the near term and prices should remain elevated and continue to provide producers with excellent margins. Due to strong production and huge margins, look for the USDA to increase its forecast of corn going to the ethanol grind in the January WASDE. 

Ethanol margins bounced higher again this week across all four reference markets. Nebraska ethanol producers saw the largest boost in margins, gaining $0.38/bushel this week. Ethanol producers are enjoying an extended period of excellent margins which are up $1.32/bushel over last year, on average. Good margins are encouraging production and farmer selling. 

  • Illinois differential is $2.67 per bushel, in comparison to $2.30 the prior week and $1.48 a year ago.
  • Iowa differential is $2.59 per bushel, in comparison to $2.27 the prior week and $1.21 a year ago.
  • Nebraska differential is $2.62 per bushel, in comparison to $2.24 the prior week and $1.42 a year ago.
  • South Dakota differential is $2.88 per bushel, in comparison to $2.60 the prior week and $1.38 a year ago.

7. Country News

China: Agriculture Minister Han Changfu says that corn production next year will be reduced by 666,667 hectares, which will be on top of the 2 million hectare reduction in 2016. (Bloomberg) 

Effective May 1, Heilongjiang, the largest corn producing province in China will ban GMO crops, including the processing and sale of imported GMOs. (Bloomberg)

Both Heilongjiang and Jilin provinces will cut the highway tolls normally charged for trucks carrying corn. (Reuters) while China railway had earlier announced increased transport of corn to stabilize prices. (Bloomberg) 

China National Grain and Oils Information Center says that rising sorghum prices are likely to reduce imports after the first of the year. (Bloomberg) 

South Africa: White corn futures rose the daily limit for a second day as dry weather and a two-week forecast of more of the same threatens domestic production. (Bloomberg) 

South America: Escalating projections about the size of the coming year’s corn crop is pressuring prices lower. Meanwhile, Brazil’s corn exports were up last week but are still not on a fast-enough pace to meet USDA’s prediction. (Agrimoney; Various)

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: From a vessel owner’s perspective, I guess you have to say it was a good run while it lasted. The multitude of shipping news sources that were welcoming in the long-awaited market turnaround have become rather silent this week. And, so has the market in general. The holiday season is upon us and is certainly adding to the reduction in market activity. However, the recent market pull-back is deeper than just the doldrums of the holiday season. Traders in the Baltic Freight Forward market got a bit over zealous in their hope for reaching a turning point in Dry-Bulk shipping. So, the realities of continued vessel oversupply have resurfaced and brought the market back into the real world.

Overall the shipping industry is doing what it needs to do. Vessel scrapping continues at a good pace and new-build orders are minimal. The Capesize and Panamax vessel age profile is now at seven years and the Handymax Dry-Bulk sector average age is at 10 years. As long as things keep moving in the right direction the market will gradually improve, but it will take more time and a true turnaround is most likely another year or two away. Please note that the Handymax Dry-Bulk market is holding up better than all others. 

U.S. export grain demand from Asia and rail and ocean freight rate spread advantages are increasing vessel lineups in the PNW.

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 Hong Kong.

Container Shipments 1
Container Shipments 2

10. Interest Rates

Interest Rates