Market Perspectives January 19, 2017

1. Chicago Board of Trade Market News

Week in Review

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Outlook: In a holiday-shortened week of trading, March corn once again bumped up against the upper end of its recent trading range. The rally was specifically fueled by poor South American weather which will likely trim corn production from the region, though soybean production is more at risk currently. The weather in Argentina looks very hot and dry in the near-term with hints of changes coming toward the end of the month as the high-pressure ridge weakens. Brazil’s weather is rainy but normal for January and will likely only marginally slow the harvest. 

USDA’s weekly Export Sales report was delayed this week due to the holiday and will be released Friday. The USDA did report 110,400 MT of corn sold to unknown destinations for the 2016/17 MY. Combined with earlier reported sales of 102,944 MT (also sold to unknown destinations), the figures point to a modest gain in weekly export sales in tomorrow’s report. Exports have been trailing off since early November but the 30-cent discount the U.S. Gulf holds to Brazil should be supportive for the next few weeks. So far, U.S. corn exports are up 72 percent for the current marketing year. However, the U.S. dollar is presenting some headwinds due to recent Federal Reserve statements that additional rate increases are appropriate due to tightening labor markets. 

One bearish consideration for corn is the apparent deterioration in ethanol margins. A third week of record ethanol production is building stocks rapidly and pressuring Midwest ethanol prices. Margins, which were exceptionally good, are now to the point where negative returns to production are likely. A pullback in production will likely weaken interior corn basis levels and put bearish pressure on the markets.

From a technical perspective, March corn has substantial bullish pressure building but is still restrained by resistance at $3.69. The contract is near three-month highs and fresh news will be required to get bulls buying above this level. There is still a lot of corn in the world but some unexpected, bullish factors are creeping up on the market (notably, South America’s weather). Funds are reportedly adding to their length in corn, even as commercial selling remains active at these prices, but not so much as to generate a breakout. It will take significant fundamental news and a sustained breakout above $3.69 to generate a new buying wave. On the other hand, the weakening high-pressure ridge across Argentina could ease weather concerns and allow prices to fall back into their trading range. Should that occur, support lies at $3.52 and $3.45. The market feels like it wants to go higher but is unwilling to do so without sound fundamental reasons. 

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 (January 19-23), above-normal precipitation (2-5 inches) is expected across most of the Gulf Coast states from far eastern Texas to and including northern Florida, most of the southern Atlantic Coast region, the Tennessee Valley, and southwestern portions of Kentucky and Virginia. Excessive precipitation amounts (liquid equivalents of 9-13 inches) are forecast for coastal California and most of the Sierras. These anticipated areas of heavy precipitation are likely to result in additional improvements to next week’s U.S. Drought Monitor depiction. Little if any relief, however, is forecast for most of the Great Plains and Northeast. For the ensuing five-day period (January 24-28), there are elevated chances for above-median precipitation across much of the contiguous U.S. However, odds favor below-median precipitation across the south-central states. Taking the two periods as a whole, Oklahoma and most of Texas are the least likely areas to receive beneficial precipitation. 

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

Due to the Monday, January 16 holiday, weekly U.S. export sales will be published on Friday, January 20. Updated U.S. export sales will be published in the January 26 edition of Market Perspectives.

Corn: Net sales of 603,300 MT for 2016/2017 were up 41 percent from the previous week, but down 42 percent from the prior 4-week average. Increases were for unknown destinations (207,000 MT), Japan (126,500 MT, including 35,300 MT switched from unknown destinations), Taiwan (80,600 MT, including decreases of 2,700 MT), the Dominican Republic (48,400 MT), and Peru (43,500 MT, including 33,000 MT switched from unknown destinations). Reductions were for South Korea (17,500 MT), Canada (2,900 MT), and Cuba (1,100 MT). For 2017/2018, net sales of 151,700 MT were reported for unknown destinations (150,300 MT) and Japan (1,400 MT). Exports of 693,900 MT were up 14 percent from the previous week, but down 14 percent from the prior 4-week average. The primary destinations were Mexico (167,300 MT), Japan (149,400 MT), Colombia (93,300 MT), Chile (44,800 MT), and South Korea (43,300 MT). 

Optional Origin Sales: For 2016/2017, the current optional origin outstanding balance of 828,000 MT is for South Korea (604,000 MT) and unknown destinations (224,000 MT). 

Barley: No net sales were reported for the week. Exports of 500 MT were reported to Japan. 

Sorghum: Net sales of 14,900 MT were up noticeably from the previous week, but down 84 percent from the prior 4-week average. Increases were reported for Japan (10,000 MT), China (6,800 MT, including decreases of 2,400 MT), and Indonesia (100 MT). Reductions were reported for unknown destinations (2,000 MT). Exports of 180,500 MT were up noticeably from the previous week and up 31 percent from the prior 4-week average. The destinations were China (179,800 MT) and Indonesia (700 MT). 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Some DDGS prices were higher this week in the Midwest, helped along by strong truck demand. The cold snap across much of the nation’s middle helped boost feed demand for DDGS while the rally in soybean meal put some urgency into buyers. On a per-protein unit basis, DDGS are now fully $1.00 cheaper relative to soybean meal than they were two weeks ago. Domestic DDGS prices were higher this week with FOB Gulf prices gaining $4/ton and prices to the PNW and California up $3/ton. 

The DDGS outlook is looking brighter with improved demand prospects and supply reductions likely ahead. While the latest export data shows November exports were down from the prior year, lower CNF Gulf and container yard prices suggest ample opportunities to entice new export demand. Moreover, tightening ethanol margins will start to restrict production; commensurately reducing DDGS supply. 

Some merchandisers are reporting that international prices seem to have bottomed out. With DDGS near 60 percent of corn value buyers are emerging and covering February-April positions. Sales to Southeast Asia have been noted along with some to China. Now that China’s final ruling on tariffs for U.S. DDGS are known, traders will begin the process of adapting to new trade terms and pricing. Some buying interest is noted heading into China but firm bids have yet to be established. Sale prices for DDGS to Southeast Asia were mixed this week with strength in Vietnamese and Philippines bids and weakness in Malaysia, South Korea, and Taiwan. 

Ethanol Comments: Ethanol producers seem determined to break production records and they did so again this week, producing 309.88 million gallons. This marks the third straight week of record-breaking production as ethanol plants increased their output by 5,000 barrels/day (0.5 percent) which boosted ethanol stocks by 1.106 million barrels (up 5.5 percent). At the same time, gasoline consumption increased by 2.1 million barrels this week (up 11 percent) which helped keep stocks from growing even faster. 

The record-breaking ethanol production was driven by a spike in ethanol prices and extremely good production margins. U.S. ethanol exports have been excellent, boosting prices. Data from the USDA suggests ethanol margins during the first weeks of December were the highest since May, 2015. Now, however, Iowa ethanol prices have fallen $0.40 from their recent highs and margins are beginning to turn negative by some measures. This will likely restrict production growth and weekly output should fall next week. 

Continued record production forced margins lower again this week. Ethanol margins fell in all four of the reference markets; declining $0.20 per bushel in Illinois and Nebraska while Iowa and South Dakota saw decreases of $0.15-0.18 per bushel. This week’s average margin of $1.48/bushel is still $0.33 higher than one year prior. 

  • Illinois differential is $1.34 per bushel, in comparison to $1.62 the prior week and $1.13 a year ago.
  • Iowa differential is $1.38 per bushel, in comparison to $1.56 the prior week and $1.02 a year ago.
  • Nebraska differential is $1.55 per bushel, in comparison to $1.79 the prior week and $1.26 a year ago.
  • South Dakota differential is $1.64 per bushel, in comparison to $1.79 the prior week and $1.20 a year ago. 

Adding to the bearish leaning for ethanol is a change in China’s ethanol import tariff. The move has reportedly caused some buyers to washout several Q1 cargoes already. The U.S. has been China’s largest supplier lately and 2016 exports (through November) were up 51 percent year-over-year. 

7. Country News

Argentina: Chicago corn futures added a weather premium as concurrent extreme wet and dry conditions in Argentina likely lower corn production by 2.5-6.8 percent below USDA’s last estimate of 36.5 MMT. (Reuters; Bloomberg) 

China: Using a slightly increased harvested area and yield, the January estimate for 2016/17 corn production was increased by 680 KMT above the December estimate and carryover stocks was raised by 5.1 MMT. (China Agricultural Supply and Demand Estimates-CASDE) report. Meanwhile, the National Grain and Oils Information Center forecasts China’s corn imports in 2016/17 at 2 MMT, versus the 1 MMT predicted in the CASDE report. 

Separately, China will increase the import tariff on ethanol, which would make imports uneconomic. (Platts) 

Mexico: Juan Pablo Rojas of CNPAMM says that Mexico will import one-fifth more yellow corn next season because of higher fuel costs and a weaker peso hitting domestic crop production. This means imports will rise from 14-16 MMT to 16.8-19.2 MMT. He also said that Mexican farmers would welcome an end to NAFTA. (Reuters) 

Philippines: The Philippine Maize Federation Inc. (PhilMaize) has asked the government for assistance including authority to export corn. Purchases by the National Food Authority have been minimal and low prices have likely caused a drop in production by 5-10 percent, and there could be further reductions. PhilMaize also wants a commodity exchange warehouse system to help manage supply and demand. (Business Mirror) 

South Africa: A survey by Bloomberg indicates farmers will increase the area planted to maize by 31 percent in the 2017 season. Production was reduced by 27 percent last year due to drought. (Bloomberg) 

Vietnam: The Vietnam Animal Feed Association has imported 4 MMT of corn so far this year, 80 percent of it GMO. Vietnam only produces half the 8-10 MMT of animal feed needed each year and allowing the production of higher yielding, pest resistant GMO varieties could help self-sufficiency, though it may also harm meat exports to some countries. (VnExpress)

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 global Dry-Bulk shipping industry has not returned to rough seas but market rates are bobbing around in this relatively quiet start to the New Year. The Chinese Lunar New Year commences in another 8 days. All in all, things are not moving in any decisive direction. I saw a Shipping Herald news headline earlier this week that read: “Dry Bulk-Capesize Rates to Slip; Low Demand, Overcapacity Weigh.” Where have we heard that before? 

In viewing the vessel lineups in Brazil, it looks like we are starting the shift to South American supply of soybeans to China and other destinations. Between now and February 8 the port of Paranagua has over 19 soybean vessels scheduled. Santos has over 27 vessels and there are more at the other 12 Brazilian ports as well.

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 January-December 2016 annual totals versus January-December 2015 annual totals for container shipments to Indonesia.

Container Shipments 1
Container Shipments 2

10. Interest Rates

Interest Rates