Market Perspectives February 9, 2017

1. Chicago Board of Trade Market News

Week in Review

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Outlook: The USDA surprised the corn market today by announcing that – nothing is changing. Traders had been expecting changes in Brazilian and Argentinian production but both the U.S. and international supply and demand situations were left essentially unchanged. The U.S. corn balance sheet was the same as the January report except for a minor adjustment to Food, Seed, and Industrial (up 35 million bushels, 25 million of which was from ethanol) and ending stocks (down 35 million bushels). The U.S. ending stocks to use ratio was lowered 0.2 percent to 15.9 percent while the annual average farm price was unchanged at $3.40/bushel. 

Of more interest was the USDA’s decision to leave Brazilian and Argentinian production figures unchanged. For traders anticipating either a bearish increase in Brazilian production or a bullish cut to Argentina’s crop, today’s report was disappointing. The decision to leave unchanged (or at least postpone changes to) South American production does leave open opportunities for the USDA to make larger revisions in the March report. Interestingly, USDA did lower the global ending stocks figure for corn, citing higher corn use in China and a draw-down in the EU’s ending stocks. Global ending stocks are now projected at 217.56 MMT, down from January’s 220.98 MMT projection. 

The price action of the March corn contract has been interesting this week. Ever-increasing moving averages are supporting the market, which broke a 6-month high Thursday before the WASDE report. The WASDE’s implications for the corn market were neutral-to-bearish but corn finished the day only 1.25 cents lower. The higher close was largely the result of large intra-commodity spreads (long soybeans and short corn or wheat) being unwound as the WASDE was more bearish for soybeans. Funds are still long the corn market and today’s report offers little reason to change their positions. It’s worth noting the December 2017 corn contract closed at $3.95 ¾ today, which may provide some attractive hedging opportunities for farmers.

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: The NWS WPC 7-Day Quantitative Precipitation Forecast (QPF) calls for moderate-to-heavy precipitation accumulations in northern California as well as western Oregon, western Washington, northern Idaho, and northwestern Wyoming. Moving eastward, lesser precipitation accumulations (less than 1.5 inches) are forecast for Texas, northern portions of the Mid-Atlantic, and eastern portions of the Midwest. Some heavier precipitation amounts (2 to 3 inches) are forecast for New England for the seven-day period. The CPC 6-10 day outlooks call for a high probability of above-normal temperatures across the entire conterminous U.S., with the exception of New England where below-normal temperatures are forecast to prevail. Below-normal precipitation is forecast for the Intermountain West, central and northern Plains, and the Midwest while above-normal precipitation is expected along the West Coast, South, and New England. 

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 971,700 MT for 2016/2017 were down 15 percent from the previous week and 13 percent from the prior 4-week average. Increases were for Japan (401,700 MT, including 145,900 MT switched from unknown destinations and decreases of 2,200 MT), unknown destinations (183,600 MT), Mexico (149,500 MT, including decreases of 900 MT), South Korea (125,300 MT, including 63,000 MT switched from unknown destinations and decreases of 8,000 MT), and Colombia (78,600 MT, including decreases of 1,700 MT). Reductions were reported for Taiwan (66,500 MT), Jamaica (56,100 MT), the Dominican Republic (23,400 MT), Nicaragua (9,500 MT), and Costa Rica (400 MT). For 2017/2018, net sales of 34,500 MT were reported for unknown destinations. Exports of 1,124,700 MT were up 47 percent from the previous week and 34 percent from the prior 4-week average. The primary destinations were Mexico (208,100 MT), Japan (194,500 MT), Colombia (188,300 MT), Taiwan (76,800 MT), and Saudi Arabia (73,700 MT). 

Optional Origin Sales: For 2016/2017, the current optional origin outstanding balance of 760,000 MT is for South Korea (536,000 MT) and unknown destinations (224,000 MT). 

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

Sorghum: Net sales of 8,300 MT for 2016/2017 were down 86 percent from the previous week and 84 percent from the prior 4-week average. Increases were for China (37,300 MT, including 53,000 MT switched from unknown destinations and decreases of 15,700 MT), Japan (20,000 MT), and Mexico (4,100 MT). Reductions were reported for unknown destinations (53,000 MT). Exports of 60,700 MT were down 70 percent from the previous week and 56 percent from the prior 4-week average. The destinations were China (49,100 MT), Mexico (11,000 MT), and Indonesia (600 MT).

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: DDGS prices were sharply higher this week, led by increases in the FOB Gulf market. The price jump was motivated by increased buying interest that is being reported by merchandisers across the U.S. Some report that container prices are rising and container availability is being factored in along with the typical post-Chinese New Year tightness in the market. Prices for 40-foot containers to Southeast Asia were up $5/MT on average this week with Malaysian and Indonesian buyers leading the way. 

FOB Gulf prices were up $3/MT for February shipment this week and reached 90 percent of FOB corn values for the first time in 2017. Interestingly, prices for Barge CNF NOLA and FOB Gulf shipments are increasing through April. The shape of the forward curve may be signaling higher demand and possibly tighter supplies in the coming months. 

Higher soybean meal prices are certainly helpful to the DDGS market right now. After their mid-January race higher, nearby futures prices retreated, found support, and are starting to move higher again. The price action is increasing the competitiveness of DDGS in feed rations, where the per-protein unit cost of DDGS (FOB ethanol plants) is now $3.32 less than for soybean meal. On the FOB Gulf market, soybean meal gained $5/MT this week, leaving the FOB per-protein unit cost of DDGS $2.02 less than that of soybean meal. 

Ethanol Comments: Ethanol production retreated from last week’s record high, with daily output falling 6,000 barrels to 1.055 million for the week. As has become commonplace to note in many analytical articles, this pace is still well above any previous records or averages for this time of year. Despite the production slowdown, ethanol stocks grew 1 percent last week to 22.085 million barrels even as gasoline consumption increased by 8 percent. The jump in gasoline consumption and stocks together is concerning for the industry as it may be indicative of an export slowdown. Ethanol exports have been brisk this year (up 27 percent through December 2016) and have added significant value to ethanol producers’ margins. A prolonged export downturn would certainly apply strong economic pressure to the ethanol industry. However, the start of the U.S. spring driving season is only weeks away and the seasonal increase in consumption could ward off any effects of slowing exports. 

Gains were noted in production margins across all four reference markets this week. On average, margins increased $0.12/bushel this week and stand $0.11/bushel higher that one year earlier. Iowa margins saw the strongest gains while more modest improvements were noted in Illinois, Nebraska, and South Dakota. 

  • Illinois differential is $1.28 per bushel, in comparison to $1.18 the prior week and $1.29 a year ago.
  • Iowa differential is $1.23 per bushel, in comparison to $0.99 the prior week and $1.16 a year ago.
  • Nebraska differential is $1.35 per bushel, in comparison to $1.27 the prior week and $1.39 a year ago.
  • South Dakota differential is $1.81 per bushel, in comparison to $1.74 the prior week and $1.38 a year ago.

7. Country News

Brazil: Conab raised its 2017 corn production estimate by nearly 3 MMT 87.409 MMT. If realized, it will be a 31 percent larger output than last year’s crop. USDA kept its forecast for Brazilian production at 86.5 MMT. (Reuters) 

China: Feed mills in the northeast provinces are being subsidized to buy corn from farmers and Beijing is encouraging provinces to undertake their own measures. Removing the price support has lowered prices and domestic corn is expected to be competitive until at least July; further boosting domestic corn disappearance are the antidumping duties imposed on U.S. distiller’s dried grains. As a result, CNGOIC boosted its forecast of domestic corn use by 21 MMT. 

Speculators are piling into Dalian corn futures in expectation that the government will successfully drive down the supply/demand ratio. They have pushed corn futures to an 18-month high (up 20 percent since September 30). Still, some contend that the increased demand does not significantly change the market fundamentally since there is still a huge surplus. The government intends to drive down corn production by -670,000 hectares (-4 percent) to 215 MMT this coming season. Corn imports this year are forecast at 800 KMT, though USDA still predicts it will be 3 MMT. (Reuters; Bloomberg) 

Saudi Arabia: State grain buyer Saudi Grains Organization (SAGO) purchased 1.5 MMT of animal feed barley in a tender. This is the second purchase of its kind since SAGO took responsibility for supplies in October. (Reuters) 

South Africa: Assuming armyworms are managed properly, wet weather is expected to boost corn production by 60 percent over last year’s drought burdened crop. Instead of importing 3 MMT of corn like it did last year, South Africa may be exporting 1 MMT of corn in 2016-2017. (WorldGrain)

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: Ocean freight traders seems to be returning to the job slowly after the Lunar New Year holiday. This week has been mostly quiet with little trading. This light volume of activity of course has not provided very much support for the markets, but rates do seem to be up just a little. Most of the related news so far has been about the poor financial conditions at both dry-bulk and container shipping companies. 

Updates derived from my trip to the Panama Canal Authority: The new lock is working with a reduced draft of 45 feet, but there is hope to go to 46 feet in a couple of weeks. It will probably be later this year before they get to a 47-foot draft and next year before they get to 50 feet. The big container vessels pay $800,000-$900,000 in transit tolls. LNG vessels pay about $400,000, and a Neo-Panamax dry-bulk vessel would pay about $280,000 in tolls. 

In that the new canal is currently working/locking through just six vessels per day at the new lock, they have created more demand for the new lock than they have capacity. Given the difference in toll structures this has to create an interesting dilemma for a Sovereign Service company. Their objective is to work their way up to eight transits per day and then eventually up to 10 or maybe 11 per day by next year. Note that there is an existing plot of land that has been designated for future expansion to another lock set if needed at a later time.

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 the Philippines.

Container Shipments 1
Container Shipments 2
Freight Chart 1
Freight Chart 2
Freight Chart 3

10. Interest Rates

Interest Rates