Market Perspectives March 30, 2017

1. Chicago Board of Trade Market News

Week in Review

Outlook: The world is waiting for Friday’s Prospective Plantings and Grains Stocks reports from USDA. May corn has dutifully been trading lower in a “risk off” strategy to what is assumed to be a set of bearish USDA reports. Analysts are expecting USDA to show 91 million corn acres planted this spring and 8.55 billion bushels of corn in bins as of March 1, 2017. If realized, the March 1 stocks figure would mean a record-large demand of 8.39 billion bushels have been used already. Ethanol production and exports have certainly been sufficiently robust as to make this a definite possibility. 

Despite record demand projections, however, the world is still awash with corn. The International Grains Center recently released their forecast for the 2017/18 global corn crop and estimated 1.024 billion MT of production. The figure is actually down slightly from 2016/17’s production of 1.053 billion MT. The decrease in production stems from IGC’s outlook of lower corn prices across the globe. Indeed, with the first-crop Brazilian corn harvest under way, Brazilian export prices have fallen to within 20 cents of U.S. FOB Gulf prices, confirmation of the long-anticipated pressure on global markets. 

Additional bearish considerations came from JBS’ announcement that the company will stop operations at 10 slaughter factories in Brazil for 20 days. While the resulting impact of keeping some cattle on feed longer should increase corn consumption, the more prevalent concern is that corn consumption by large industries will be lower due to the large meat stocks that have formed in Brazil. 

USDA’s export sales figures were quite bullish this week. The U.S. sold 33.1 million bushels of old-crop corn, well above the 28.2 million that were needed to reach the USDA’s export projections for the year. Similarly, weekly exports of 55.2 million bushels were almost 25 percent greater than what was needed last week. YTD exports are up 62 percent and YTD bookings (exports plus unshipped sales) are up 50 percent for the year. These figures show U.S. exporters have been aggressive in marketing corn, through with the Brazilian harvest coming their abilities will be tested. 

From a technical perspective, May corn is in a downtrend, though significant support lies just under current prices. Additionally, the contract is oversold according to stochastic indicators and the Relative Strength Index. However, trading on technical analysis is hardly advisable since tomorrow is one of the most significant report days of the year. Should a bearish report be released, May corn will likely fall below support at $3.50 and head lower, perhaps surrendering to a 100 percent retracement to the August 31 contract low ($3.33). If, on the other hand, USDA’s reports are bullish, the immediate upside target becomes $3.75, and later a test of the February 16 high of $3.87. The view, however, is for bearish news to be absorbed more quickly and bullish news will be rewarded with a slow grind higher. 

2. CBOT Corn Futures

CBOT May 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 storm responsible for the heavy rain that has fallen since Tuesday morning over the southern and central Plains will move slowly east, bringing welcomed showers and thunderstorms to the eastern third of the nation. The greatest likelihood for an inch or more of rain will be from the Midwest into the Northeast, with the more appreciable rainfall totals bypassing the lower Southeast’s drought areas. Meanwhile, another moisture-laden Pacific storm will track from the Northwest across the northern Great Basin, emerging onto the central High Plains before reorganizing and strengthening over eastern Texas. This latter system will produce a swath of rain and mountain snow from the Pacific Northwest into the central Rockies, while moderate to heavy rain (2-6 inches) develops across the south-central U.S. by early next week. Moisture from this second system is expected to reach the Ohio Valley, Mid-Atlantic, and Southeast by Tuesday morning. The NWS 6- to 10-day outlook for April 3-7 calls for above-normal temperatures nearly nationwide, with the greatest likelihood of warmth occurring in the southern Atlantic States. Meanwhile, near- to above-normal precipitation across most of the country will contrast with drier-than-normal weather from parts of California to the Rio Grande Valley. 

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 716,900 MT for 2016/2017 were down 47 percent from the previous week and 28 percent from the prior 4-week average. Increases were reported for Peru (205,800 MT, including 155,000 MT switched from unknown destinations), Mexico (189,300 MT, including decreases of 5,200 MT), Japan (180,000 MT, including 56,200 MT switched from unknown destinations and decreases of 17,600 MT), Colombia (149,300 MT, including 140,500 MT switched from unknown destinations and decreases of 8,600 MT), and South Korea (133,000 MT, including 500 MT switched from Taiwan and decreases of 3,400 MT). Reductions were reported for unknown destinations (273,600 MT) and Canada (10,700 MT). For 2017/2018, net sales of 125,000 MT were reported for Mexico (78,200 MT), Nicaragua (30,000 MT), and unknown destinations (17,100 MT). Reductions were reported for Japan (300 MT). Exports of 1,402,800 MT were up 2 percent from the previous week, but down 4 percent from the prior 4-week average. The primary destinations were Colombia (398,200 MT), Mexico (228,000 MT), South Korea (191,200 MT), Taiwan (187,800 MT), and Japan (155,600 MT). 

Optional Origin Sales: For 2016/2017, options were exercised to export 68,000 MT to South Korea from the United States. The current optional origin outstanding balance of 462,000 MT is for unknown destinations (203,000 MT) and South Korea (259,000 MT). 

Barley: No net sales were reported for the week. Exports of 200 MT were reported to Taiwan. 

Sorghum: Net sales of 16,700 MT for 2016/2017 resulted as increases for China (62,600 MT, including 58,000 MT switched from unknown destinations and decreases of 200 MT) and Mexico (14,500 MT), were partially offset by reductions for unknown destinations (57,500 MT) and Japan (3,000 MT). Exports of 58,300 MT were up noticeably from the previous week, but down 20 percent from the prior 4-week average. The destinations were China (57,800 MT) and Mexico (500 MT). 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: One key feature of commodity markets is that they are a “zero-sum game.” Someone wins at someone else’s loss and only one of two opposing views can be right. This dichotomy was prevalent in the DDGS market this week: buyers are sitting tight, waiting for softer prices as the weather warms, while sellers are defending offers in anticipation of week-long “turnarounds” heading in to April and May. Consequently, the market was quiet and featured infrequent, low-volume trading. Only time will tell which of these views will ultimately prove correct, but last year’s two-month-long bullish move started in April. 

FOB NOLA DDGS prices remain competitive against FOB soybean meal, priced at 41 percent of soybean meal. This equates to a $1.55 per protein-unit cost advantage for DDGS on the export market. FOB corn prices came under pressure from Brazil this week which pressured FOB Gulf DDGS lower by $2/MT. The value of FOB DDGS versus FOB corn was down slightly but basically unchanged at 90 percent. Barge rates were essentially unchanged this week (down $1/MT) in line with price signals from the Gulf. 

CNF Prices for 40-foot containers to Southeast Asia were higher this week, climbing $3/MT. Prices for containers destined for Vietnam rose $6/MT while product destined for Taiwan increased $3/MT. The forward curve for internationally-destined DDGS is looking stronger with prices for April, May, and June shipment all increasing ($1/MT on average). If FOB Gulf prices attract significant buying attention near $150/MT, it seems CNF prices to Southeast Asia have done the same at $175/MT.

 

7. Country News

Brazil: Winter corn planting is complete in the Center-South region and the harvesting of the summer corn crop is 56 percent complete. (Bloomberg) 

China: Chinese corn futures on the Dalian Exchange have been falling ($242.36/MT close on March 29) based on the rumored impending sale of government surplus stocks. Corn prices in the south have been rising ($251.07/MT; 1,730 yuan/MT) and the government may sell corn from reserves in April at prices expected to be at $210 to $217 per ton. There is no official confirmation but market talk says the price could go as low as $159/MT (1,100 yuan/MT), which would be 32 percent below the May futures contract. Heilongjiang produces a lot of corn with few users and the government sold corn in the province last year at $174/MT (1,200 yuan/MT). (Bloomberg) 

Separately, the Dalian Exchange plans to begin offering corn options contracts if the soymeal options contract launching on March 31 is a success. 

Malaysia: Brazil is the typical supplier of corn to Malaysia, but due to last year’s drought the U.S. has now supplied 162,000 MT of corn to the country. These are the first sales by the U.S. in five years. (Feedstuffs) 

South Africa: The Crop Estimates Committee forecasts this year’s corn production at 14.3 MMT, an 83 percent increase over last year’s drought-stricken crop. Ample rainfall means this year’s crop may yield the most production in 36 years. (Bloomberg) 

Turkey: Ankara imposed high duties on Russian supplied wheat, corn and sunflower starting in mid-March. The economy ministers for the two countries plan to hold discussions on Russia’s supply of grain to Turkey in early April. (Reuters) 

Ukraine: Export shipments of corn are up 6.7 percent thus far in this marketing year. Top buyers include the EU, Iran, Egypt, and South Korea. (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: There was a big jump in ocean freight indices this week, with a bit lighter move up in physical voyage charter rates. Market excitement was mostly focused on the Capesize and Panamax vessel freight markets and less so in the Supramax and Handymax sectors. 

The Baltic P2 and P3 Panamax indices ran up in increments of 400-500 points per day this week. So…everything is bullish now? Most indices rose to highs not seen since November 2014. But, interestingly enough the Baltic S1C Dry-Bulk Supramax index from the U.S. Gulf to China-South Japan dropped in value each day this week. This caused quite a divergence in market spreads. Chinese coal and iron ore/steel demand due to “restocking” was the main demand factor behind the rally.

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 YTD 2017 versus January-December 2016 annual totals for container shipments to Indonesia. 

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

10. Interest Rates

Interest Rates