DDGS Comments: In last week’s report this section noted the prospect of increases in global freight rates. Since then, additional validation for expressing that statement was given in a Reuters news story which discussed the prospect that grain exporters could feel more price pain as shipping rates are set to rise. The story notes that logistical companies are prepared to increase rates because of expectations for increased demand. Rate increases are expected for bulk, barge and containers.
While freight is expected to be very tight this fall, a favorable pricing opportunity is currently being presented as increasing freight rates are unlikely to offset the tremendous declines that occurred this past week in DDGS prices. Declines in domestic DDGS prices were particularly pronounced and fell more than $25/MT out through September.
The price for containerized DDGS to export markets declined $10 to $1 5/MT during this past week as corn futures tumbled down to new lows. At the moment, this process of declining corn futures is rather aggressive as speculators exit the remainder of their large long positions in corn contracts. A number of buyers are apparently attempting to delay purchases in hopes of buying at the absolute bottom. As is commonly the case in market dynamics, multiple buyers simultaneously have that same objective. Some in the group are likely to purchase after speculators have already exited their losing long positions. Alternatively, other DDGS buyers seem to have an objective plan to purchase in order to achieve a specific margin level. These buyers seem to feel that attempting to purchase the absolute seasonal low is not a realistic expectation. Rather, their opinion seems to be that credit is given to the management team who can consistently obtain favorable returns.
Ethanol Comments: Ethanol stocks are remaining stable even as corn prices decline. U.S. ethanol stocks of 18.3 million barrels for week ending July 4 are basically unchanged from prior week’s level of 18.2 million barrels. The present stocks level is 15.7 percent above the year-ago level of 16.3 million barrels, but that is largely because the average daily production rate for the same week a year ago only averaged 881,000 barrels per day (bpd), due primarily to higher corn prices. Recall that a year ago the expiring spot market July contract was trading its last days above $7.00 per bushel. Current corn input costs are substantially lower for ethanol facilities, and yet ethanol production is not increasing as the price of corn falls. Rather, ethanol production declined to an average weekly rate of 927,000 bpd, in comparison to the prior weekly rate of 953,000 bpd.
Stability in ethanol stocks and production is not a certainty: Ethanol imports have returned at a rate of 9,000 bpd. As well, there is potential for U.S. production levels to expand because the spot market differential between the declining price of corn and the price of byproducts improved for ethanol facilities during the week ending Friday, July 11. The average differential of all regions is more than a dollar above the year ago level – which is incentive for production. The differential between the cost of corn and the value of ethanol and DDGS at processing plants in different regions of the Corn Belt are as follows:
- Illinois differential is $3.39 per bushel, in comparison to $3.09 the prior week and $2.31 a year ago.
- Iowa differential is $3.09 per bushel, in comparison to $2.93 the prior week and $2.04 a year ago.
- Nebraska differential is $2.95 per bushel, in comparison to $2.68 the prior week and $1.98 a year ago.
- South Dakota differential is $3.43 per bushel, in comparison to $3.16 the prior week and $2.36 a year ago.
Argentina: It is anticipated that farmers will sow less corn in the upcoming 2014/15 season should Argentina default on its sovereign debt, according to Reuters. Argentine farmers are heavily reliant on loans in order to fund planting each year, and a default would force interest rates to rise and have a negative impact on their ability to secure credit. Corn is already considered the most expensive crop to cultivate in Argentina.
Asia: Grain importers throughout Asia have reduced purchases in the hope that prices will drop even further than their already low levels, according to Reuters. While feed mills generally book cargoes three-to-four months in advance, many are now booking just two months in advance. It is feared that this action could have a negative impact on major grain exporters and could leave consumers vulnerable to supply disruptions, particularly in an El Nino year.
China: It seems likely that China will soon disband its reserve-based corn price support system in favor of transitioning to a market-based system that would allow supply and demand to decide crop prices, reports Reuters. The expectation is that markets will more efficiently streamline China’s food production chain compared to centralized control. Further on China: State corn sales have increased this week as the government sold 2 MMT (40 percent of the total volume offered) at an average price of $340-$360/MT.
Russia: The Ministry of Agriculture has advised that Russia should begin replenishing grain stocks with domestic purchases beginning in October, according to Reuters. This decision came following a meeting between the ministry and market participants including producers, unions and traders.
South Africa: Yellow corn for December delivery in Africa’s largest corn producing country fell by 4.9 percent and currently stands at $166.97/MT, reports Bloomberg News. South Africa is predicted to produce 13.9 MMT of corn this year, and so far around 7.5 MMT has been harvested.