by John Kappelman
The author is a trader with Cereal Byproducts Company, Port Washington, Wis.
Much of the action around dairy feed prices the past three months has centered on benchmark protein soybean meal and its record-setting, torrid pace of export shipments. USDA has shuffled numbers on soybean crush, domestic use and export commitments, and has maintained a 135 million bushel soybean carryover for the latest crop year.
This is considered by most market watchers to be the bare minimum needed to maintain adequate supplies throughout the rest of this crop year. To maintain this 135 million bushel carryover, the USDA projection assumes there will be at least some significant cancellations of "in place," export commitments of U.S. soybean meal to China and other Asian customers. This is particularly likely as the South American soybean crop becomes available.
Most market watchers expected to see some of these cancellations by the latter part of February and March; however, this has not occurred. If these cancellations do not materialize very soon, the U.S. carryover at the end of this crop year could very easily fall below 125 million bushels, a carryover considered too small to prevent domestic U.S. supply disruptions and shortages prior to the new crop. The situation can only be changed by reducing pace of domestic crush, the cancellation of some export sales, rolling some export sales into the 2014 to 2015 marketing year, larger imports of South American soybeans this summer or some combination of several of these factors.
This marketing development is already impacting other feed and by-product markets, particularly those that tend to move in sympathy with benchmark soybean meal prices, as well as those feeds which carry significant protein components. The feed industry is eagerly watching to see what will happen to ending stocks for the balance of this crop year. This situation has been further complicated by the Western and Southwestern U.S. droughts.
Another complicating issue is the political unrest in Ukraine. As a major world grain producer, the possible effects on grain shipments with the Russian actions in and around the Ukraine's Black Sea ports could cause market fluctuations.
Corn gluten stocks tight
The corn gluten feed market continues to be tight and high priced in nearby months, relative to corn prices. Prices are being driven by protein value, particularly on dry pellets. Recently in the upper Midwest, late spring and summer pricing had been offered at $155 to $165 per ton FOB (free on board) at various Midwest plants.
However, the past several months, just as the nearby delivery month approaches, prices have repeatedly risen significantly, as the overall protein market direction remains unresolved. March and April posted offerings were running $190 to $200 per ton free on board at Midwest plants on dry pellets. These numbers are nearly $25 to $30 per ton higher than a month earlier for this same period.
Some large Western U.S. dairy feed customers, facing the severe drought, have committed to significant purchases of Midwest gluten feed pellets for this spring and summer. This further strengthened spring and summer gluten feed markets which are historically at their weakest from April through July. The worldwide sugar glut also continues to suppress demand for corn sweeteners, limiting the crush at corn wet milling plants.
The extreme winter temperatures have caused severe operational difficulties within the wet milling plants, which have led to multiple outages this winter; several extending as long as a week or more.
The forward market will likely be determined by the future direction of protein markets, corn sweetener demand, rail logistics, and additional Western and Southern U.S. dairy feed demands due to long-term drought conditions.
Rail hindered canola
Railroad movements of canola meal from Canada have improved somewhat in recent weeks. The basis cost of canola as compared to soybean meal has moved back to a more favorable relationship of $75 to $85 per ton under the respective month CME soybean meal price, delivered to upper Midwest rail-to-truck transload points.
Rail movements are still problematic with the severe winter weather, as trains were being shorted from a normal 130 car length to 90 cars or less to maintain proper operating air pressure throughout the train. Railcar movements are also difficult with rail yards choked with backed-up traffic, ice and snow, and the railroad's limited personnel and power resources being dedicated first to intermodal and oil shipments.
Agricultural rail shipment holdups and the low priority given to them have attracted the attention of the Canadian government. The government has recently stepped in to demand that railroads give more priority to agricultural shipments.
One fear is that, when rail movements resume, end user receiving points will be overwhelmed with the backlogged shipments and will struggle to handle them. This same issue has severely impacted the oat market this winter. Most of the oats used in the U.S. are produced in Canada and have been "weather bound" in Canada most of the winter creating huge market shorts.
Strong demand, product short
The whole cottonseed market has been absolutely on fire this past month. A short on acreage but good yielding crop was 27 percent smaller than last year. Insufficient rationing of the crop, particularly with higher milk prices, poor yielding upper Midwest forages with low digestibility and extra demand due to the drought, have driven prices well above the $400 per-ton mark.
This translates into $470 per ton cottonseed delivered to upper Midwest dairies. Prices of over $500 per ton for summer delivery have already been realized. Many resellers are reluctant to sell large volumes because of the difficulty of finding any replacement offers. This is causing most producers to reevaluate their use of cottonseed in their rations, even with record milk prices.
Available supplies are presently so tight that we do not expect to see any significant price declines, as most remaining supplies are already committed to end users. Adding to the price furry, a significant export sale was made to Japan recently with delivery spread through the spring and summer.
This is highly unusual, as the Asian Rim typically buys Australian cottonseed during our U.S. spring and summer. This would tend to indicate that Australian cottonseed is unavailable or priced out of the market. This may also indicate that there will be little movement of Australian cottonseed to the Western U.S. dairies under drought stress.
New crop (2014 to 2015) acreage is projected to be up approximately 10 percent, which should help supplies somewhat in the fall. However, it must be remembered that the present crop had very good yields overall, with no major crop losses due to hurricanes, so supplies for next year may not grow significantly with average yields.
For those wishing to use cottonseed this coming fall, some purchases might be warranted. Fall 2014 harvest values are $120 per ton lower than present values, and there are adequate milk futures prices to offset this feed purchase risk.
Even with the recent news of some distillers grains for export being rejected due to GMO issues, exports continue at a rapid pace, driven by protein demand. Often GMO issues are as much about price renegotiations as actual GMO issues.
Some upper Midwest plants with good quality are not contracting domestic dry distillers grains forward and have only limited spot loading available at $240 per ton FOB, as they continue to meet their export commitments. Prices in general have ranged from $190 to $210 per ton in the upper Midwest.
On the positive side, there have been periodic flushes of wet distillers grains available at discounted prices of $30 to $40 per ton free on board at some Midwest plants this winter, which are easily finding their way into many dairy diets.
Soy hulls and malt sprouts
Both of these products have found renewed interest with drought, hay shortages, poor forage fiber digestibility, and very high cottonseed and protein prices. Soy hull pellets could have been contracted for the next several months at approximately $179 to $185 per ton recently, but with the risk of a looming reduced domestic soybean crush, prices have advanced $15 to $25 per ton or more.
Malt sprout pellets can be contracted through midsummer at $190 to $200 per ton delivered to upper Midwest dairies. Both products are being used by nutritionists to "tweak" production performance, which has been very strong on milk components but has been somewhat disappointing on milk volume.
It appears most likely that U.S. soybean ending stocks will be very tight, creating volatile and weather-driven markets this spring and summer. Dairy feed markets will need to be closely monitored, as the soybean market influences will affect many other dairy feed markets beyond the soybean complex.