While I would like to say it is good to be back, it would be hard to call the first week of trade in 2024 welcoming. Corn and wheat lost 11-12 cents this week with March beans falling 42 in the four days of trade.
While many of the stories we are trading today are like what we were trading at the start of my holiday hiatus a handful of weeks ago, time has given us the benefit of getting a clearer picture of what it all may mean for price. Unfortunately for market bulls, a lot of what has transpired over the past couple of weeks has not necessarily supported a move higher in prices.
With this week marking a full return from the holiday season we are no longer short on news or participants, so let’s go ahead and look at the big stories I am watching and what they all could mean as we head into 2024.
South American Production
Trying to get a clear picture on what to expect out of Brazil production-wise has proven difficult this growing season. A far drier than normal start thanks delayed monsoonal flow has resulted in a greater level of variability in conditions across the country this year than what we would typically see. Early harvest results out of Mato Grosso have been called disappointing but with the country experiencing its driest October and November on record with bouts of extreme heat, the beans being harvested now grew in the worst of conditions.
We have seen the average trade guess for Brazilian production creep lower over the last several weeks, landing now in the mid 150’s. It is interesting to note that even with the poor weather on paper, the country’s NDVI or vegetative index is above average when you look at the USDA’s crop explorer. Knowing this makes the USDA Brazilian attaché’s recent bean estimate of 158.5 mmt, a figure that is more than 4 mmt above the average trade estimate, make a little more sense.
From a physical market standpoint, it appears much of the panic over a significant production loss has begun to fade with an uptick in farmer selling and weaker basis for February and March shipments, even with futures falling off. While it does happen on occasion, it is rare to see commercials or exporters position themselves wrongly when it comes to the physical market and production potential.
With many of the larger conglomerates having spent millions to access satellite data and to have boots on the ground across both hemispheres, they tend to have a decent read of what will be available when it comes to grain movement. This makes watching the trend in basis values and grain sales a far better indicator of sentiment regarding crop size than listening to the slew of private estimates released ahead of CONAB or USDA reports.
While we wait to see if Brazil’s crop ends up closer to 152 or 158 mmt, the market is also working to factor in a significant recovery in Argentina’s production, up 23 mmt from last year according to the most recent USDA estimate. Argentina’s government is in dire need of cash, and with agriculture the best way to turn products into dollars, there is incentive to get grain flowing out of the country. Offers out of Argentina May forward are undercutting Brazilian values, with the significant recovery in crush and subsequent meal availability out of the country contributing to soybean meal’s over $100 rout since mid-November.
Overall, it appears that even with the drop in Brazilian production, the soybean crop across South America will be up year over year—with us not able to say the same about demand at this juncture.
Chinese Demand and Taiwan’s Election
After what was a significant run in government reserve buying of US soybeans, Chinese buyers have gone quiet. Grain and protein markets in China have been under pressure the last several weeks, with imported soybean values falling to multi-month lows and soybean meal falling to the lowest level seen since January 2021. Hog prices have been under pressure for months now, with margins continuing to encourage a liquidation of live hogs.
The country continues to struggle with soaring youth unemployment rates and a middle class who has seen a significant share of its wealth decline with the collapse of property values. Downstream demand remains incredibly weak, with wheat millers and other food suppliers reporting surprisingly lackluster buying ahead of next month’s New Year holiday.
Traditionally we would see significant buying ahead of the holiday, with a downshift in demand after, making the recent stretch of slow demand that much more concerning.
In addition to a problematic economic picture for the middle class and others across the country, I am closely watching what happens after Taiwan’s election next week.
I am trying to ignore the nagging thought that the situation between China and Taiwan feels eerily reminiscent of the situation between Russia and Ukraine in the months leading up to the invasion. Over 19 million people are expected to head to the polls in Taiwan next Saturday, voting for a new president.
There are three candidates running, with the country’s current Vice President and leader of the independence leaning Democratic Progressive Party William Lai Ching-te ahead in the polls. Beijing has made it clear they are not fans of Lai, saying he is problematic and will bring chaos. A reportedly staunch defender of the island’s right to self-govern, he has said he wants to be friends with China, not enemies but that he will fight to maintain the country’s freedom.
Chinese officials have upped the ante over the last several weeks, with Xi saying in his New Year speech that reunification will take place. Other officials have warned the Taiwanese people that it is in their best interest to denounce independence, choosing to vote for peace. With the uptick in military activity in the region and tensions already high, the results of Saturday’s election and the subsequent response from China will have to be closely watched.
Major USDA Update
Friday will give us one of the bigger data dumps from the USDA in a given crop year. We will get final production figures that have been reconciled versus the updated quarterly stocks, with an update to overall supply and demand. We will also get winter wheat acres and a slew of global production and demand updates.
Looking at the overall market structure there shouldn’t be much in the way of major changes. The bean pipeline continues to show signs of tightness with the recent spread and basis strength we have seen, though with domestic carryout expected to come in near pipeline minimums again this year, that shouldn’t be surprising. Recent export figures say we could see a further reduction in the bean export outlook, though I only expect to see a cut there if production comes in smaller than expected.
The cash market in corn shows a widening spread between Eastern and Western Corn Belt values, though even with comparative strength in the Western Belt versus the East, levels are lower than seen last year for the most part. With Gulf values some of the lowest seen over the last 10 years and the US the cheapest supplier of the best quality corn, the glaring lack of world demand is becoming more obvious. Of course, while this could change quickly, especially if we see a further decline in Brazil’s second crop corn outlook, it appears as though domestic carryout will remain more than adequate—especially as we start to see feed and ethanol margins decline.
Wheat is interesting because of the recent uptick in Chinese demand, and it has the twist of the winter wheat planted acreage report. There were rumors this week of more Chinese soft red wheat buying interest, though no confirmation of trades being done. Friday’s supply and demand figures will likely see limited adjustments from last month, with the acreage figure the bigger focus.
The report lurking at the end of the week could encourage some position squaring, especially by market shorts. With speculators sitting at near their shortest level for this time of year in corn and the market having seen a decent sell-off, we could see some traders move to the sidelines just in case. Speculators will likely slow their recent selling pace of soybeans as well having liquidated a large amount of their ownership since mid-December.
In the end, we will not be lacking in market developments, with geopolitical tensions remaining elevated as we try to assess what is going to happen in the world economy in the months ahead as well. I expect trade to be supported this week ahead of the report after the recent sell off, but we need to see signs of improved demand to provide additional strength.
As always, don’t hesitate to reach out with any questions! Have a great week.
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
