My level of concern when it comes to Brazilian weather has been on the rise recently. The pattern has been less than ideal in many parts of the country. Too much rain has been seen in southern regions where upwards of 30” of rain fell in October. Northern and eastern portions of the country have been struggling with the opposite, with October one of the hottest and driest seen in several years.
The situation is a mixture of both in central regions, with planting progressing slower than normal throughout Mato Grosso and surrounding areas. Some agronomists have reported farmers may look to replant, while others have said some farmers may choose to skip planting soybeans entirely, focusing instead on cotton.
The pattern is not expected to change dramatically any time soon according to forecasts. Drier than normal conditions are expected to linger in eastern and northern parts of the country not only throughout the next two weeks, but through the rest of November and into the first part of December. Above normal precipitation is expected to continue across much of the southern part of the country to finish the month as well.
Less than ideal weather has had an impact on Brazilian logistics. Too much rain in the southern port of Paranagua has resulted in loading delays that are now stretching out to almost 6 weeks. Northern ports are dealing with reduced drafts and tows like what we have seen along the Mississippi, causing shipping costs to soar, pinching exporter margins.
In addition to logistical issues, weather has a major influence on farmer psychology and how willing they may be to sell old crop supplies. Crops on hand become a hedge against a perceived crop failure when weather is poor, reducing a farmer’s desire to sell in a big way. The slowdown in farmer selling combined with poor logistics has resulted in an increase in values Brazilian exporters are willing to offer into the global market.
What That Means for US Exports
Up until recently US values had been well above Brazilian offers, limiting our sales pace to customers that weren’t somewhat captive, like Mexico. The new crop export sales pace for soybeans has been a hot topic to start the marketing year. Shipment pace has been strong, outperforming the levels seen a year ago and taking our outstanding sales down to historically low levels. Sales pace though is slow overall, with sales underperforming last year by just under 9 million metric tons.
The USDA has recognized the reduced sales pace and the economics behind the reduction, taking their anticipated soybean exports for the year ahead down to trade war levels at 1.755 billion bushels. Taking the reduced export expectations into consideration, we continue to lag the sales pace needed by just under 3 mmt, with China where the lag in business is most obvious.
Corn sales are ahead of a year ago, driven by an increase in purchases by Mexico. A small uptick in a whole host of purchases by other buyers around the world has also helped to compensate for a nearly 2 million metric ton reduction in purchases by China.
As we have discussed so many times before, the depth of China’s demand is the unknown with the most potential influence on the market. This week an expert in the Chinese oilseed industry expressed a bullish outlook when it came to soybean demand in the last quarter of the calendar year. He believed we would see a continuation of strong imports, taking total inbound soybean shipments to a record level at 105 mmt, 3 mmt higher than current USDA estimates.
This bullish outlook has come into question though after a sharp drop in crush margins in the country has started to pressure importers. Reports ASF has been spreading in northern regions, bringing many hogs to market, and leaving buildings empty in the area has reduced the outlook for domestic soybean meal demand in the short-term. Traders have reported Chinese crushers are looking at offering meal supplies into neighboring countries, something that could be interesting considering the uptick we have seen this year in US meal sales.
Chinese corn demand remains the 500-pound gorilla in the room as well, as traders remain very aware of what happened the last time China looked to source supplies in a big way. If weather remains poor in Brazil not only limiting short term sales but also limiting second crop production, we could see China look to source supplies elsewhere. Ukraine is actively selling corn into the market some 50 cents below US values, but questions over their ability to perform logistically makes the discount necessary.
It does feel important to point out at this point though, Chinese import margins for corn are nowhere near where they were the last time we saw big purchases of US supplies. Cash values have been under pressure in the country as farmers are concerned over warmer than normal temperatures impacting quality, pushing them to increase sales. Rumors that Sinograin may stop purchasing supplies for reserves continue to circulate, spooking farmers as well, though those continue to be denied.
When it comes to soybean purchases, it is not necessarily price alone that drives the decision, something we have also seen in wheat and could potentially see in corn going forward as well. US beans tend to be drier and lower in oil, helping them store better for longer. This with an ability to ship quickly when needed due to our somewhat unhindered logistics pushed China’s Sinograin to buy US soybeans for February shipment, even though they were 75 cents more expensive than Brazilian offers.
So, what does it all mean?
We continue to try and judge what happens in the year ahead with each day bringing us another small piece of the puzzle. The weather in Brazil is not something that can be ignored, with production estimates already being reduced by some, due to the less than ideal start. These issues are likely to catch the attention of traders in a big way, and with the funds as short as they are in beans and even corn, we could see a short-term pop result, due to the need for an increased risk premium.
At the same time, we are hearing stories of freight providers trying to incentivize grain movement by reducing costs here in the US. Cheaper freight to export terminals could open the door to increased US export business, something that should show itself soon if it is there.
One of the constant themes in my thinking regarding grains and market direction hinges on the health of the global economy and subsequent demand. Now is one of the greatest opportunities to see how deep that demand may be, and how much has been hidden by the idea we would not see any type of disruptions to supply. Do we see foreign buyers who have been slow in purchasing pick up their pace on concerns over a reduced production outlook out of Brazil? If they do so, the US would be the benefactor.
If not, I’m afraid it would be confirmation we are working to return to the pricing patterns more commonly seen from 2014-2019.
Other Things I Am Watching
--Treasury yields and outside market movement. Money flow has an obvious influence on price direction. If traders move money out of one market and choose to look back to grains, fundamentals will take a backseat.
--The dollar. We saw a sell-off in the dollar to end the week, helping make US supplies even more attractive. Do we see continued weakness? Does it help aid our export sales outlook?
--Black Sea developments. There is more talk that the West is trying to broker a peace deal. Are they able to make steps when it comes to the safety of ships in the region? What does Russia do with their wheat exports?
--The WASDE update. The USDA will update their supply and demand projections. A major adjustment to US production is not common, but the risk remains we could see some changes.
In the end, even if Brazil’s weather problems don’t impact production in a big way this year, they could help to push business to the US as well as catch the attention of speculators who had all but left grains the last couple of months. I will be watching to see if the psychology of the world buyer starts to change since that will have a huge influence on price direction as we work to wrap up the year.
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.
