We are not short on things to discuss this week. Brazil’s weather remains far from ideal and looks like it will get worse before it gets better. China has finally picked up their buying pace of US beans, giving demand bulls a shot in the arm, while major developments in the Black Sea could also change the demand outlook for grains.
Brazil’s Weather and Production Outlook
As we discussed somewhat in-depth last week, Brazil’s weather has the attention of traders and is causing great worry when it comes to production potential. The forecast is not great for the week ahead, with dryness remaining in place for the next 7 days while temperatures soar across much of the country.
Brazil’s soils are not made to withstand periods of heat and dryness like many are expected to see—not that any soils are really made to withstand dryness and temperatures in the 100s.
Many are rushing to make major cuts to Brazilian bean production, with some already taking their estimates into the mid-150’s. The USDA’s most recent update has the crop at 163 mmt, with CONAB, Brazil’s version of the USDA, upping their estimate this week on the back of increased acreage. It is interesting to note the last time we saw similar conditions with widespread dryness across Central Brazil was in the 2020/21 crop year. We saw a significant delay to the country’s rainy season that, with farmers forced to wait until late November and even December to plant beans.
The challenging start had the USDA cut their 133 mmt starting estimate for the Brazilian crop to 126 mmt in January, before ending the year at 137 mmt. In the end, that year, it was corn that took the hit in production.
Corn prices to finish 2020 were not nearly as competitive as beans. Chinese demand had started to show, though no one was expecting it to be quite as deep as it was. Production reductions from the long tail of the August derecho had not been fully factored in either, keeping corn prices somewhat depressed, while beans started to rally on South American planting delays.
Economics favored continued bean planting at the sake of corn, and in the end Brazilian corn production ended up dropping 14 mmt from initial estimates, finishing at 86 mmt.
One could argue the economics this year also favor continuing to push bean planting, if, of course, the weather starts to cooperate.
When it comes to weather, both the GFS and the Euro have rain in their extended outlooks, remaining consistent with development around the 20th. This rain is critical and will need to be verified, with continued rains needed as we work into December and beyond.
As I talked about a bit last week, it is important to keep in mind weather has been trending drier the last several years in the Oct/Nov timeframe. November only tends to average 5” of rain total across much of the country, while December through February rainfall totals increase to 10” or more.
Chinese Demand. A Sign of Things to Come?
China is rumored to have purchased upwards of 3 million metric tons of soybeans from the United States over the last couple of weeks. Of this total, nearly 2 million have been announced, with more flash sales likely coming if the rumors are true.
Traders have been arguing over what is driving the uptick in buying interest from China. Some credit the production issues in Brazil, saying Chinese buyers are obviously concerned, thus the uptick in buying. Others say it is a goodwill effort by Chinese traders ahead of Xi’s visit to the US this week. Another plausible reason given is that Sinograin is working to replenish depleted government reserves by the tune of 12 million metric tons.
In my opinion, all three are at least somewhat correct. First off, with the slow start to planting in Brazil and the likelihood we will see a large amount of beans needing to be replanted, the idea we will see an early start to the Brazilian export season is basically off the table. Northern regions in Brazil are generally the first to hit the export market, with their early absence likely delaying the real kick off to the country’s export season well into March.
The knowledge Brazil’s exports will be slower than expected to start, combined with a healthy US crush industry, makes it clear to any seasoned trader that physical beans for February were not likely to get any cheaper.
At the same time, the US and China are the world’s greatest “frenemies.” For those lucky enough not to know what this word meant prior to this very moment, a frenemy is someone you must be friendly with, even if you’d rather not for a whole host of reasons. Relations between Biden and Xi have been chilly at best, raising concern we could see the rift between the two countries grow.
Some political strategists believe China may work to cozy up with Biden ahead of the election next year, concerned Trump could return to office.
The third reason cited is Sino’s need to replenish reserves. US beans store better thanks to their lower oil and moisture content, making them the more likely choice to supply government stockpiles. Some claim stockpiles are lower than current estimates and that Sino will continue to buy aggressively. I question these thoughts after China struggled with bean demand at stockpile auctions earlier this year, but this is something I will be keeping an eye on in the days and weeks ahead.
Black Sea Worries
A ship sitting at the Port of Odesa waiting to load iron ore destined for China was struck by what Ukrainian’s claim was a Russian anti-radar missile earlier this week. A crewmember on the ship was killed, while at least 3 others were injured, the first casualty during the use of Ukraine’s humanitarian corridor.
What this means for trade through the corridor going forward remains a little unclear as Ukraine says the show must go on and that the corridor remains open. According to freight traders, the cost of moving ships through the region increased by upwards of $20/tonne or 50 cents a bushel. This increase in freight now brings Ukrainian offers up to Brazil or US values—with the US the clear winner when it comes to logistical performance.
The question is no longer whether the US can get cheap enough to compete when it comes to corn exports, it is now a question of what kind of global demand we can expect beyond what has been incredibly stout demand out of Mexico.
What Else I’m Watching
--Money flow and trader sentiment. Money flow dominates everything, and with funds relatively short compared to what we’ve seen the last couple of years, the risk is always there that something could prompt a return to grains, sparking a sharp move.
--Demand outside of the usual suspects. Of course, the focus will remain on China, but I am watching closely to see if other traditional buyers get spooked by Brazilian weather concerns. Will there be a push to cover physical shorts?
In the end, the unknowns regarding Brazil’s production outlook are incredibly high. However, we are seeing a nice recovery in Argentina’s soil moisture and production estimates, potentially helping to stabilize the global supply outlook. We need to see the moisture currently forecast for much of Brazil 10 days out roll forward and verify, with signs of a pattern shift much needed to put minds at ease.
This week will likely work to put the “violent” in “violently rangebound” if I had to guess. As always, don’t hesitate to reach out with any questions and 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.
