Adverse weather shrinking South American production
Soybeans rebounded late last week on news that China, in what could be a good will gesture, will allow importing of U.S. rice. Traders took this as a positive sign and a good start to resolving trade issues. The two countries are expected to begin negotiations the week of January 7th. China hopes to be able to make supplies last until new crop Brazilian soybeans are in a shippable position in mid-January.
New crop soybeans will likely be at steep discounted to old crop stocks from Brazil and soybeans from the U.S. If China can stretch soy reserves, this gives them another 6 months to negotiate trade differences before soy demand puts them in a crunch.
U.S. soybean export inspections had another dismal week as they came in below trade estimates. Soybeans tallied 24.9 million bushels, which was outside the trade range of 26 to 37 million bushels. Corn was in line with trade estimates coming in at 36 million bushels. This was a 3.2 million bushel decrease from last week’s 39.2 million. In comparison to last year for this period, corn is ahead the USDA export forecast and soybeans are well behind.
Ethanol production for the week ending December 28th showed a decline of 31,000 barrels from the preview week, at 1.011 million barrels produced each day. Despite lower production, ethanol reserves grew by 29,000 barrels and stand 23.16 million barrels.
Jair Bolsonaro was sworn in on Tuesday as the new president of Brazil, the largest country in South America. This breaks the four consecutive election cycles that have been held by left leaning presidents. The first order of business for the new President was an executive order to merge the Ministries of Agriculture and Environment. This could potentially allow new land to become available for commercial agricultural production.
What producers plan to plant this coming spring continues to be debated by traders. Current soybean to corn ratio is around 2.36. Meaning it takes 2.36 bushels of corn at the current value to reach 1 bushel of soybeans at the current value. Analysts believe with higher input cost of corn, the ratio will need to be closer to 2.2 for farmers to plant corn over soybeans. If the price of corn remains steady, for that ratio to be seen, November soybean values would need to drop to $8.80 or roughly 70 cents below the current price.
Spot corn futures closed the year with gains of 24 cents, the first annual gain seen in the past 6 years. Ending stocks of corn are estimated 656 million bu less than last year at 1.781 billion bu. Front month soybean futures finished the year 70 cents lower. Soybean carryout is estimated a large 510 million bu higher than last year at 955 million bu.
As usual, speculation of what changes will be made on the final supply and demand numbers from the USDA are being discussed. A recent study by FC Stone showed that since the year 2000, there have been 7 years the corn yield has been reduced from the October to the November report, like this year. In 5 of those years, reductions from the November report into the January, final report were also made.
Brazil weather forecasts have been forefront for the last two weeks. Spotty rains fell over portions of the growing areas recently but not enough to alleviate stressed areas. Forecasts released mid-week are calling for temperatures 10 degrees above average for the driest areas of the south central and southwest and into Paraguay. Variability in forecasts have kept risk premium built into soybean values. Private analysts continue to reduce the crop size, many estimates are now in the 115 120 MMT range, comparted to early estimates of 123-126 MMT. The latest USDA estimates are for 122MMT.
While trade is monitoring South American weather closely, a few factors are expected to keep values from overacting to the situation. One being, rainfall totals. Although this December went down as the third driest in the last 40 years, 7 inches of rain was received. Much of the rain in December most years is actually excess and not needed to produce average yields. Another limiting factor is the fact that 3.1 million more acres were seeded in Brazil this year over last, so even with less yield, production will likely still be adequate.
Early soybean harvest has started in parts of Brazil. Sources are estimating that in two weeks notable supplies of soybeans will hit the export ports. These bushels are expected to be at a discount to the US offerings and more economical for Chinese buyers.
For more information, you may contact Mick Hoover at (515)-200-5115, or e-mail at firstname.lastname@example.org. The opinions and views expressed in this commentary are solely those of Mick Hoover. Data used in writing this commentary obtained from various sources believed to be accurate. This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position. Please visit our Risk Disclosure Page for more information on commodity trading.
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