Happy holiday season 2024! I can’t believe we have reached this point of the year already, since I’m pretty sure it has only just begun.
From the start, I could tell 2024 was going to be a year we were going to remember. From the sharp sell off at the start, to a complete lack of a weather rally during the growing season, 2024 was a painful one for many farmers and a year many grain traders are going to be glad to see go.
As I gear up for what I hope is a peaceful stretch to finish out the year, I wanted to look at some of what will have my attention even amid planned holiday cheer and time away from the office.
Brazil
After what was an exceptionally dry start to the growing season, with some planting delays seen due to slower monsoonal flow, Brazil’s summer crops are off to a great start. Soybean production estimates out of Brazil have become reminiscent of some of the conversations we had heard at the end of the US growing season, with analysts scurrying to bump up their production estimates each chance they get. Talk of a soybean crop well into the 170’s has become commonplace, with many wondering where farmers and elevators will put it all at harvest.
In a normal year, the Brazil effect would be negative on the market as we prepare for a flush of beans into the global pipeline. However, this year’s outlook is even more complicated, with an exceptionally bearish tilt at first glance, as Brazil’s currency collapses, trading to new record lows last week.
The issues in Brazil’s economy are interesting and unlikely to be rectified anytime soon. Analysts, experts and the country’s central bank say spending is out of control and unsustainable, calling on President Lula to make sharp cuts in his budget. Lula listened—in part—introducing a trimmed budget but one that also had tax breaks and government programs aimed to help the country’s citizens with lower incomes.
The tax breaks and new programs were seen as a sign Lula is not taking the warnings of the country’s imminent fiscal demise seriously, leading to the start of the real’s collapse at the beginning of December. The real traded to new record lows last week as the country’s congress began to vote on the new budget, pushing their central bank to auction billions of dollars from their reserves to try and stem the losses.
On Thursday alone Brazil’s central bank sold $8 billion of its dollar reserves, the largest amount in one day since 1999, taking the total sold up over $17 billion over the past couple of weeks.
On paper, a weaker currency generally results in a greater number of exports as the country’s supplies become more attractive to the world buyer who is using dollars. The collapse in Brazil’s real last week helped to push soybean prices to new contract lows on this knowledge. However, what it says on paper and what happens in reality may be two very different things, especially in this situation as farmers begin to look at supplies as a hedge against inflation.
With Brazil’s central bank bumping rates 100 basis points this past week, with another two 100 basis point bumps expected by March of next year and an eventual target rate of over 16%, Brazilian farmers may find margins pinched in ways they have yet to experience. Something likely to be exacerbated by the recent reported spike in farmer bankruptcies and subsequent tightening of credit.
What is taking place in Brazil is not likely to be easily resolved, with a new head of the country’s central bank set to take over at the start of 2025. Analysts believe we could be looking at Brazil struggling with inflation well into 2027, if, that is, their central bank is able to get the demise of their currency and government spending under control quickly.
Argentina
While Brazilian farmers face what could be a stretch of incredible economic uncertainty, the policies of Milei appear to be working—at least for now.The gap in the country’s official and unofficial exchange rates has all but disappeared, with thoughts we will see both import taxes reduced and changes to the current export tax scheme made in the year ahead. The changes in the economic outlook for Argentina and its farmers will be interesting and fun to watch in the years to come, with the potential there for a big return in crush demand and byproduct exports.
Argentina’s weather is showing some signs of potentially turning dry as we finish the year and head into next though, which is something I will keep on my radar in a major way. However, after a great start to the growing season, the extent of the crop’s demise could be limited. One must also wonder if the great weather in Brazil could mean we see any major cut in Argentina’s outlook offset by production gains to the north.
While how farmers approach the changing market landscape and make selling decisions will be primarily driven by their thoughts on production potential, it will be interesting to watch what else influences their decision making as the need to hedge against triple digit inflation appears to be fading. In addition, the changing business landscape in the country will be something to watch as we could see greater growth in domestic demand and eventual production if margins continue to improve.
World Biofuels
When it comes to biofuels and what is happening in the demand outlook as we move ahead, I continue to struggle with how we quantify demand we’ve never had before that is tied to fuel usage percentages and new forms of energy like sustainable airline fuel. It’s not that I’m not smart, or that I haven’t done the research, it’s simply that countries are changing their biofuel mandates by the day it seems.
From Indonesia to India, Brazil, Argentina, the EU and nearly every country in between, governments are trying hard to find ways to reduce their carbon footprint, while also struggling to support domestic production and their farmers. Biofuels check many of those boxes, and though their inclusion may be facing an uphill battle in US markets, we continue to see solid growth elsewhere.
Speaking of the uphill battle here in the US, the lack of clarity in government policy is creating major issues that will be difficult to unwind if direction isn’t given to the industry soon. The $1.00 gallon biofuel blender credit provides significant support to the market and is supposed to be replaced by the 45z tax credit at the start of 2025. However, the lack of clarity from the Biden administration on the 45z credit with no guarantee the blender credit will be extended, is weighing heavily on deferred margins and keeping traditional domestic soybean oil buyers on the sidelines.
With many believing the Trump administration will be tough on biofuels considering his first term and his pick to head the EPA, the lack of action from Biden or Congress in last week’s negotiations was seen as incredibly disappointing. If clarification or an extension to the credit were to be seen soon it would be beneficial, but in the meantime, we will have to look at exporting supplies to help other governments meet their blending goals as our main support to price.
Economic Disaster Aid
While Congress was unable to negotiate an extension to the blenders credit or access to year-round E15 during last week’s continuing resolution negotiations, there was approximately $10 billion in economic aid added.
Farmers will be paid around $44/acre for corn, $31/acre for soybeans, and $32/acre for wheat with payments for cotton and rice outlined as well. The payments will be calculated on what farmers planted in 2024, with a cap of $125,000 per farm, except for in certain instances where the cap can be doubled.
While there are opinions about the payouts and a whole host of other things, I think it is most important to remember that much of this money will not sit in the hands of farmers for long, going instead towards new crop input purchases or just simply to catch up on payments after last year.
What this extra cash flow may do though is make for extra tough farmer holding after the first part of February. As discussed last week, cash flow needs will likely drive a lot of farmer selling decisions as we start the year, and while the government support is unlikely to hit accounts before the first of March, it equates to around 30,000 bushels of corn at $4.25 and 13,000 bushels of soybeans at $9.50-if the farm has the $125,000 cap.
The Other Things
We can’t forget what is happening in the Black Sea. Reports are indicating now that Trump will continue to send military aid to Ukraine once he is in office, though uncertainty remains over what that will look like. Many have grown accustomed to solid grain movement out of the region even in the face of war, something that has helped to limit market moves as of late.However, we are now starting to see signs that the nearly three years of fighting is taking its toll on both countries, with Ukraine dealing with damaged energy and rail infrastructure and Russia’s shadow fleet beginning to suffer losses.
The uncertainty that comes with a Trump presidency of course has my attention as well. While lots of folks will tell you with great confidence that they know what will happen next, trying to outguess human decision making and the emotion that comes with it is nearly impossible.
While for now the uncertainty is incredibly bearish, it does feel as though many of the most bearish fundamental factors have been priced in. As we work our way into the end of the year and head into next, I will continue to watch farmer sentiment and how well grain is or isn’t able to work its way into the pipeline as well. Farmer selling has been far more aggressive to start the marketing year than seen a year ago, while end user buying has been a bit more lukewarm so far.
Until next year, have a great holiday season, and don’t hesitate to reach out with any questions.
