Welcome to December! It is hard to believe we are in the last month of 2023, but like they always say, time flies when you’re having fun!
The human psyche has always been incredibly fascinating to me. What influences thoughts, decision making, and all the things that make people who they are is a rabbit hole I could wander through for ages. In trading, the things that influence market sentiment and trader psychology are also incredibly fascinating, as we not only are seeing the influence of information on one, but we are also seeing the development of group thought.
Last week I spent time talking about farmer length in corn and how the large amount of unsold physical bushels could have an impact on market direction in the months ahead. In that, I had mentioned that the worries over Brazilian production potential and thoughts there could be a drop in supply had prompted many farmers in Brazil to hold back on sales. In addition, we have seen farmers in the United States and around the world lock their bins as harvest has wrapped up, holding onto supplies in the hope they will sell for better prices later in the marketing year.
The move to keep farmer bushels out of the pipeline has had an impact on the corn market, with farmer selling in Brazil and the US remaining nearly non-existent.
Heading into the end of the calendar year many had believed the Brazilian farmer would be pushed into selling the last chunk of bushels to make space for the impending bean harvest. However, according to Agrinvest, a Brazilian analytical and cash trading firm, the increased use of silo bags has made space a non-issue.
The lack of corn movement has firmed domestic prices in Brazil, with values nearing their highest level since June and many exporters facing big losses if they are short supplies. Some traders report losses of up to a dollar a bushel if they find themselves trying to source physical supplies in the spot cash market to meet their commitments.
This has basically taken Brazil out of the world cash corn market a month or two earlier than expected, resulting in two interesting developments.
The first being it opens the door to increased exports out of the US. While business to China is down significantly, thanks to their aggressive purchases from Brazil throughout the summer and into fall, Mexico has stepped in, aggressively buying nearly 3 mmt more corn this year than last. Discounted rail rates and cheaper supplies than a year ago is behind some of the big increase in purchases by Mexico, with shipment rates indicating we’ll likely finish the year with a typical final purchased amount.
The reduction in availability out of Brazil has helped to increase purchase rates recently by Japan, Colombia and Unknown. While they haven’t necessarily been in chunks large enough to catch trader attention with flash sales, we have seen purchases by Japan come in 1.7 million metric tons higher than a year ago, while Colombia has bought 1.6 mmt more, and Unknown has purchased an additional million metric ton.
With the uncertainty over Ukraine’s ability to ship, it is likely we could see the US continue to gain back some of the traditional corn export business lost last year. If this continues like I think it could, we could meet the USDA’s optimistic export projection, anticipating a year over year export increase of 414 million bushels. Something that while it is not necessarily bullish as it keeps us with a 2 billion bushel plus carryout, is supportive to price on the idea of continued business.
The reduction in corn movement through Brazilian ports will open logistical capacity that had been thought to be constrained previously though. This will help open the door to more soybean, soybean meal, or other product exports. Last year’s Brazilian bean export program saw a slow start due to the longer run in corn exports, pushing bean business back to the US late in our export window.
This does not appear to be the case this year, with exporters now looking to increase their February bean shipments and undercutting US values by over a dollar a bushel already. While the start to the bulk of the country’s bean export season could be delayed due to the poor start to the growing season, the availability of supplies remains higher than normal. This could have a big impact on the direction of the bean market, especially if the weather turns off wetter as indicated, bean production outlooks stabilize, and the Brazilian farmer becomes a more aggressive seller.
All of this of course assuming we have a normal Chinese demand profile in 2024—whatever a normal Chinese demand profile is. China is dealing with its share of problems that could have an impact on their imports in the year ahead. This being their first winter back open after nearly three years of Covid lockdowns is going to be hard on the country’s hospital system. I saw an analyst refer to it as an ‘immunity deficit’ and it doesn’t take me long to remember the winter of illness we experienced here the first season back in school and in the office.
The reduction in immunity combined with a respiratory virus like the flu or pneumonia has filled hospitals and prompted the country’s National Health Committee to call for the opening of more fever clinics to provide care. While the World Health Organization says the cause of the spike in illness is known and not worrisome, analysts in China report a significant downturn in restaurants and store traffic.
In addition to worries over demand, hog prices continue to crash in China. Dalian hog futures lost over 10% in the last 10 days, forging multi-month lows, and crushing already depressed margins. Hog producers in China have seen a string of 10 months’ worth of losses, with prices falling off during what would otherwise be a seasonally strong period ahead of the New Year holiday.
Falling hog prices have pushed producers to liquidate herds, with harvest rates well above a year ago. The drop in mouths to feed is reducing meal demand in a big way, pressuring crush margins across the country. The drop in margins has pushed private crushers to the sidelines, leaving Sinograin’s buying of beans for government reserves the only business getting done.
The slowdown in China’s need to buy may not have come at a better time for them, as we work to pin down just what the Southern Hemisphere is going to produce.
Trader psychology is also very evident in the outside markets, as the rate cut narrative is again winning and this time traders really seem to believe it. From the outside looking in it is interesting to see the exuberance over what appears to be a recycled narrative. While yes, it appears the Fed will no longer need to raise rates, I am not sure the rate cuts everyone is calling for follow soon behind--but even if they do what is a quarter of a point or two amongst friends?
Powell is adamant higher for longer is a concept they will not soon part from, and while we could see a cut in the next 6 months, the full impact of a sharp rise in rates unlike anything many of us has ever seen, has yet to be felt.
The increase in rates was evident in this week’s spread trade, with the December/March corn spread going out to an historically wide 27 cents worth of carry. The cost of holding bushels is up in a big way from a year ago and is something commercials around the world are thinking about when it comes to making buying or selling decisions. The increase in rates will keep sellers more aggressive as they need to make sure they are capturing margins before costs eat into gains, while buyers remain hand to mouth not wanting to finance large amounts of inventory.
In the end, though we have seen some dramatic shifts in production outlooks for Brazil, they appear manageable at this point from a pricing standpoint. The loss in production has put a floor under the market, while a potential reduction in demand and farmer length will continue to limit rallies.
Other Things I Am Watching
--We will get an update from the USDA on Friday. The December report generally isn’t one for major adjustments, with the USDA waiting for quarterly stock information in January to make changes. Traders are expecting them to reduce Brazilian production from their current estimate of 163 mmt of beans and 129 mmt of corn as they are well above current market consensus.
--CONAB, or the Brazilian version of the USDA will release their update on Thursday, with traders looking for reductions there as well. It will be interesting to see what their production outlook is after the poor weather seen over the last month.
--South American weather. Meteorologists are expecting rain to pick up this week, with a divergence in what they are expecting in the extended timeframe. Some say we see above normal precipitation the last half of December forward, while others say after this week’s rain it goes back over to dry. December and January are said to be the most important months for Brazilian bean development.
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.
