I’ve been using the phrase ‘violently rangebound’ for several weeks now, with this week continuing the trend. We are currently trading one of the biggest potentially bullish developments in months, with Brazil’s weather as awful for crop development as advertised this past week, with large export sales reported in Thursday’s update. However, questions remain when it comes to global demand in the months ahead, keeping the outlook clouded enough to discourage the aggressive buying needed to push us through recent resistance.
In addition to uncertainty over what we can expect as the calendar rolls over to 2024, we are also working our way into the holiday season. There are about two more weeks left in the business year to accomplish much, leaving many market participants uninterested.
When it comes to what I am watching in the week ahead, much of it feels the same as what I have been watching in the weeks prior, with a few new developments peppered in there for a fun twist ahead of the holiday shortened week.
South American Weather
As mentioned, Brazil’s weather this week was as bad as feared, with temperatures soaring to over 100 degrees Fahrenheit and no rain across a large swath of Central and Northern portions of the country. Mato Grosso was at the heart of the heat wave, with pictures making their way around social media of wilting bean plants and barren fields. Mato Grosso accounts for 26% of Brazil’s bean production. With the conditions as poor as they have been, traders believe nearly 15% of the state’s soybean production potential has been lost. If realized, this would be a reduction of 6-7 mmt.
Both the GFS and Euro agree this week will be active weather-wise across much of the country, though they vary somewhat when it comes to expected totals. To me, price direction this week won’t hinge as much on observed precipitation amounts as it will on the extended forecast.
Meteorologists had expressed concern late last week that the pattern could shift back over to warmer than normal with below average precipitation in the 8-14 day time frame. Of course, drier than normal does not mean completely dry. With Mato Grosso averaging 2” of rain each week in the month of December, they could still manage to produce a crop with lower than normal rainfall.
Argentina’s weather has improved significantly from a year ago, with soil moisture and condition ratings on the rise. Farmers are likely to increase their soybean plantings slightly as economics favor beans and current conditions are conducive to continued plantings. Extended forecasts remain favorable for much of the country, a stark contrast from a year ago.
Argentina’s Election
Speaking of Argentina, voters in the country are expected to turn out in a big way today to choose their new president. The election is a choice between Sergio Massa, the country’s current economic minister and Javier Milei, an economist and former TV pundit who is described as a bit of a radical.
Farmers are not thought to be fans of Massa or his party but are worried Milei could be a little too unpredictable for comfort.
Milei’s reported plan for dollarization is the biggest factor to watch when it comes to influencing commodities and having an impact on global supply and demand. While many feel it is far too difficult to make a reality, Milei has pushed for Argentina to abandon the peso and use the dollar.
Argentine farmers tend to hoard grain supplies to hedge against losses from currency weakness, keeping grain flow at a bare minimum most times. Abandoning the peso would help eliminate the farmers’ need to hedge against currency losses, potentially helping change the way they approach marketing. It would be interesting to see if Milei will adjust the country’s current export tax system as well. That system relies heavily on soybean products and grain exports for government revenue. Dollarization or not, a win by Milei will likely result in some uncertainty in the region, as it is thought he will be quite aggressive with his approach to governing. A win by Massa would likely result in more of the same when it comes to Argentina production and trade policy.
Ukraine’s Insurance Agreement
Maybe it is best this was done with limited fanfare, but to me, the agreement between Ukraine and the world’s ship insurers was one of the bigger developments seen this past week. One of the biggest factors when it comes to completing a trade is having certainty the transaction will be completed as expected, when expected. The war in Ukraine and the shutdown of the Black Sea Grain Corridor presented major challenges to Ukraine’s ability to facilitate trade, raising shipping costs and pushing buyers to other suppliers.
Insuring ships, their cargo and their crew is not cheap, and doing so when there is war risk involved is a non-starter for most companies. The plan as it has been described has a $50 million dollar kick in from Ukraine in the event there is a claim and is said to be very similar to the plan that helped facilitate the Black Sea Grain Initiative.
This is big because at a time when we were seeing near peak uncertainty when it comes to Ukraine’s ability to ship after a vessel was struck at an Odesa port, they have announced an agreement that not only solidifies their corridor, but one that will also cut shipping costs significantly as well.
China Stability
Finally, while the meeting between Xi and Biden this week held little in the way of major developments or surprises, it did show Xi’s desire to ‘play nice’ with the West. China has spent much of the last several years working to limit foreign investment, something that like their crackdown on the property sector, seems to have backfired.
A friendlier attitude towards foreign investment and a more dovish attitude towards The West are welcomed signs China is not looking to do anything out of line anytime soon.
While the reduction in tensions is wanted, it could potentially remove the risk we see a need for significant stockpiling from the country’s grain buyers anytime soon.
What Does It All Mean?
Demand remains key as we look ahead, especially if we see Brazil’s production outlook stabilize in the weeks ahead. We did see a sharp uptick in Japanese corn buying this week, likely on the back of the poor Brazilian weather outlook and reduced grain flow out of Ukraine. However, outside of corn sold to Mexico we are still struggling when it comes to the overall export sales pace.
China has reportedly gone back to buying Brazilian beans for February forward, though the price has increased as farmer selling there has slowed to a near stop. Chinese crush margins are poor in January and February, keeping buying for that timeframe somewhat limited. However, private crushers can only coast for so long before supplies will have to be replenished.
Domestic demand remains a major bright spot, with soybean crush at record highs for the month of October and ethanol grind running at one of its best rates in years.
A volatile back and forth on price will likely continue this week as we try to judge the extent of the losses in Brazil and traders work to square up their positions before the holiday. We will have a full day of trade on Wednesday before reopening for a partial day of trade on Friday. 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.
