Grain and soybean exports have been discussed in a big way for the last several years. It started with a trade war with China that began in 2018, its resolution in 2020, leading to a phase one deal that arguably led to a massive surge in Chinese buying, sending prices soaring, to today, where the conversation is very different.
When talking with customers, farmers and market watchers recently, I’ve had a lot of similar questions when it comes to exports and why they seem to matter so much more this year. Just this week the BBC published an article titled “The US is the world’s biggest exporter of corn, but for how long?” A question quickly answered, because the US is expected to fall behind Brazil this year.
First things first, this isn’t a new development. Exports have always played a major role in market direction, acting as an accelerator or brake when it came to managing a healthy balance in supply and demand. Prior to the trade war, the last big disruption to exports would have been the drought of 2012, where a sharp drop in available supplies and soaring prices curbed demand from our major end-users.
Over the years export growth has been relatively benign for corn, but on a sharp rise for soybeans, with the US playing a major role in supplying the rest of the world with high quality supplies, shipped on time, when they were needed.
However, quietly over the last decade or so the modernization of agriculture in countries around the world has resulted in an interesting increase in competition. This increase in competition and subsequent reduction in US export business has long been warned by many in the industry. However, hiccups in production due to weather, a war, a pandemic and a whole host of other issues have kept the ramifications of changes in global supply very much muted, until now it seems.
When looking at supply changes, it is easy to see where the biggest growth has taken place, and that is in Brazil. Brazilian agricultural production has seen unprecedented growth over the last 15 years. Brazilian farmers have gone from producing only 57 million metric tons (2.1 billion bushels) of soybeans in the 2008-2009 crop year, to producing an estimated 156 million metric tons (5.7 billion bushels) this past production season.
Similar growth has been seen in corn production, where the overall crop size has grown from 51 million metric tons (2 billion bushels) in the 08/09 crop year to an estimated 132 million metric tons (5.2 billion bushels) once Safrinha harvest is completed there over the next couple of months. What is most interesting about Brazil is that the bulk of its corn is planted after the harvest of first crop soybeans, making it possible to produce two crops a year on the same piece of land.
While growth is notable elsewhere, it is Brazil’s growth that will likely continue to have the biggest influence on US export demand as we look ahead. Officials there believe they can incentivize agricultural expansion of upwards of 5% a year by bringing out of condition pasture into production. It is also hard to ignore the large amount of capital invested by China into Brazilian infrastructure, with billions spent on a plethora of projects designed to help increase export capacity and efficiency.
While the increase in global competition is very much a driver in the reduced export outlook, it is not the only factor at play. In fact, there are several other components weighing heavy on global demand for US goods that could have long-lasting implications on our long-term export outlook, well beyond this crop year or next.
One of the first factors that has a big impact on global demand but has seemingly been ignored so far, is the overall lack of capital around the world. A study by The Brooking’s Institute in 2022 pointed out just how cash strapped many nations were, even before the sharp increase in interest rates implemented by the US and other central banks around the world were seen.
The increase in borrowing costs is estimated to be upwards of 7% on trillions of dollars of debt, sending the cost of financing that debt alone soaring, and creating a crisis for some of the most cash strapped nations. Even those countries that aren’t necessarily on the brink of financial ruin are still finding it difficult to finance grain purchases, with us having to look no further than to Egypt as an example. Wheat tenders from Egypt’s grain buying arm this year have been sporadic, with limited buying interest of large quantities seen and terms of payment seemingly fluid.
In addition to cash being tight, the market structure itself pays end users to buy in a more hand to mouth fashion. The job of a market inversion is to force buyers to do just that, once of course they can cover their short-term needs and feel confident again in their ability to source future supply.
Speaking of ability to source future supply, the logistical disruptions seen during and after Covid have been long since resolved, with an overall reduction in global demand for goods in general helping improve grain movement. The lack of competition when it comes to moving goods has not only created a cheap freight environment, with bulk ocean freight trading to near five-year lows, it has provided an environment in which the end user can wait longer to see if supplies get cheaper.
This reduction in price and increase in availability has created an interesting psychological shift as well, as the global end user now finds themselves a bit more in control, after having been nearly completely powerless the last couple of years. The impact of this shift on buyer attitude cannot be underestimated either, as many of these producers have found themselves pushed to the brink when it comes to margins the last few years and are still working through expensive product as world values fall.
All these factors play a role without even mentioning currency conversion or geopolitical developments. The removal of Russia’s agricultural bank from the SWIFT financial transaction system has prompted some interesting changes in trade over the last year, with some countries working to transact in their own currencies between one another as opposed to transacting in dollars as previously seen. What this means going forward will be another interesting factor to watch as countries with large amounts of commodity-based exports see a sharp contrast in their expectations of growth versus those without commodity exports to rely upon.
When it comes to corn exports, China remains the wildcard. So far signs do not point to any type of 2020 style buying from the US, though less than ideal production weather in some parts of the country has my attention. Domestic prices remain well below recent highs but have rebounded over 10% since mid-May on the previously mentioned production worries, and an improved domestic demand outlook as much of the feed wheat in the country may be too high in toxins to feed to pigs and industrial margins have seen improvement.
How Chinese buyers approach the Brazilian market in the coming weeks as cheaper supplies come into the export pipeline may give a lot of insight into what we can expect from them in the months ahead.
In the end, it’s not just a global competition thing at play when traders talk about their worries over our export outlook, it’s a whole host of factors that will likely have a big impact on overall demand not only this year, but in the years ahead.
Of course, it is still only the beginning of July, with weather remaining a far greater factor than anything else as we work towards harvest. However, it is important to recognize just why traders could grow more comfortable with supply even if yield were to begin to shrink.
We will get an updated supply and demand outlook from the USDA this week, with many traders expecting a reduction in yield after a dry June. Whether we see that, and what the USDA does with demand as they change their supply expectations will be the main thing I watch.
As always, don’t hesitate to reach out with any questions! Have a great day.
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.
