I’ve been using the phrase “violently interval” for a few weeks now, and this week continues the trend. We are currently trading one of the biggest potentially bullish developments in months, with Brazil’s weather as dire for crop development as announced this past week, with large export sales reported in Thursday’s update. However, questions remain when it comes to global demand in the coming months, keeping the outlook dim enough to discourage the aggressive buying needed to push us through recent resistance.
In addition to uncertainty about what we can expect as the calendar turns to 2024, we are also working in 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’m watching next week, a lot of it feels the same as what I’ve watched in previous weeks, with a few new developments peppered in there for a fun twist before the holiday shortened week.
South American Weather
As mentioned, Brazil’s weather this week has been as bad as feared, with temperatures rising to over 100 degrees Fahrenheit and no rain across a large swath of Central and Northern parts of the country. Mato Grosso was at the heart of the heat wave, with images circulating on social media of wilting bean plants and barren fields. Mato Grosso accounts for 26% of Brazil’s bean production. With the conditions as bad as they were, traders believe that nearly 15% of the state’s soybean production potential has been lost. If realized, this would be a reduction of 6-7 mmt.
Both GFS and Euro agree that this week will be active weather-wise across much of the country, although they vary a bit when it comes to expected totals. In my opinion, price direction this week will not depend as much on observed precipitation amounts as on the extended forecast.
Meteorologists expressed concern late last week that the pattern could shift back 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 Groso averaging 2″ of rain each week in the month of December, they were still able to 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 increasing. Farmers are likely to increase their soybean plantings slightly as economics favor beans and current conditions are favorable to continued planting. Extended forecasts remain favorable for much of the country, in stark contrast to a year ago.
Choice of Argentina
Speaking of Argentina, voters in the country are expected to go to great lengths today to elect their new president. The election is a choice between Sergio Massa, the country’s current economy minister, and Javier Milei, an economist and former TV pundit who is described as somewhat radical.
Farmers are not thought to be fans of Massa or his party, but fear Milei might 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 too difficult to implement, Milei pushed for Argentina to abandon the peso and use the dollar.
Argentine farmers tend to stockpile grain stocks to protect against losses from currency weakness, keeping grain flow to a minimum most of the time. Dropping the weight would help eliminate the farmers’ need to hedge against currency losses, potentially helping to change the way they approach marketing. It would be interesting to see if Milei will also adjust the country’s current export tax system. That system relies heavily on soybean products and grain exports for government revenue. Dollarization or not, a victory by Milei is likely to result in some uncertainty in the region as he is thought to be quite aggressive with his approach to governance. A victory for Massa would likely result in more of the same when it comes to Argentina’s production and trade policy.
Insurance Agreement of Ukraine
It may be best that this was done with limited fanfare, but in my opinion, 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 closing a business is certainty that the transaction will be completed as expected, when expected. The war in Ukraine and the shutdown of the Black Sea Grain Corridor have posed 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 was 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’ve seen almost peak uncertainty when it comes to Ukraine’s ability to ship after a ship was struck in Odessa port, they’ve announced a deal that not only solidifies their corridor, but one that will also cut it. shipping costs significantly as well.
Chinese Stability
Finally, while the meeting between Xi and Biden this week produced few 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, appears to have backfired.
A friendlier attitude towards foreign investment and a more domestic attitude towards the West are welcome signs that China is not looking to do anything extraordinary anytime soon.
While the reduction in tensions is desired, it could potentially eliminate the risk that we see a need for significant storage by the country’s grain buyers in the near term.
What Does It All Mean?
Demand remains key as we look ahead, especially if we see Brazil’s production outlook stabilize in the coming weeks. We saw a sharp increase in Japanese corn buying this week, likely due to the poor Brazilian weather outlook and reduced grain flow from Ukraine. However, outside of corn sold to Mexico we are still struggling when it comes to the overall export sales pace.
China is said to have returned to buying Brazilian beans for February forward, although the price has increased as farmer selling there has slowed to a near halt. Chinese pressure margins are bad in January and February, still buying for that time frame is somewhat limited. However, private crushers can only go ashore for so long before supplies need to be replenished.
Domestic demand remains a major bright spot, with soybean crushing at record highs for the month of October and ethanol milling operating at one of its best rates in years.
Volatile back and forth on price is likely to continue this week as we try to judge the extent of the losses in Brazil and traders work to square off their positions ahead of the holiday. We will have a full day of business on Wednesday before reopening for a partial day of business on Friday. As always, don’t hesitate to reach out with any questions. Have a great week!
More Grain News from Barchart
As of 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 for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.