With only two days remaining, December is continuing to trade like a classic South American weather market. It rallies and falls with every iteration of the weather maps, and rainfall is always classified as “too much” or “too little.” For the first three weeks of the month the market fixated on central and southern Argentina. This week all eyes have turned to northeastern Brazil. As with the previous saga, we have started our watch with crop-saving rains two weeks away.
While last year’s South American weather problems were much more harmful to corn, we continue the tradition of trading this as a soybean problem. Soybeans broke 50 cents last week on good weather in Argentina and rallied 25 cents on Tuesday, Dec. 27, on dry weather for northeastern Brazil. Reports of record yields in Mato Grosso, Goias and Parana were ignored yesterday, but embraced today. As always, news follows price.
Prior to last week’s break, soybeans had become very expensive relative to the grains. The soybean:wheat ratio had reached levels not seen since the 1970’s, and the new crop soybean:corn ratio was at a record for the month of December. Since October, the economics of planting soybeans in the spring of 2017 have been far superior to the economics of planting corn. Should these economics persist through March, we would expect soybeans to pick up four million acres from corn and three million acres from wheat. January weather in South America will determine whether or not 90 million soybean acres are really needed in the U.S.
Corn, with its largest U.S. carryout in 29 years, has been slow to follow soybeans on these rallies. In addition, farmers have sold less corn than normal this fall and those bushels are now available to the market on any reasonable rally.
On the demand side the domestic picture is more encouraging than the export side. Ethanol producers are grinding at a record pace thanks to plentiful corn and an OPEC- supported energy price. Feed demand is up versus a year ago, and last week’s meat and animal reports showed better than expected numbers.
Conversely, on the export side, demand is flagging. Shipments have only met the USDA’s projected pace one week in the last eleven. Feed wheat and corn from the Black Sea have reduced the U.S. market share. Argentina is now the cheapest origin for March through May, and Brazil is cheapest for June through September. The current corn forecast for the five major producers in South America is 125 million metric tons (MMT), which is up 28 MMT from last year. It will require a major problem in South America for the U.S. to meet the current USDA projection. A 2 MMT reduction in U.S. exports will probably be offset by a similar increase in ethanol demand.
Wheat started the month near 31⁄2-year lows relative to corn. While it is too late in the crop year to generate much new wheat feeding in the U.S., the narrow spread has helped put world wheat feeding on a record pace. We’ve generated several 20 cent rallies in the wheat market this fall via winterkill scares and via rallies in corn and soybeans, but we’ve never threatened the major speculative short that is now in its 15th month. U.S. wheat acres are at 100-year lows, but other countries continue to add acres and yields have been good to excellent in most of the major exporting countries.
One of the offsets to lost U.S. wheat acres is Argentina, where President Macri’s zero export tax program is working exactly as he hoped. Planted acres for both corn and wheat have increased significantly and Argentina is now competitive for “cheapest wheat” business. Their Dec. 20 sale to GASC (Egypt) was the first to that government in over a decade.
India, unfortunately, is not faring as well as Argentina and the government has dropped its import tax rate twice, from 25% to 10% and from 10% to zero. Private companies are actively importing wheat into India, and it appears that at least four million tons will be needed. To this point there is no sign of the government becoming an importer. They appear content to let the private sector do the heavy lifting. It may be an unspoken admission that too much waste and graft is created when many tiers of government are involved in the food chain.
We would be remiss if we did not mention the potential impact of the incoming Trump Administration on our markets. The two areas where it might most quickly impact our markets are ethanol and China. Several of his most high profile nominees are either anti-ethanol, pro-Big Oil or both. If they so choose, the EPA could quickly eliminate the RFS mandates and leave ethanol and biodiesel to the vagaries of the market. With China it is a question of our overall trade relationship. Should that situation deteriorate, soybeans—China’s largest import from the United States—could become trade war fodder.