Market analyst: Adverse weather coming for South America

It’s the rainy season for South America - when the yield potential for grain is either enhanced or reduced.

So far this year, it looks like it is being reduced, as rather dry weather is occurring in central Brazil and crop forecasts are being reduced by private firms all over the world. The U.S. Department of Agriculture (UDSA) cut Argentina’s corn and soybean production forecasts slightly in the December report, but Brazil’s forecast has been left unchanged, so far.

South America’s weather forecast as of mid-December is still supportive to market prices, with below normal precipitation and above normal temperatures in most of South America next week and moderating that forecast somewhat in the 8-14 day forecast (as it typically does in a tropical environment).

You have to remember, Brazil has a 50% chance of rain nearly every single afternoon. So essentially, most citizens don’t listen to a weather forecast during the summertime. If you see clouds brewing overhead, it’s time to bring out the umbrella, as it normally rains every other day.

For weather watchers in the commodity markets, the question is not if it rains in Brazil, how much it will rain in Brazil. 10% less than average (average is about 3-4 inches per week during the rainy December and January period), or 10% more than average is a big deal for the summer and is the difference between a poor crop and a bumper crop on the sandy soils of Brazil. A drought is 45 inches of rain in the rainy season, and 55 inches is a wet year if you normally get 50 inches in the six month growing season. Of those six months, December and January are the two wettest.

In other world news, estimates out of China show the pig/sow herd is back to 90% of normal capacity as of Nov. 30, and should fully recover by the first half of next year.

While capacity has mostly recovered, prices are still much higher. Inventory needs to build to push prices back to normal ranges. Brazil’s farmers have 95% of soybeans planted, versus 96% last year at this time. AgRural cut its forecast for Brazil’s soy crop to 131.6 mmt, below USDA’s 133 mmt, but still a record output. Another group suggests 130 mmt so numbers are coming in smaller than USDA’s and getting smaller all the time.

Argentina’s soy crop is estimated at 48 mmt, while USDA just cut it to 50 mmt in December versus 51 mmt in November. There are many estimates now below USDA’s based on the late planting start in Brazil, and smaller area in Argentina. USDA has Argentina corn at 49 mmt and Brazil at 110 mmt, while private estimates are closer to 40-47 mmt in Argentina, and 102 mmt for Brazil corn. If so, there’s a lot more bullish news that will hit the corn and soybean markets.

We still haven’t finished the US production season estimates, either, as the January USDA report will project final corn and soybean yields. The U.S. December soybean yield estimate is still 0.5-1.0 bushel/acre too high.

This would reduce U.S. ending stocks from 175 mb to 100-135 mb, which is extremely tight already. Given that U.S. soybean exports are still well ahead of projections, there could be a 50-100 mb hike in U.S. exports, as well, which essentially eliminates the U.S. carryout. That cannot realistically happen, so obviously the market needs to do some rationing - and that can only be done with higher prices.

If South American weather problems also materialize through the end of the year, we could have an explosive situation in soybeans. U.S. exports of corn and soybeans continue to be strong, while Russia pushes exports out the door ahead of their export restrictions, which means lower U.S. wheat exports for now, but perhaps higher later.

Finally, we have a bullish situation in grains! It could be a very explosive situation in soybeans due to the tight U.S. stocks situation and the ongoing South American drought. The South American soybean yields will be the powder to ignite the rally, if weather remains adverse there. Once we get to March, though, a shortage of soybeans worldwide would pull acres away from corn, wheat and every other crop so that all grains become a very bullish situation. For the “Wrong Side Randy’s” who thought prices could never go up the past few years, you are a about to pay or probably already have paid some expensive ‘tuition’ for this marketing lesson!