South American weather improvement
12/12/17 — This is the time of year when South American (SAM) weather becomes more important, as the growing season is upon us for the majority of South America. The crop is mostly planted, and now as Jan. 1 comes around, it is similar to July 1 for the U.S. crop development — basically becoming the more critical time for the growing crop. In the next month or two, essentially much of the crop yield will be determined by the weather in the next couple months in Brazil and Argentina. So it becomes a critical time of year to monitor the weather developments there.
The past few weeks have been relatively dry in Argentina, and the same weather more or less is also having an effect on southern Brazil (warm and dry). However, northern and central Brazil have been a bit on the cool/wet side, with above normal precip and below normal temperatures. This weather pattern seems to have set in for the past few weeks, and of course, weather patterns can persist for some time. Of course, there is some ebb and flow in the course of the summer (even in droughts it still rains, but just less like 50-75 percent of normal). So far, this is probably the biggest concern in the southern hemisphere crop to this point – that the weather pattern would continue as it has the past few weeks.
However, in the past few days the forecasts in South America have been modified a bit. South American weather today continues to add rain into the Argentina forecast, this time some rain appearing in the next 7 day forecast. So precip in the next 7 days shows above normal in northern and central Brazil, and below normal in southern Brazil and most of Argentina. But some rain does creep into the Argentine forecast late in the 7 day period. Then the 8-14 day precip forecast is now above normal precip for both Argentina and Brazil — a dramatic improvement from just a few days ago. Temp forecasts are above normal in Argentina and southern Brazil in the next 7 days, and below normal in northern and central Brazil. The 8-14 day forecast cools, however, to a more normal temp forecast for all of Brazil and Argentina. Overall this is still a negative forecast for grain prices as it could improve the yield potential of the South American crop.
South America affects soybean prices the most as they are large producers and exporters of soybeans, but they also produce a fair amount of corn and wheat. Also, the supply of soybeans has an impact on the price of corn and wheat, too. Note that soybean prices are attracting acreage away from wheat and corn in the U.S., and have been for the past few years. USDA is projecting wheat acreage to drop again in the U.S. for 2018, and some of that acreage will go to soybeans (again) as it has the past few years. So as the South American soybeans go, so also do the prices of U.S. wheat and corn.
While the world’s attention has turned to soybeans, we at Progressive Ag have been eyeing the corn market for an opportunity to buy back sold 2017 corn. Our average price for 60% of the 2017 crop was $4.015 Dec. futures (most sales within a few weeks of July 1 of last year on both sides). It’s probably time to buy back some of those sales, as corn prices are very cheap, and the market looks like it is bottoming (prices low and going no where the past few months). Since bottoms last months and tops last minutes, this looks like a bottom in the corn market (finally!)
We hit our target yesterday of $3.375 Dec. corn to buy back any remaining 2017 hedges we had in place. Recall we had 60 percent of 2017 crop sold at an average price of $4.015 Dec., so we will be taking about 64c/bushel profits on these hedges. If you’ve already delivered this grain at harvest, no need to do anything. At this point, it is probably OK to take the downside risk in corn again as prices are already quite cheap, harvest is over, and bin doors are probably locked for now. It will take some bidding to get grain out of cover now as most grain should be under storage now. We currently are trading $3.36 Dec. corn and $3.4975 March corn, so take these hedges off at these price levels.
As we go into the new year, we expect very little price movement in most grains, but soybean price movement could heat up in the next few months, the important growing season months for the South American crop.