Now that planting is well underway in Argentina, we are starting to get a better indication of potential crop sizes. As expected, farmers in Argentina shifted a large amount of acres from soybeans to corn to avoid the country’s high tax rates on oilseeds. Even with a lower cost of production on soybeans, the return on corn is 8% higher from these taxes. Indications are farmers shifted 2% of their soy acres to corn this year which will give the country the lowest soy acres since 2007.
We are starting to see a difference in opinion on the potential for this year’s corn production in Brazil. Some analysts have the crop at 117 million metric tons while others have it at 124 million metric tons. This difference is the result of variability in acreage projections. The initial corn crop acreage in Brazil is thought to have expanded by 2.5%, and the Safrinha is expected to increase by 5.6%. Even if less than perfect weather develops, these added acres will increase crop size. Last year Brazil produced 87 million metric tons of corn from all crops.
There has been a considerable amount of market discussion over this year’s corn crop in Brazil, but some of this is now shifting to next year. The cost of production in Brazil is climbing same as it is around the world, especially on corn. Corn costs in Brazil rose 3.2% in October making it the 10th consecutive of elevation. The cost of production on Brazilian corn is now at $1.85 per bushel, or $167.00 per acre. There are thoughts this could limit expansion to Brazil’s future corn production.
Several improvements have been made to production agriculture in Brazil with elevated yields being a primary one. While the corn yield in Brazil has increased, its still low compared to the United States at just 90 bushels per acre. As this increases, farmers will be able to plant fewer acres to produce large crops. Another country that is seeing higher corn yields is Ukraine. Before long this may start to pressure the US on corn, same as it has on soybeans.
Even though Brazil is gearing up to start another soybean harvest, the country is still exporting large volume of old crop inventory. For the month of November Brazil exported 2.6 million metric tons of soybeans, more than trade was expecting. This is also well above last year’s sales at this time as inventory was already exhausted. Larger production has allowed for these sales to continue. Given the forest for this year’s crop to be even larger, Brazil will likely become a perpetual soybean exporter from this point forward.
So far, the La Nina even has had little influence on South American weather patterns. At the present time only 17% of the corn and 24% of the soybean regions in Brazil are reporting dry soils. These are actually seen as a benefit as harvest is set to begin in the country. Argentina is only reporting dry soils on 4% of its corn and 8% of its soybeans. While these numbers can change quickly, they are currently viewed as favorable for production.
One region of the world that is being impacted by ongoing drought conditions is the US Wheat Belt. A reported 33% of this region is currently experiencing abnormally dry soils. This is the highest level since 2014. While there is plenty of time for soil conditions to improve, the longer it takes, the more nervous and already unstable wheat complex will become.
US exporters are trying to determine Chinese soybean needs for the next several months. The United States is currently the cheapest source for soybeans in the global market but buying interest has been limited, especially from China. Chinese officials claim the country has 85% of its soybean needs for December covered, and January needs are 50% covered. From that point forward Brazil is offering soybeans at a sharp discount to the US, leaving a very narrow window for any increase in sales.
Trade is also trying to determine China’s future corn needs. China is actively booking corn from Ukraine as even though the US is cheaper on corn, freight favors Ukraine making the overall price cheaper from that source. China is layering in corn purchases from January through April when the South American crop will be ready. As with soybeans this may not leave the United States the widow for exports that was hoped for.
A hindrance for US exports on a whole right now is logistics. For one, rail lines are reporting back ups which is preventing movement to points of export. This is also taking place in the river system where low water levels are causing draft restrictions on barges. These low water levels may also allow rivers to freeze quicker than normal. Importers are monitoring these conditions and may adjust their purchases accordingly. Buyers tend to pass on a source regardless of price if they are unsure on timely delivery.
This commentary is the sole opinion of Karl Setzer, market adviser for AgriVisor. This is intended for informational purposes only and not to be used for specific trading recommendations. The information used to generate this commentary is gathered from a variety of sources believed to be accurate. If you have any questions or would like additional market information, feel free to contact Karl at email@example.com You can also follow Karl on Twitter via @ksetzergrains.