By Alan Brugler
DTN Contributing Analyst
Yes, you read the headline correctly. Corn and soybeans have been in a bull move, or at least a corrective rally. Front-month soybean futures have rallied from $9.34 in September to $10.20 recently. Corn hit $3.01 before Labor Day and recently rose to $3.59 1/4 in the nearby futures. Prices have been pulled off of their early harvest lows by strong export sales and shipments, along with some market structure issues that required a little speculative and commercial buying. Corn was helped for a while by declining U.S. production estimates, but that ended Wednesday when USDA hiked estimated national average yield to 175.3 bushels per acre and projected ending stocks to 2.403 billion bushels.
Soybean producers have been their own worst enemy, with yield and production estimates for the U.S. rising monthly. Wednesday was no exception, as NASS bumped up projected national average yield to a record 52.5 bpa and put the crop at 4.361 billion bushels. The remarkable thing about these rising production numbers is that futures prices have rallied despite the more bearish ending stocks estimates. Which brings us to the theme of the day: Will oncoming South American production cause that benevolent price pattern to fail?
There are some interesting dynamics at work in South America. For this column, we will focus on just the corn and soybean production, and only for Brazil and Argentina.
BRAZIL
A big chunk of Brazil can double crop corn and soybeans. In recent years, producers there have leaned toward soybeans for first crop (verao) and planted more corn for the winter (inverno), or safrinha crop. That allows use of the nitrogen fixed by the soybeans, and an opportunity for tightening corn supplies in the U.S. post-harvest to create a better pricing opportunity.
This year the math is different. The drought last winter in Brazil (this summer in the Northern Hemisphere) resulted in very short corn supplies and high corn prices. The producer response has been to plant a higher proportion of first crop to corn. Projected first-crop planting is 6.4 million hectares for corn vs. 5.7 million hectares last year. Production estimates from analyst Celeres are 35 million metric tons for first-crop corn and 64 mmt for second crop. That would be a total of 99 mmt vs. 73.9 mmt the previous year. USDA has a lower corn production figure at 83.5 mmt, up from the drought-depressed 67 mmt last year. If yields cooperate, Brazilian soybean production (using Wednesday's USDA numbers) at 102 mmt vs. 96.5 mmt last year.
The market-wrecking aspect? As WASDE pointed out Wednesday, that type of recovery in corn production would allow exports to rebound from only 16.5 mmt last year to 25.5 mmt for the 2016-17 marketing year. That's 9 mmt, or 354 million bushels, of additional export competition for the U.S. The absence of that competition is the reason U.S. corn export sales commitments are 88% larger than the previous year at the present time. Brazilian soybean exports are seen expanding to 58.4 mmt from the current year's 54.3 mmt. In both years Brazil ships more than the U.S.
ARGENTINA
The Argentine situation is a little different. The Macri administration eliminated the export tariffs for corn and wheat after it took power in late 2015. This represented a big price increase for Argentine producers. The soybean tariff was trimmed only 5%, from 35% to 30%, and will remain at that level until gradually phasing down beginning in 2018. The result has been a shift of acreage intentions away from soybeans and into corn.
Again using USDA to summarize local data, Argentine old-crop corn production was 29 mmt (hiked 1 mmt Wednesday) with exports thought to be 20.5 mmt. The current 2016-17 production estimate is 36.5 mmt, with exports likely to rise to 25 mmt if that amount of supply is available. A 4.5 mmt hike in Argentine exports would be an additional 177 million bushels of export competition after harvest in April and May.
On the soybean side, Argentine old-crop production was dragged down from 61.4 mmt to 56.8 mmt in 2015-16 by bad harvest weather, with exports slowing to 9.92 mmt. Argentina has a large crushing industry and typically exports more meal and oil vs. whole beans. For 2016-17, projected production is 57.0 mmt despite smaller acreage, with yields expected to rebound. Export are seen at 9.25 mmt, actually a little smaller than last year.
The bottom line should be pretty clear by now. Unless weather problems develop during the South American growing season, there will be a lot more competition in the export market next spring and U.S. shipments will slow dramatically. Lacking a weather problem, the job of the market is to make prices low enough next spring to discourage planting of that safrinha crop in Brazil.
Alan Brugler can be reached at alanb@bruglermktg.com
(SK/AG)
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