The Ghost of Christmas Past has returned to the soybean market, with traders working to make this December the third in a row where we see a big rally. However, grains remain unconvinced, with speculators jumping ship in a big way and wheat prices trading to September 2021 lows.Â
The drought in Argentina has caught the attention of traders the last couple of weeks, as La Nina’s impact is seen across much of the country. Above normal temperatures and below normal precipitation remains the norm, with a pattern shift hard to see in the short-term forecast. The dry conditions and limited rain has planting of both soybeans and corn running well behind normal.Â
The dryness combined with a massive unroll of a soybean oil/soybean meal spread has pushed soybean meal nearly $70/higher than its mid-November low and has helped soybeans trade to their highest level since early September.Â
As mentioned, this is proving to be the third year in a row we’ve seen a big, somewhat unexpected pop in the bean market in December. In 2020 Brazil was struggling with exceptionally dry conditions and an incredibly delayed start to their planting. In addition to worries and uncertainty over Brazil’s production potential, Argentina’s dock workers went on strike, limiting all shipments from their ports.
Last year, La Nina took hold across Southern Brazil, Uruguay, Paraguay and Argentina, taking over 30 million metric tons (1.1 billion bushels) of production potential off the South American crop. The drought and subsequent massive production cuts caught the Chinese crusher who was already short off guard, propelling US prices higher as unexpected export demand came into the market.
This year one could argue unexpected export demand is coming into the market again with China’s surprise reopening. If you had told me 2 weeks ago Chinese leadership would move this quickly to break away from the zero-Covid philosophy I would not have believed you.Â
The reopening in my opinion is bullish demand, as citizens no longer have to live in fear of quarantine camps or being patient zero in a lockdown. Restaurants and shopping malls will no longer require negative tests or a health code for entry, and citizens can freely gather with one another again for the most part.
Food demand will likely return so long as citizens feel comfortable financially to increase their spending—and some of the moves quietly made by the government in recent weeks to help prop up the ailing property development industry may help do just that.
In the end, while many were bearish soybean export demand for the 22/23 crop year, China’s abrupt shift in policy will likely keep the US on track to meet current projections. The USDA agrees, leaving current year exports unchanged in last week’s report though traders were expecting a cut.Â
Now back to Argentina. Argentina is the world’s largest meal exporter, expected to ship over 27 million metric tons versus the US shipping just under 13 mmt and Brazil just under 20 mmt. A reduction in Argentina soybean production is viewed as a threat to the world meal market, though one must be cautious getting too comfortable in this mindset for a couple of reasons.
The first being last year’s soybean production and subsequent meal exports. Last year we saw La Nina take Argentina soybean production to 43.9 mmt, a number that is below the low end of the current range of published estimates and over 5 mmt smaller than current USDA soybean production estimates. Even with a reduction in production of that size Argentina remained an exporter of over 26 mmt of soybean meal, according to the USDA.Â
In addition to Argentina’s ability to maintain crush in the face of reduced production, the growth of crush capacity around the world may lower Argentina’s relevance in the meal market, as China looks to source whole beans for crushing as domestic margins improve and the US and Brazil both look to increase meal production in the years ahead.
Secondly, the world can’t ignore the size of the crop likely to come out of Brazil this year. While the crop is weeks away yet from being in the bin, we do have a general idea of what the weather will look like the last part of the Brazilian growing season, with many analysts and industry groups putting their crop estimates around 152-155 mmt.
If realized, this would be 25-28 million metric tons above last year’s crop, or somewhere between 918 million bushels to just over 1 billion bushels more than last year. Basically, Brazil’s year over year production increase alone is nearly 5 times what the US is expected to have left over at the end of the marketing year.
The good news however at this point being the weight of that crop so long as it is confirmed is not likely to be felt for several months yet.Â
Outside of what is happening in China and South America I am watching what is happening with speculator positioning in the grain market. Over the last couple of years speculators have been on a tear buying commodities as a hedge against inflation, with wheat being one of the first to see that level of interest. The buying interest had pushed markets into inversions, providing the spec long gains in rolls to the next month, with rallies keeping buyers heads above water.Â
Wheat started to change that mid-summer, with hedging pressure and limited end user interest shifting the market into big carries, cutting into speculator wins when it came time to roll to the next month. We have seen the speculator leave the wheat market, moving to a short position over the last handful of weeks, a position that has not been often seen since late 2020.
Friday’s commitment of trader’s data showed a shocking cut to speculator length in corn, with traders cutting their bullish bets by a far greater number than anticipated. The impact of the selling was mostly offset by end user pricing with commercials cutting their shorts. The question now becomes what the speculator does next as a reduction in speculator length has been a big bullish catalyst in the market the last couple of years.Â
Outside market factors may influence the speculator as the Fed works to curb inflation and we now begin to see a recognition that a Fed pivot in monetary policy will only come when prices of goods begin to fall.
All of this said without even touching on the war that continues to be waged in the Black Sea, and the questions surrounding what Russia does there next as Odesa’s energy infrastructure has been reportedly damaged in the latest round of attacks.Â
Monday kicks off the last full week of the year before holiday mode completely takes hold with a slew of questions unanswered, likely keeping us on our toes as 2022 comes to an end.Â
As always, don’t hesitate to reach out with any questions! Have a great week.
More Grain News from Barchart
- Wheat Ends Near Lows for the Day
- CoT Data Confirmed Liquidation in Soy Oil
- Mixed Friday in Corn Market
- Dollar Strength Knocks Cocoa Prices Lower
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.
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