Sunday Scaries: What I'm Watching This Week In The Grain Markets

I think I have mentioned it here before, but for those of you who don’t know, I did not go to college to learn about anything agriculture or market related. I was going to be a high school English teacher initially but decided around halfway through my sophomore year that teaching Mark Twain every September for the rest of my life sounded horribly boring.

I wanted something fun, something that would be different every day, I said…and now I realize I should have been careful what I wished for. 

While the overall topics in grains haven’t necessarily changed in a major way over the last few weeks, there are several recent developments from around the world that have caught my attention. When putting them together for this week’s article it felt like a breakdown by country would fit better this week than anything else, so without further ado, here we go.

China

I feel like we may have finally reached the bottom in Chinese market sentiment this week now that central planners look like they will step in with support. 

With real estate and the stock market making up the bulk of where China’s middle class puts their money, the rout in both has been devastating. China’s stock market has lost over $6 trillion in value from its peak, while property values in the month of December marked their greatest monthly decline in 9 years. A private survey showing a surge in foreclosure rates last year and estimates that the youth unemployment rate is nearing 30% helps reinforce the dire nature of the situation. 

With stock indices hitting multiyear lows to start the week, talk of major stimulus grew, with Bloomberg reporting officials are working on a $278 billion rescue package. In addition, moves to restrict short selling and a cut to reserve requirements for banks, something that is expected to add $140 billion worth of liquidity, are seen as supportive in the short-term as well.

The country’s stock market reacted positively to the news, with a floor seemingly found in many agricultural commodities mid-week as well. 

China has been interesting to watch over the last several years, with their level of importance in price direction impossible to ignore. China accounts for the bulk of global demand, with the change in their import habits after the trade war responsible for surging prices and contributing to shortages in supply. 

How they approach the market in the months ahead will have more of an influence on price than anything as they can make or break a supply and demand outlook. With their government finally looking to possibly provide an economic floor, we could see a recovery in consumer sentiment, helping to support demand, though unfortunately at this point, it is unclear whether the US will benefit.

Brazil

While I started the week incredibly optimistic thanks to potential policy changes in China, the situation in the Brazilian cash market had me finishing the week questioning whether the worst is behind us in the bean market pricewise or not.

Brazil’s soybean basis fell another 40 cents this week, with values for March shipments now nearing lows seen last August. With the reduction in corn exports out of the country, traders who are long freight are finding themselves forced to move beans, even at a loss, just to keep bushels moving. 

This drop in Brazilian bean offers has taken values to a dollar below a year ago and is problematic for a handful of reasons. First, it has widened the spread between US and Brazilian values enough we are hearing reports of Brazilian beans being traded into the Eastern US. While of course, imports happen every year, with the USDA expecting 30 million bushels worth of imports this growing season, this type of trade did not happen until April or May last year.

With Brazilian values significantly cheaper than US beans and commercials having a hard time getting domestic beans bought here, I worry some of the 11.6 mmt (426 mbu) of unshipped soybean export sales we have on the books could be at risk of being washed out of as traders find arbitrage more appealing. 

While the fact many of the unshipped beans have been sold for Chinese government reserves could reduce the washout risk, how difficult it will be to compete for the last 21% of sales needed to meet current USDA projections cannot be ignored.

In addition to falling bean values in Brazil, there is talk now that the acreage cut to second crop corn may not be as great as once anticipated. According to Agrinvest, surveys show the acreage reduction will likely be less than 10%, much lower than the 25% reduction some feared was possible at the start of December. 

Improving weather, and a need to help bolster revenue after disappointing early bean yields are pushing farmers to try and produce themselves into profitability. While big cuts to technology and some additional cuts to other inputs may result in lower yield potential, a total corn crop of over 120 mmt remains possible. 

Argentina

Hotter and drier weather has moved into Argentina after a great start to their growing season. While it appears soil moisture is adequate and the heat will be short lived, it could help to reduce what had been some lofty production projections.

Argentina has my attention as we watch Milei do his best to try and bring about the changes he had promised. Aside from an adjustment to the country’s official exchange rate and a slew of proposed changes put in front of congress, it seems not much has changed just yet. 

With the spread between the country’s official and unofficial exchange rate widening and threats of strikes impacting major industries as we head into spring, farmers have returned to holding on tightly to their supplies. While this year will be very different from last when it comes to supply availability, the idea that we could see a surge in grain exports out of Argentina as soon as harvest hits could come under question—especially with how aggressive Brazil has been as of late.

It is interesting to note, China added Argentina to its list of approved wheat importers. While much of the work to make this happen took place before Milei was elected, Argentina making the list after many had said trade between the two countries would fall apart because of his anti-China stance, is notable.

United States

As mentioned before, I am again worried about our bean export outlook. With the dry start to Brazil’s production season and uncertainty over what would happen in Argentina, I had a stretch where I felt confident we would meet current USDA projections. 

However, that confidence is starting to fade as the start to China’s Lunar New Year means we are likely looking at March or April before we see them return to the market in a big way. 

In addition, with Brazil offering beans as cheap as they are and Argentina looking at doubling the bushels they produced a year ago, even if they were to return, how much the US would benefit remains under question. 

We also must watch the situation in the renewable space closely, as D4 RINS, something that helps support profitability in biodiesel or renewable diesel, have lost nearly 90 cents since last October. 

The drop in value has come from disappointing government blending mandates and a realization many of the bigger players that have come into the crush space recently will produce as much as possible, even if economics would point to a slowdown. This in addition to news we are seeing imported feedstocks petitioning for and winning approval for import into California to meet low carbon fuel standards could continue to weigh heavily on crush margins in the months ahead.

While the weight on margins will do little to slow crush in the near term, it is likely to discourage some of the projects currently being proposed or planned. 

In the end, there are a lot of moving pieces to the current market structure that will keep things interesting. How China approaches stimulus, cash market developments and weather remain key to watch. 

As always, don’t hesitate to reach out with any questions. Have a great week!  

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