WEATHER in South America is dominating the grain trade wires at the moment. Much of the northern hemisphere winter crop is still under snow, and the Australian harvest finally finished.
This time of year every year it is about the weather. The northern hemisphere winter crop is still in dormancy with talk of winter kill issues and the South American (SAM) summer crop is at its most vulnerable. Markets sometimes don’t like what they initially see, and react accordingly. However, once they assimilate the localised occurrences into the world perspective, in this case huge stocks of feed grains globally, it is quite often not as bad as originally perceived.
A few weeks ago we saw a rally in United States soybean futures on fear of production losses in Argentina due to excessive summer rainfall in some states and drought in others. That fear has now eased following a run a more favourable weather across much of Brazil and Argentina, which has seen SAM production estimates stabilise. Chicago soybean futures have reacted accordingly and the March contract is now trading almost US$0.50 per bushel off the mid-January high.
In Argentina, the Buenos Aires Grain Exchange has pegged the soybean area at 19.2 million hectares (Mha), which is down about 4.5 per cent on last year. However, with the easing of the flood fears almost 80pc of the soybeans are now in a favourable condition. Production is currently estimated to be around 55 million tonnes (Mt), down 3.5pc on the January USDA estimate of 57Mt.
In Brazil, the soybean harvest is in full swing, with the state of Mato Grosso already 30pc completed. This is more than one week ahead of the three year average for this time in February. However, further south in the state of Parana, harvest progress is well behind last year, following a string of precipitation enforced delays. Nevertheless, the generally favourable conditions have seen the crop estimate increase by 1.5Mt to 106Mt, slightly above the January USDA estimate of 104Mt.
On the corn front, the Buenos Aires Grain Exchange is calling the corn area up 27pc on last year at 4.9Mha hectares with production expected to be 35.2Mt. Across the border in Brazil it is early days for the corn harvest but reports to date are favourable and production estimates have remained steady at around 89Mt. This estimate includes the ‘safrinha’, or second corn crop, that is currently being planted.
So what does this mean for Australian dollar (AUD) grain values? The soybean and corn production estimates above are huge (records in some instances) and if they come to fruition, the already burdensome world balance sheet simply becomes overwhelmed. If Argentina and Brazil manage to bin this big crop then global futures markets have to react, and Australian values will most likely follow suit.
The northern NSW and Queensland markets have been well supported as the summer crop suffers under heat and moisture stress. Elsewhere across the country any increase in United States dollar (USD) terms has largely been eroded by the stronger AUD/USD exchange rate.
As the summer crop production certainty increases in SAM, markets will turn to the next big news event in the world grain production cycle. This will most likely be the on-set of the northern hemisphere spring and the condition of the crop as the snow melts and the winter dormancy is broken.
Source: Nidera weekly market report