By Roger Wright
Agricultural Marketing Service
The current La Nina episode is what caused old beans to rally a buck ($9.44 low on 12 January to $10.47 yesterday) and new beans 65 cents. It has also changed the dynamics of the corn and wheat market to lay the foundation for a significant rally in both. The Australian Bureau of Meteorology issued its semi-monthly ENSO update today:
La Niña retreats
La Niña continues its decline, with sea surface temperatures in the central tropical Pacific Ocean warming over the past fortnight. Most models indicate a return to neutral conditions is likely early in the southern autumn.
The decline of this La Niña is evident in oceanic and atmospheric patterns, with several indicators recently returning to levels more consistent with a neutral ENSO phase. Sea surface temperatures are very close to neutral levels, cloudiness near the Date Line has increased, and trade winds are generally near normal across the equatorial Pacific. However, the current pulse of the Madden-Julian Oscillation (MJO) has been strong, and the effects of wind variations associated with it is likely to have amplified the decline. As the MJO progresses east, its effect will reverse, meaning some La Niña indicators are likely to strengthen briefly.
Four of eight international climate models surveyed by the Bureau maintain La Niña values through March. By May, only one model still exceeds La Niña thresholds. For July, all eight are within the neutral range. This ENSO event has had relatively little effect on Australian rainfall patterns over the 2017–18 summer.
The Indian Ocean Dipole (IOD) is currently neutral. IOD events are unable to form between December and April.
Last year, a mild La Nina produced a record large bean and corn crop in Brazil without hurting Argentina’s crops. The 2017 Brazilian bean crop was a new record by a whopping 18.1% over the 2016 record large crop, which was produced without the aid of La Nina. Last year was perfect weather for Brazil’s corn and bean farmers. In their sandy soil, they need several inches of rain every week, every 3 to 4 days is even better. That is what La Nina provides Brazil’s primary crop area. Last year, as this year, La Nina started in October to early November and continued throughout the growing season. Last year, just as the crop matured beginning late January and into February, La Nina ended, allowing normal rainfall for harvesting the beans and get the second crop corn planted because La Nina faded away in December and January. This year, however, La Nina held on for an additional month (so far). That additional month has wreaked havoc on the Argentine crops and has made an even larger (probably) Brazilian soybean crop very difficult to get harvested and greatly reduced the size of Brazil’s second corn crop.
Last Thursday, Brazil’s Agroconsult increased the Brazilian bean production to a whopping 117.5 million tons; last year’s record was 114.1 million mts. However, unlike last year, La Nina conditions did not fade away in late January and February. Not only is the bean harvest 11% behind normal, the bean quality has suffered and the planting of the second crop of corn has been delayed to the point there will not be nearly as much corn planted as last year. Some bean fields were planted to corn without harvesting the moldy and sprouting beans. Some beans were 40% moisture when delivered to elevators. The corn planting window closes for Mato Grosso a few days before the first of March. Brazil’s corn crop is expected to be at least 400 to 600 (8 to 12%) million bushels smaller this year.
Meanwhile, down in Argentina, unlike last year’s weak La Nina, this year’s strong La Nina has caused a major drought. The bean crop has been reduced from 58 million mts to somewhere between and 44 and 46 million. Some think the current ten day forecast will result in a 40 million mt crop. It has been the drought in Argentina that has rallied the bean market despite the Brazilian crop getting larger at about the same speed as the Argentine crop got smaller. Brazil’s crop estimates have gone from 108 million mts three months ago to Agroconsult’s 117.5 million mt while Argentina went from 57 million down to 45 million or even less.
La Nina has caused a drought in India. Their prospective wheat production has been lowered to the point that India will probably be a net importer og wheat rather than a net exporter of wheat in 2018 and first part of 2019. This is a major change of the world wheat market paradigm.
Too get a major rally in wheat, we need to see major weather problems in three of the many wheat producing areas of the world. Australia harvested a wheat crop a few months ago half the size of the previous year due to drought. Now India will probably be importing wheat instead of exporting. All of Europe’s winter wheat will get a nasty cold spell this week without adequate snow cover. The US hard wheat is suffering terribly from a lack of water. Kansas’ wheat crop is rated only 12% good or excellent, down 2% from last month. It has never been rated that poorly. If that drought continues into May as most forecasters expect, we may have four major wheat producing areas suffer significant production losses.
Wheat is, by far, the most emotional grain market because “everyone” (over the age of 30) knows bread is made from wheat. Speculative buying could push wheat to ridiculously high levels. Do you remember in 2008, Minneapolis Spring Wheat futures hit $25 per bushel? People don’t care so much about corn and beans because they don’t eat corn and beans directly for the most part, but they want their bread!
You have heard me say it many times and you have seen it many times: The anticipation of an event will have more impact on the market than confirmation of that event. The “event” in this case is reduced corn and bean production in Argentina. Because the crop area of Argentina extends a long distance from north to south, the country’s planting and harvest periods are quite long, about three months. Argentine farmers will begin harvest in a month and last for three months. The high prices during a drought always occur well before harvest. Thus, if you have old beans to sell, this or possibly next week is the time to do it.
However, and it is a big however, if the above normal rain in Brazil continues, their huge soybean crop will not transition into huge exports. China’s huge soybean appetite demands quality. How many million mt of soybeans in Brazil will be harvested at 25 to 40% moisture? A lot. How many million mt of Brazil’s soybeans will be a bit moldy or sprouting when harvested? A lot. How many million mt of these low quality beans will China want to buy, ship halfway around the world and feed to their fish, chickens and livestock? None.
I have felt all along that the potential for a price rally in beans was just as strong due to wet weather during harvest in Brazil as dry weather during Argentina’s growing season. I will grant that the weather conditions are probably changing for the better in South America. Scattered showers for the next ten days are expected over a large part of Argentina, but no one expects the rainfall to add production to this year’s crops. Harvest progress in Brazil last week was substantial. For example, Parana, Brazil’s #2 soy and corn producer, went from 9% harvested to 27% week, second corn crop planting advanced to 42% of expected area vs 16% a week ago. For the first time in three months, Rondonopolis, in the heart of the #1 soybean production state of Mato Grosso, this morning is predicted to have rain only 3 of the next 10 days. For more than three months, Rondonopolis was predicted every day to have 7 or more days of rain out of every 10 day forecast. Most of those forecasts, the prediction was for 9 or 10 days out of 10 to be rainy. Note that this morning’s 10 to 20 day forecast predicts heavy rain for Brazil and a return of drier conditions for Argentina. If La Nina is dying, which appears to be the case, I would not bet on a return to a weather pattern in South America like they have had for four months.
Perhaps enough poor quality beans are already assured to restrict Brazil’s exports by more than 10 million mt. If so, that would be a tremendously bullish shock to the market. But, let’s suppose weather from here on will be
perfect for Brazil and Argentina. The facts are Argentina will harvest a bean crop 12 to 17 million mt less than normal and Brazil’s crop will not get any bigger and maybe smaller, but exportable supplies very well may get a lot smaller due to wet weather damage already suffered.
And finally corn. La Nina has assured Brazil’s 2018 corn production will be reduced 15 to 25% from last year. That is not going to improve because the planting window is closed. Meanwhile, corn acres in the US are not going to be increased over 2017 acres because of price and input cost in a tight cash flow situation. Forty-five days ago, Ohio State Extension Marketing guru Barry Ward was saying bean acres would be 95 million and corn acres would be 85 million. I don’t know what he is saying now, but USDA predicted 90 million of both during their Agriculture Outlook Forum last week, about the same as last year. China and Brazil both announced programs last year to make 100% of their gasoline blended with ethanol by 2020. Those countries do not have the capability to make that happen, but the effort and progress toward that goal will take a lot of corn… and I mean a lot of corn. Cellulose ethanol production has been an economic bust so far.
The three most important things to predicting price direction are carryover, carryover and carryover.
What is the carryover now?
What does the market think carryover will do in the coming year?
What does the carryover actually do in the coming year?
The large world carryovers have been a heavy burden for the market for several years. That is why corn, beans and wheat have been below breakeven for the most of the past several years.
In January, the world corn, bean and wheat carryovers were probably as large as they are going to be for the next two or three years. In February, the world corn and wheat carryovers both were reduced by two days’ worth of usage (a lot!) and the world bean carryover was reduced slightly. All three carryovers will be reduced in the coming months thanks to La Nina related losses already suffered in South America and Australia.
The market expects corn and wheat, along with the soybean carryover, will be reduced substantially in the coming months. That is why we have already had substantial rallies.
What will the carryovers actually do in the coming months? The full extent of the La Nina related production problems have not been realized yet. Production numbers will get smaller. I think demand will grow because we have 8% more cattle on feed, 3% more chickens, 2% more hogs, expanding ethanol production around the world, improving economy around the world with more people to feed and a weak dollar getting stronger this year (because of increasing interest rates) will encourage foreign buyers to buy ahead US products.
The seasonal trend is up for corn and beans into the middle of June.
Because of La Nina, normal weather for the Northern Hemisphere is less certain this year than most. Seismic activity is at a record high level. In the Philippines, Mount Mayon, which began erupting on January 13 and forced 75,000 to flee, saw another eruption on Monday. Scientists expect this volcano to issue the largest world eruption in decades in the coming weeks or most certainly within a year. Mount Sinabung, on Indonesia’s Sumatra Island, exploded Monday and is still spewing ash and sulfur dioxide. The eruption has not been strong enough to send the debris into the stratosphere, but that is expected to happen. The question is when?
From a marketing viewpoint (downside risk versus upside potential), this is not the time to be pricing new crop corn, wheat or beans. But if I had old beans, I would be pricing this week or next. You are less than ten cents from the contract high. You can’t ask for much better opportunity than that.