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** A Different Year, Same Brazilian Politics: With protests recently erupting across Brazil, the country stopped today to watch the appeal trial of former leftist president Lula da Silva. Lula was convicted last July of corruption and money laundering, and is now appealing the conviction to a 3 judge panel. Only 2 of the 3 needed to vote to uphold the conviction, but if the vote is not unanimous, it opens the case up to more appeal options. However, today’s unanimous vote leaves only 1 appeal option, which is to the country’s supreme court. The trial has increased volatility in the currency market in recent days, with the Brazilian Real dropping on Tuesday, and the rallying to a 3 month high today, on ideas that the conviction will be upheld. Note in the chart that after reaching an all time low against the dollar in early 2016, the real has held in a narrow range over the last 2 years, while the Brazilian stock market has rallied non stop to a new all-time high this week.
** Traders Bearish, Investors Bullish The Real: This week’s trial has been scheduled for many weeks, and investors and traders have been busy positioning in the early weeks of the year. The chart shows the latest Traders in Financial Futures data from the CFTC. Note that Leveraged Funds (CTA’s and CPO’s) began buying the Real futures back in August and continued to buy into mid-October, when they held the 2nd largest position on record. But that position was unwound rather quickly and funds were net short by early December. Funds continued to sell into a near record position through the 1st week of 2018, but ahead of the upcoming trial, began to cover last week.
Asset managers (pension funds, endowments, and mutual funds) on the other hand have been significant buyers of Real futures in early 2018, with last week’s report showing a net position worth nearly 15,000 contracts, up more than 13,000 in just 5 weeks.
** Currency Strength Keeps Works Against Brazilian Farmers: Regardless of which hemisphere one is farming in, the chart below shows that prices this year have generally held below last year. But for the Brazilian farmer, the currency has added to volatility in both hedging and cash market sales. Brazilian producers are thought to have been slow new crop sellers through last summer, in hopes that a US weather problem would give them a chance to hedge better prices, and sales are thought to have remained slow through planting. But early harvest is now underway and will gain momentum in the upcoming weeks. Brazilian farmers this week have anxiously hoped that this week’s trial would produce a drop in the Real, and the chance to hedge new crop prices at new highs (in Reais) for the year. One only has to look back to last May, when an overnight 8-9% drop in the real took CBOT soybean futures down more than $.30 in a day and another $.40 lower in the following week Brazilian farmer hedging. Note that while CBOT soybean prices closed up today, the stronger currency took prices lower for the Brazilian farmer.
The Brazilian fertilizer association, ANDA, reported total fertilizer sales for the month of December at 2.4 MMTs. This is down slightly from last year’s 2.7 MMTs. As the soybean crop has been largely planted, sales at this time of year are typically for the 2nd Brazilian corn crop that will be planted following the soybean harvest. Combined Nov-Dec sales totaled 5.7 MMTs, slightly less than a year ago, but still the 2nd largest in the last decade. The attached chart plots the relationship between Nov-Dec fertilizer sales and Brazil’s safrinha corn crop. Note that CONAB’s estimate for safrinha corn acres is identical to a year ago, at 12.1 Mil Ha, while the fertilizer data does not offer a compelling reason to strongly disagree.
The safrinha corn crop is typically low yielding (relative to US yields) but has become increasingly important for both the Brazilian farmers and the world corn market in recent years. In 2004/05 the safrinha crop amounted to just 7 MMTs, while last year’s crop totaled a massive 67.4 MMTs! The record yield of 5,495 Kg/Ha (95 BPA) was set in 2014/15 crop, while record production was reached last year on expanding area. But note that while yields are considerably less than the US, they have followed a similar trend higher over time. CONAB’s January yield forecast of 5,806 Kg/Ha (92.5 BPA) was near unchanged from a year ago, and 5% over trend. However, weather in the upcoming weeks will be key in determining both total area and yield.
While area and yield forecasts are basically unchanged from a year ago, the chart shows that CONAB has a consistent history of underestimating area, yield, and crop size in their January estimate. In 10 of the last 11 years, the January report has underestimated total safrinha corn area by an average of 12%. Ultimately it’s changes in yield that have had the greatest impact on production changes. In 9 of the last 11 years, CONAB has underestimated yield. The most notable miss occurred in the 2015/16 crop year, when extreme drought put the final safrinha corn yield 48% under the January forecast, which cut the final crop size by nearly 14 MMTs.
This miss, is a reminder of the importance of weather (in a La Nina year) for a crop that has yet to be planted. The CBOT will closely watch rainfall across key states of Mato Grosso do Sul, Mato Grosso, and Goias in the coming months. Moreover, Mato Grosso farmers are also looking at planting cotton, a far more profitable crop than corn. This could help limit any future winter corn seeding expansion.
The Brazilian veg oil association ABIOVE, last week reported that it’s membership crushed 2.8 MMTs of soybeans during the month of October. ABIOVE estimated that it’s reporting membership has represented 74-78% of the total Brazilian soybean crushing industry this year, which implies a total October crush rate of 3.7 MMTs during the month, a 19% increase over last year and the largest October crush on record. Estimated spot crushing margins are well under a year ago, but still thought to be positive. While Brazilian soybean supplies remain more than adequate following last year’s record crop. The latest USDA forecast calls for an annual crush total of 41.5 MMTs, and the chart shows monthly estimates Nov-Jan estimates needed to reach the USDA forecast.
Brazil’s late season export pace has been far better than expected, which is quickly whittling away at stocks. Brazilian soy processors told ABIOVE that at the end of October they had 4.8 MMTs of soybeans on hand, similar to a year ago, and slightly less than the 5 year average. This leaves another another 4-6 MMTs of soybeans that either need to be purchased and/or delivered within the next 3 months to meet the USDA’s annual crush forecast. Note that early harvested soybeans should become available to the market sometime in January. The bottom line is that even with the increased larger export program, Brazilian processors should have the supply, and large crush rates are expected to continue into 2018.
Brazilian soymeal exports were behind a year ago through the 1st 6 months of the crop marketing year, but have been above last year since August. The cumulative export total for the year through November (per government trade data) totals 12.3 MMTs and was slightly ahead of last year. The latest ship lineup update for this week shows 1.2 MMTs of meal (hipro, lowpro, and pellets), that have either sailed or are expected to sail during by January 1st. If realized, this leaves just 1 MMTs to ship in January to reach the USDA’s annual forecast, which should be easily reached. The current USDA forecast has world soymeal trade increasing 2-3 MMTs, while Brazil is expected to pick up close to half of the additional global business. This of course all largely hinges on whether all of the Argentine crops get planted, and whether a La Nina type growing season unfolds.
The December CONAB report on Tuesday did not offer any major surprises, with Brazilian soybean production pegged at 109 MMTs, versus the range of 106-109 MMTs that was offered back in November. Area of 34.9 million hectares was little changed from the average November estimate, while the national yield forecast was increased 2% to 3,123 Kg/Ha (46.4 BPA). The far Southeast regions of the country are in dire need of rainfall with some areas seeing rainfall at just 25% (or less) of normal over, with similar conditions extending west into Argentina. Other key growing regions farther north have seen normal rains during the last 30 days. The USDA’s crop production estimate was held just under CONAB at 108 MMTs. Typically, the USDA waits until January to begin making yield adjustments, and often follows CONAB’s guidance in December. Since the 2 agencies are already using similar numbers, it would likely to a major weather calamity in the next month for the USDA to change their estimate of the Brazilian crop substantially.
When estimating soybean production in December over the last decade, there has not been a strong bias for CONAB to either over or under estimate production. The December production forecast has been too high in 5 years by an average of 5%, and too low in 6 years by an average of 6%. CONAB has consistently underestimated soybean area over the last 11 years, by an average of 1.3%. As seen in the chart, CONAB’s error in estimating production has been completely driven by the error in yield. Following 5 consecutive years of over estimating yield in December, last year CONAB’s soy yield estimate was 10% too low with the final yield up 17% year over year, and 9% over trend. The current yield estimate is down from a year ago, but right in line with the 30 year linearr trend.
In the soybean balance sheet estimate, CONAB estimated Jan-Dec soybean exports will total 64 MMTs, unchanged from the November estimate, but still down 2.5 MMTs from the current year exports of 66.5 MMTs. The USDA estimates the local crop year balance sheet on a slightly different schedule from Feb-Jan, but they are currently projecting a similar decline, with annual exports projected at 64.5 MMTs.
The CBOT soy trade continues to struggle with a number of concerns. The first is that Brazil’s yield could rise and that like last year, the final crop could be 3-8 MMTs larger. This would cut into US late season old crop and early season new crop exports.
The second is that it’s still very early in the growing season in a La Nina year. Today’s weather forecast projects rains over the next 2 weeks, which need to materialize, and then continue into March replicate last year’s big 9% above trend soy yields.
ARC expects the CBOT soy markets to remain sensitive to changing weather forecasts with support expected from $9.60-9.70 spot CBOT futures. The odds of a Jan/February weather rally is elevated.
Brazilian trade data released last week showed soybean exports for November at just over 2 MMTs, which was inline with expectations. Cumulative exports for the year are now near 65 MMTs, a record large export pace and 28% more than a year ago. The USDA in November, held their estimate for the Feb-Jan crop marketing year at 65.6 MMTs, which leaves less than 1 MMTs of soybeans to export in the last 2 months, to reach the USDA’s forecast. However, the latest vessel lineup data is already shows 1.6 MMTs scheduled for December, and that figure is likely to increase by month’s end. The USDA is expected to raise their estimate for old crop Brazilian soybean exports, and without an increase in world demand, will come at the expense of US export forecast.
November soymeal exports were down slightly from October and totaled just over 1 MMTs, but still above last year as soybean crush rates have remained higher. The latest data from the Brazilian crushing industry association (ABIOVE), has data through September, but shows that soybean crush rates remained well above both last year and the 5 year average through the month. Cumulative soybean processing for the year is estimated at 29 MMTs, up 3% from last year, but also the largest on record. To date, processors are estimated to have purchased 33 MMTs of soybeans, while stocks on hand at the end of September were the lowest since 2004, at 5.8 MMTs. But with total Brazilian supplies still above last year, strong monthly crush figures are expected to continue.
Corn exports in November were disappointing and fell short of expectations. Private trade data showed exports near 4 MMTs, while the government data showed a monthly total of 3.2 MMTs. Total exports in the USDA’s Mar-Feb crop marketing year now total 23 MMTs, versus the USDA’s annual forecast of 36 MMTs. To reach the USDA’s annual forecast, Dec-Feb exports need to total 13 MMTs. A year ago, Brazil exported just 3 MMTs in that period following a drought reduced crop. However, exports routinely reached 10-14 MMTs from 2012-2015. Just 4 days into December, the vessel lineup is already showing more than 2 MMTs scheduled for the month, and December exports are expected to total 4-5 MMTs. Brazil is not offering corn for export beyond February.
Published Brazilian soybean export offers for both spot and forward quotes have not been competitive with the US for the entire year, yet Brazilian exporters continue to win business. Lower freight costs to Asia and higher quality premiums have been cited as reasons for the strong Brazilian export program, while analysts also wonder if public prices being reported are accurate? Nevertheless, Brazil continues to a record breaking export program. Exports in October were at a record large 2.5 MMTs, bring the cumulative total to 63 MMTs – up 12.5 MMTs or 25% more than a year ago. The USDA has repeatedly bumped their annual forecast higher, and Nov-Jan exports need only be 3 MMTs to reach that forecast. The latest vessel lineup update shows 1.5 MMTs already scheduled for the month of November, so the USDA’s forecast could still be a little too low.
Soymeal exports in October were at a 5 month high, totaling 1.3 MMTs, and was the largest October figure since 2011. The latest data available from the Brazilian crushing industry association (ABIOVE) is current through August, but shows that soybean crush rates jumped sharply in both July and August. Cumulative crush through August is estimated at 25.7 MMTs, fractionally above last year but also record large. To date, soybean processors are estimated to have purchased 27.4 MMTs of soybeans, while stocks on hand at the end of August were the lowest in 16 years, at 6.4 MMTs. With record large supplies, domestic crushers have not been willing to extend coverage, but depressed interior cash soybean prices are likely to keep crush rates up into the end of the year.
Following this year’s record large corn crop, Brazil continues to pump out exports a record pace. The Brazilian government counted total corn exports in the month of October at just over 5 MMTs, which is the 3rd consecutive month above of exports over 5 MMTs. For the USDA crop marketing year that begins in March, Brazil has now exported 20 MMTs or more than double the pace of last year and well above the 5 year average of just 12 MMTs. The latest USDA forecast has total Mar-Feb exports at a record large 36 MMTs, which leaves just over 16 MMTs left to export over the next 4 months. Brazilian corn export offers remain competitive with the US (through the US harvest), and the latest vessel lineup update shows that there is already 3.5 MMTs scheduled to sale in the month of October. The large Brazilian export program has come at the expense of US exports, but without a major weather problem next year, Brazil is likely to produce and export similar totals in 2018.