Morning Comments January 10, 2022

Tractor Winter Oil Painting Vf

Markets surged higher Friday as hot and dry forecasts for Argentina this week combined with some index fund interest and technical buying came together to push us to the highest level seen since early June for soybeans. Corn was higher as well, pushing to early July highs, but limited in gains as wheat continues to struggle.

As we discussed Friday, forecasts continue to show extreme heat and dryness throughout much of Argentina for the next 7 days. It is important to note that Argentina has an incredibly diverse growing season, so while the majority of their corn and soy crops were only recently planted, the earlier planted crops are definitely struggling. 

Parana and points south into Uruguay are poised to pick up some continued rains this week as the pattern shift there appears to have come to fruition. With government groups and private analysts already throwing in the towel on production potential there though it may be difficult to assess just how much production has been permanently lost and what can be saved. 

Locals continue to attest that northern regions will offset some of the southern region's losses. Others are pointing out that rainfall throughout the last half of January into February is far more important for Rio Grande do Sul and Argentina than December and early January. Still, the story remains the same and with temperatures forecast to hit 100 degrees or more in portions of Argentina this week traders will be watching how models roll next week's rains forward closely.

In addition to continued dry forecasts, bulls were emboldened by Chinese purchases of new crop beans, saying it's a direct indication they are concerned about South American production.

Taking a step back though, while yes China stepping up and securing October forward looks like a strong sign they are worried about what Brazilian supplies may look like once we get out that far, looking at values differences it appears to be an easy decision.

The recent runup in prices has forced the March-November soybean spread into a nearly one-dollar inverse. With the spread taken into consideration, it appears the Chinese are able to buy October shipped soybeans for around +30 the March board, saving a considerable amount of cash for much deferred shipments. 

Of course, Chinese buyers will still need to cover late spring forward into fall, but it appears with hog producers there looking at over $30/head losses and crush margins remaining negative, no one is in a hurry to pay too much for beans.

All of this not even taking into consideration how the country manages their zero Covid policy in the face of the Omicron variant, as it was discovered in the country over the weekend. 

Local Chinese analytical group Sitonia Consulting suggests the country will struggle with maintaining a zero Covid approach in the face of a variant some 3-4 times more contagious than Delta which was 2 times more contagious than the initial Covid virus. The group goes on to say that even if the country were to abandon the zero case approach citizens have been conditioned to fear the virus and its consequences, likely impacting demand for key commodities significantly. 

Looking ahead, we will get updated export inspection figures this morning at 11:00 a.m. Eastern, and we will continue to look at shipment pace, especially for corn as we need to average around 56 million bushels a week to meet current USDA expectations. We will continue to monitor updated forecast models as well, with one eye on just what is taking place when it comes to index funds and their much-discussed rebalancing.

Corn down 1 to 2

Beans down 5 to 6