Jun 28, 2017

Long Tail of 2016/17 S. American Exports will compete with U.S.

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The 2016/17 crops in South America turned out better than initially expected, especially in Brazil, but I think the most important news now in South America is the fact that farmers are holding back some of the grain production in the hope that prices will improve going forward.

This could end up being very important for American farmers because if South American farmers are slow in marketing their grain, that means there will be a larger than normal amount of grain competing with U.S. exports later this fall. In that light, let's take a look at each crop in Brazil and Argentina.

Brazil Soybeans - The 2016/17 Brazilian soybean crop set a new record high production of at least 113.0 million tons compared to the 95.5 million tons produced in 2015/16. Even though exporters have been moving soybeans out of Brazil at a brisk pace, the export volumes are not high enough to avoid having a lot of soybeans left over in Brazil later this year.

According to the latest report from Safras & Mercado, Brazilian farmers have sold 58% of their 2016/17 soybean production compared to 76% last year at this time. The situation is similar for new crop soybeans in Brazil as well. It is estimated that Brazilian farmers have sold 4.3% of their 2017/18 anticipated soybean production compare to last year when 21% had been sold by the time the crop was planted last September.

Brazilian farmers are slow sellers because of the low prices of course. If they sold their soybeans at the current domestic prices, they would either lose money or barely break even. They are waiting for higher commodity prices due to a weather concern in the United States or a weaker Brazilian currency. I don't know if there will be a significant weather concern in the U.S. or not, but they are getting some help in recent days due to a weaker currency.

Earlier in the year, the Brazilian real was trading in the range of 3.10 to 3.15 to the dollar. Currently, it is trading in the range of 3.30 to the dollar. The weaker currency has encouraged some sales because a weaker currency means that farmers will put more money in their pocket when they sell a sack of soybeans. Even with an uptick in sales, Brazil will still have a larger volume than normal of soybeans left to sell later this fall.

Brazil Corn - Brazilian farmers have recently started harvesting their 2016/17 safrinha corn crop which will account for two-thirds of Brazil's total corn production. The 2016/17 Brazilian corn crop will set a new record high production for the country. As the combines start to roll, farmers have two concerns - low corn prices and a lack of storage space for the corn.

Mato Grosso is the largest corn producing state in Brazil and the current price of corn in the state is in the range of R$ 16.00 per sack or approximately $2.20 per bushel. This is just slightly below the minimum price guaranteed by the government which is R$ 16.50 per sack or approximately $2.27 per bushel. For farmers who did not forward contract their corn, the current price could be as low as R$ 13 to R$ 14 per sack (approximately $1.80 to $1.90 per bushel). The current price is below the cost of production and as a result, farmers are going to be reluctant to sell their corn, but a lack of storage space could complicate their marketing plans.

The lack of storage is due to the fact that a lot of the grain silos are still filled with the recently harvested soybeans. As long as that is the case, much of the safrinha corn will probably be piled outside. Right now the dry season is underway in central Brazil, so there is little weather risk to the corn that is piled outside. That will not be the case in September when the first rains of the new rainy season start to fall.

Since the soybeans are safely inside the silos and much of the corn will be stored outside, I think farmers may be more likely to sell their corn than their soybeans. Even if they do sell their corn first, the corn export season could have a long tail as well because not only is there a record large crop to move, continued soybean exports could interfere at the ports with the early corn exports which usually start later in August.

Argentina Soybeans - The soybean harvest in Argentina is essentially complete and the 2016/17 production should be in the range of 57.0 million tons, which is just slightly larger than last year's production. Exporters indicate that it is getting increasingly harder to buy soybeans because farmers are holding back their soybeans for improved prices.

One of the reasons why they have been slow sellers not only of this year's crop, but also of last year's crop as well, is because of the fact that soybean prices are guaranteed to start increasing in January of 2018 regardless of the international price of soybeans. The current soybean export tax is 30%, but the tax will start to decline 0.5% per month starting next January. So in a sense, the longer they hold their soybeans, the higher the sales receipts will be for their soybeans.

As long as farmers can continue to sell their corn and wheat in order to pay their bills and purchase inputs for the 2017/18 crop, they will probably continue to hold onto as many of their soybeans as possible.

Argentina Corn - The corn harvest in Argentina is still less than 50% complete and at this pace, they probably will not finish their corn harvest until the end of August. Even though the corn harvest is slow, it is more likely that farmers will sell their corn and eventually their wheat before they sell their soybeans. The export tax on both corn and wheat has been completely eliminated, so there is no export tax advantage for Argentine farmers to hold onto their corn or wheat.

Bottom Line - Due to the current slow selling by farmers in both Brazil and Argentina, there will likely be increased export competition later this fall out of South America, especially for soybeans.