Porto Alegre, May 2, 2023 – Agricultural commodities may resume their price curve to levels closer to their average, including corn. The rearrangement of supply in relation to demand is the key point for this framework, as it restores a rebalancing of global stocks. Undoubtedly, there are many factors ahead, and agricultural production can only be confirmed after being reaped. Markets, however, forecast events and, at this moment, the indications of a recovery of production in the United States followed by an El Nino year ahead reinforce the rearrangement of global supply and rebalance of prices.
The surprise of Brazilian growers with the recent corn and soybean lows cannot be linked to new facts. There was no major global downward indicator that could harm prices in Brazil, on the contrary, the main external information for the year is still the historic crop failure in Argentina. Basically, bullish information. However, markets cannot maintain or suggest the maintenance of future prices with current global information. So, for growers who are scared by price lows in the first half of the year, it is important to recap the reasons for the upward movement and why they are moving to new levels:
– The pandemic brought the great new global fact by affecting the economic system, global distribution, production and prices;
– In the depressive panic, governments and central banks acted through sharp cuts in interest rates and injection of reasonable resources into the financial and social system. The attitude avoided the worst for the economies but, of course, left scars;
– The excess of money injected into the economies brought inflation, a “less worse” consequence in relation to a depression, and today this is very clear;
– Commodity prices skyrocketed, be it for the increase in the quantity of currency in economies, production and distribution difficulties, or speculation;
– The prices of basic agricultural inputs surged, such as fertilizers and chemicals;
– In the midst of the pandemic, a war at an important point for the supply of oil, wheat, and corn in the international market. Additional factor for commodity prices to skyrocket and seek the 2012 highs;
– Production losses due to weather in Europe, the United States, southern China, and South America reduced stocks and consolidated the upward price curve;
– Coincidentally, the weather phenomenon La Nina was present in the three years of the pandemic, plaguing the crop in South America, in particular;
– From 2022, the world has begun to free itself from the chains of the pandemic, with China in February 2023 reopening its provinces for the transit of people and goods;
– This process allowed for factories to return to production, mines to recover their activity, global distribution networks to realign themselves, and global supply, at its own speed, to meet the demand that was resurfacing with the end of the pandemic;
– The picture has been taking place within the speed of rearrangement of production in relation to demand. Oil reached almost USD 120/barrel in this global environment, today it approaches USD 70/barrel. Just like oil, fertilizers and chemicals also started their readjustment curve. Inputs such as urea and glyphosate, in the agricultural sector, were the first to correct the historic high curve of 2021/22;
– In this environment, wheat prices surpassed USD 14/bushel on CBOT. Today, prices are below pre-war levels of USD 6.30/bushel. Corn rose in a “perfect storm”, that is, all factors led to a global high, with prices on the CBOT close to USD 8.00/bushel, also the 2012 highs. Soybeans reflected the high in oil, low stocks in the United States, crop failure in South America, and the competition for area due to high corn prices. CBOT showed prices near USD 18/bushel last year, and today we still have levels above USD 14/bushel.
– This three-year global anomaly is reflected in global commodity prices. As this anomaly begins to be corrected, commodity prices also begin to seek correction.
And it is at this point that we must reflect on the current environment of falling prices of corn, wheat, and soybeans. The highs set for the last three years were derived from this global anomaly, and this is beginning to be corrected. The decline in oil and wheat prices, two commodities heavily affected by the war in Ukraine, is the clearest symptom. Some groups of fertilizers and chemicals also fall, and others depend on a little more time for adjustments.
As demand is already known and with little elasticity for the second half of this year, the main variable for price continues to be supply. Argentina has a historic crop failure, following the end of the La Nina phenomenon. However, Brazil shows a super soybean crop and good corn production, neutralizing a good part of the Argentine effect on prices. We can say that this crop failure allowed for the postponement of the downward curve for corn and soybeans in the international environment.
Now, with South America with few corrections to be made, the market focuses on the next supply factor, that is, the 2023 US crop. For now, the two pieces of information that we know are bearish:
– The estimated planted area is higher this year for corn, with 92 mln acres. This area will only have its first definition on June 30th. Can there be any change in the estimate? Of course, which can be neutralized by yield in case acreage is below the expected;
– Planting started at a very good pace, above the five-year average, suggesting high yield potential;
The next bearish information for corn on CBOT is in the report for the next 12th, to be released by USDA. The projection of area with a high yield estimate, due to the very good initial planting, suggests total rearrangement of the 23/24 stocks from the current 34 mln tons to something close to 46/48 mln tons.
Thus, all that is left is the weather, given that US exports are no longer able to support the market in the short term. China bought and canceled more than 500,000 tons in the last two weeks. Weekly sales dropped again. Premiums felt the lower condition of demand absorbing high levels. FOB prices are falling, even in Argentina, which is facing a historic crop failure.
Last week, the CBOT prices reached a new important level. September on the exchange is the initial month of the US crop, and December is the month that reflects the harvest. September has broken an important support near USD 5.50/bushel and could head toward a contract low of 5.10/bushel in the coming few days. Strong cold on the northern side of the Corn Belt and some heavier rain in Iowa are not enough to support prices, although some information sources try to find some factor for this.
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