The News and What it Means – Surprising South American Corn Forecast & Implications of Crude Price Drop

 

By John DePutter and Dave Milne – March 13, 2017

 

The News

USDA raises its forecast for 2016-17 Brazilian corn output by 5 million tonnes from last month, to a whopping 91.5 million. Argentina’s crop is revised up 1 million from last month to 37.5 million tonnes. That’s a new record high for the two countries, up 34.3% from a year earlier.

   —USDA monthly global crop update, released Thursday.

 

What it Means:

A lot of the focus on South America tends to be on soybeans, and US government forecasts for beans did jump higher as well. But you could see that coming. These predictions for more corn, on the other hand, weren’t so widely expected.

This extra six million tonnes of corn relative to what was expected a month ago will compete in the export market against US corn. The US export pace has been red hot, with export inspections running almost 74% ahead a year ago as of March 2.

If South America’s crops meet the USDA’s expectations and South American corn flows out to world buyers later this year, it’ll cool the US pace.

More importantly: it’ll affect the market. The news knocked July and Dec futures down 5 ¼ and 4 1/2 cents to their lowest since early February. Even if South American grain doesn’t keep pressuring the market in the short-term, it will at least limit whatever rallies get going later this spring.

Key take-away: The US supply-demand is a primary driver of corn prices, but not the only driver. Corn supplies outside the States matter. With more than ever in South America, that means more competition for US corn in international markets.

 

The News

“The price [of oil] has fallen by more than 8 percent since last Monday (March 6), its biggest week-on-week drop in four months…”

   —Reuters, March 13, 2017

 

What it Means:

Press coverage will point to rising US crude inventories which are offsetting OPEC cuts. We can’t help but to wonder whether OPECs reductions really had teeth anyway.

That said, we have two take-away points when considering this news:

Take-away #1: This heavy break proves there were a lot of bullish speculators in the market, and many of them ran for the exit doors all at once. This is something you won’t hear about in the mainstream media.

Recent commitments of traders’ data hinted that big spec funds were the reason crude futures were as high as they were, more so than supply and demand considerations.

(Note: Commitments of traders’ data is something we keep an eye on for all markets, not just crude oil. And recently, the spec element was inordinately high, which made us wonder in past weeks whether the crude market was vulnerable to a sell-off.)

Take-away #2: This break in crude oil has an impact on other markets.

First off, it is helping weaken the Cdn $. That’s helping Canadian ag commodity prices relative to US prices, which is a net benefit to Canadian farmers. If crude stays down where it is or falls more, that’ll keep the exchange rate benefit alive for a little while yet.

That’s the good news. But there’s a negative aspect to this as well. Crude oil is loosely tied to corn. When the entire energy complex suffers – and other energy markets did cascade lower as gasoline, diesel, natural gas and ethanol were also under pressure – it doesn’t help corn. Doesn’t help veg oil markets either.

It’s important to understand something here: The crude oil market says a lot about grains and oilseeds. Of course, it’s not that every day’s up and down action by crude is followed directly by crops. But energy and crop markets do frequently dance to the same music, even if they’re not always in step.