February 23, 2012
By João Carlos Kopp
BRAZIL - Over the last few days we've heard a lot of noise about how large the American corn and soybean crops will be, but as Farm Futures' analyst Arlan Suderman says, "the area planted won't be confirmed until the seeds are in the soil."
Well, let's look at the big picture. We have huge losses in South American crops in Argentina, Paraguay and Brazil, with most farmers in Brazil planting early thinking they could take advantage of high prices due to small inventories in South America. But this decision was hammered by weather. We now have the strongest La Niña in eight years and the cooler waters of the Atlantic ocean don't provide enough rains in Brazil; especially in Rio Grande do Sul, Santa Catarina, Parana, Mato Grosso do Sul and South of Mato Grosso.
The same conditions are crushing Argentine production, with higher temperatures, lower levels of soil moisture and increase in "photoperiod," which increases evapotranspiration in the drought situation and increases losses in the field.
These extreme conditions in South America should result in smaller production numbers from USDA and CONAB (Brazil National Agency) once the harvest is finished. The losses will require higher premiums at export terminals in Brazil, even harvest proceeds. Premiums today are reaching $0.86/bu above the March contract and we don't even have the lower numbers yet.
The situation in corn is much worse because we use more than 80% of what we produce, as opposed to soybeans, where we export 50% of our production, with more than 30% covered in derivatives. We don't have enough corn across Rio Grande do Sul (RGDS) and Mato Grosso (MS). CONAB is trying to provide some corn for small farmer´s, but they don't have stocks. Another way to escape this problem is bring old-crop corn from Mato Grosso, but those supplies are tight as well.
There is currently a lot of discussion by the Brazilian government of importing corn from Argentina, Uruguay and the United States. Argentine corn is priced in Brazil at $8.75/bu, with U.S. Corn at $9.78/bu. Domestic market corn is currently selling at $7.98/bu. The import parity became smaller and has support of the government to proceed with subsidies for the cost of shipping.
However, we have another problem: the Argentine corn crop is small too, and farmers there don't want to sell at current prices. U.S. corn looks more favorable, but we have a big problem with corn usage vs. inventory in the United States as well. Prices will likely go up and that doesn't even factor in aggressive purchases by China.
Other concerns include the U.S. government considering a release of the Conservation Reserve Program. We think they have good information. We now have the smallest inventory in grains market in history, and the world needs food. The U.S. can plant more and export more, and help the U.S. economy come out of a recession, like President Obama wants.
In conclusion, the big picture to me is very bullish, but a few South American traders look only for their belly buttons and don't want to believe in South America's small crops. Rather, they continue to focus only on how huge our acreage is.
My Grandmother says too me: time is Lord of reason!
When inventories are too low and we have completed the harvest in South America with small numbers, then those same traders will probably find something to blame for their bearish positions. --Kopp is a private grain analyst and consultant in Brazil.
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