There is always a one-month time lag between the USDA figures and the latest market developments. This tradition was respected once again this week. Following on a very neutral Feb report, the USDA March stocks were left, yet again, largely unchanged for corn and soya. This came as a surprise and a disappointment for bulls. The gap really came from the S. American situation where both Brazil and Argentina are facing very adverse weather conditions. Nevertheless, price reaction has been very limited as, with current low stock levels, traders consider any downside as a buying opportunity.
Rains are slowing down the soya harvest in Brazil, delaying the traditional shift between US and Brazilian export origination that usually takes place in February, causing major logistics problems for Chinese buyers. In addition, at this stage, soya quality and yields could also be affected. When the USDA is reporting 134Mt, local analysts are now talking about 131Mt for the Brazilian harvest. However most importantly, the Safrinha (2nd corn crop) drilling progress is considerably delayed, adding some risk to the production potential. Here, for this crop, the USDA is working on a corn production of 109Mt. This figure will soon be questioned.
In Argentina, the situation is also becoming problematic for the late corn and soya crops. February has been the driest month in history when the flowering period had already started. Here again we believe USDA figures were overestimated as local analysts are seeing both corn and soya crops below 43Mt, when the US officials are still considering 47.5Mt.
With very low ending stocks, the world needs the S. American crop to be bumper. Current conditions are clearly adding some risks and production figures will probably be downgraded in the next reports. Adding to this tightening situation, the Chinese appetite for coarse grain is very likely to continue as long as their domestic prices remain so elevated when compared to world prices. Consequently we will be monitoring, very closely, this spread in the coming months.
As the US drilling season commences, the weather market should add even more volatility to our markets. Prices have gone up, but not yet enough to significantly ration demand. We consider at this stage that any price downside is limited, and a more bullish scenario is still on the table. In term of risk management, our advice is to hold and watch for new developments in the near-term in a buoyant and volatile market.