Tales of woe when discussing the weather in Argentina have become a popular topic among U.S. farmers recently. The February USDA Supply and Demand Report posted February 8, 2018 had the following to say about South American Corn and Soybean production:
USDA 2017-18 South American corn and soy production (mmt)
Outlook for 2017-18
Outlook for 2017-18
|USDA Figures for 2016-17|
You can see from the table that production overall is looking to be reduced from last year’s record-breaking South American crop. It’s important to take a look at what those actual differences amount to though:
In total, South America corn production is estimated to be 5.5 mmt less than last year (216.5 million bushels).
Similarly, South American soybean production is estimated to be down 5.9 mmt (216.8 million bushels).
Losses of about 4% of the of last year’s record corn and bean crops sound significant, but how much of a price movement is that worth? When you compare it to our current projected carry outs for domestic corn of 2.352 billion bushels and soybeans of 530 million bushels, the relative importance becomes clearer.
In the 10 days following the release of the February USDA report we saw both of the nearby futures contracts rally, but corn gained only 2 cents, while soybeans rose 38 cents. It seems as if the futures market is paying attention to the weather in South America when it comes to soybeans, but not so much for corn.
When you look at the numbers you understand why: South American soybean production matters, corn does not. As long as the U.S. is carrying over 2 billion bushels of corn forward, South America would need a complete corn crop failure to put a dent big enough in this vehicle to make the market stop and fix it by calling for higher prices. Until then we shall see U.S. weather and production be the dominant factor in setting the supply side part of market prices for corn.
Soybeans have rallied though, considerably. South America weather seems to be just as important these days as U.S. weather when you’re talking soybean prices. Anybody who’s been around ag markets very long knows there is no way to effectively predict how high prices can go when you’re in the throes of a weather market seemingly reducing crop production potential by the month, week, and day.
However, when the rally is over, those higher prices seem to disappear overnight. They don’t disappear completely overnight, but it will feel that way if you don’t have any priced or hedged on the way up, and refuse to do anything on a down day. That is a handy piece of information to know about yourself when looking forward to how you will carry out the rest of your risk management plan for this year.