Morning Comments February 7, 2022

Harvesting Soybeans

Markets are picking up where they left off on Friday, gapping up on the overnight with soybeans trading to new contract highs across the board.

The story remains the same, the reduction in South American production and the much discussed short of the Chinese end user continue to fuel buying interest. Dalian Palm Oil trading to its highest level since July of 2008, with other vegetable oils rallying around the world is also helping to bring new interest to the complex.

As we discussed late last week, the production reduction out of South America is real, though the true quantity lost remains unclear as we are still working to get a feel for actual acres planted and what supplies will be once we're further into harvest. China returned from holiday overnight with a surge in commodity values as their market works to catch up after being closed for a week.

However, not all is well when it comes to food producers in the country. Publicly traded futures for the largest hog producer in China were limit down on Monday as the company announced losses of around $3 billion U.S. in their 2021 earnings. Low hog prices due to a surge in production combined with a shift in domestic demand was compounded by high feed costs, with other major pork producing companies reporting major losses on the year as well. 

The drop in hog prices and potential issues with major producers has put Chinese crushers in a tough spot. Prior to the Spring Holiday, crush margins were deep in the red, with last week's rally in futures and basis out of Brazil only further adding to losses. According to Sitonia Consulting, crushers in the country are looking at $25/ton losses on crushing spot Brazilian beans, with losses of $57/ton estimated on spot purchases out of the U.S.

Interesting to note, China is using the fanfare surrounding the Olympics to build memorandums of understanding and other deals with its allies. Late last week we got final confirmation China will now open itself to imports of wheat from all areas of Russia, as opposed to supplies out of only certain regions permitted prior. 

In addition to allowing imports of Russian wheat, something rumored to possibly be behind the corn cancellation we saw last Thursday, both countries have agreed on bipartisan infrastructure deals, building both a railway terminal capable of transporting 8 million metric tonnes of dry, bulk commodities a year connecting the two countries as well as a natural gas deal and new pipeline set to be complete in 2-3 years.

In addition to solidifying its relationship with Russia, China has been working closely to support financially challenged Argentina. The two countries quietly agreed to a funding deal for an Argentinean nuclear plant early last week, with more talk of a 5-year plan for agricultural trade as well. 

As we have seen take place in Brazil, China will help finance infrastructure responsible for grain and bulk commodity movement, while Argentina will work to increase production and stabilize supplies. 

Looking ahead, we will continue to monitor the weather outlook in South America as Argentina looks to turn dry through the next 14 days, with some heat returning to the forecast next week. There is talk rain could return to the region to finish out the month, though uncertainty regarding this outlook is high.

We will get updated export inspections this morning. Traders continue to talk about some surprising strength in nearby soybean export demand, likely resulting in strong loadings yet again. Corn loadings will definitely start to come into focus as we still have a substantial amount of Chinese corn on the books that needs to go. 

Bullish traders continue to contend corn shipments will pick up soon, thus the importance of weekly figures remains.

We will get an updated supply and demand outlook from the USDA Wednesday. As we mentioned last week, these monthly reports have been responsible for some pretty abrupt direction changes these last few months, whether or not that trend continues remains to be seen.

Funds were big buyers of beans last week, taking their length back up to the most seen since last May as of Tuesday the 1st. Continued buying has likely pushed us well beyond those highs, with significant length in corn seen as well.

Corn up 8 to 9

Beans up 22 to 24