Morning Comments November 11, 2022

Cover Crop

Yesterday was a surprisingly ugly day for corn and soybeans as a weaker Brazilian currency and rumors Argentina is considering another round of the specialized currency designed to incentivize farmer sales pressured the market. When the dust settled corn was down 11 and soybeans were down 29. Wheat traded both sides of unchanged, finishing the day down 3. 

Brazil’s currency has fallen hard versus the US dollar recently, losing 5% this week alone, as left leaning Lula looks to substantially increase government spending to cover the social programs he promised during his campaign. The drop in the real combined with the recent run-up in soybean futures has pushed the Brazilian farmer to become a more aggressive seller, with Brazilian cash brokers reporting a major spike in new crop soybean sales this week.

In addition to changes in Brazil’s economic outlook, the Argentina government continues to struggle to find cash as inflation in the country is expected to soon surge to nearly 100%. The ‘soy dollar’ as it was dubbed was announced in late August, with farmers able to sell their soybeans at a currency conversion set closer to the dollar, providing them a much larger return on sales.

The introduction of the soy dollar was thought of as mostly inconsequential at first, but it worked as intended, prompting Argentine farmers to sell over 10 mmt of beans for export and generating billions in cash. The offer expired at the end of September, but with cash still very much needed, the government is again floating the idea of a return to the soy dollar at the start of December. 

There are additional rumors too that corn could be included in the exchange this go around, potentially increasing the flow of cheap Argentina corn into the global pipeline if supplies increase. In addition to talk of corn being included, there are rumors sales to crushers would be included. Their exclusion in the prior round created some interesting potential shifts in global meal market dynamics, as Argentina is traditionally more of a meal exporter than an exporter of whole beans. 

However, all of this was forgotten overnight, with a final confirmation that some rumors floating around China regarding rollbacks in quarantine time and cancellation of their international flight circuit breaker are becoming a reality. 

As you may recall, the country’s international flight circuit breaker basically shut down a flight path for a specified number of days if a certain percentage of travelers were discovered to be Covid positive on arrival. This uncertainty limited international flights and kept travelers guessing as to whether their travel plans would be interrupted. 

In addition to getting rid of the flight circuit breaker, centralized quarantine times for close contacts or international travelers were cut from 7 days to 5, with another 3 days of quarantine required after the centralized round once you reach your destination. Centralized quarantine is very much like it sounds, as it is basically quarantined in a government approved facility. In China there are three types of approved quarantine facilities for close contacts or travelers, two hospital-style options or a quarantined hotel, none of which are considered rich in amenities.

The National Health Commission reiterated the country’s adherence to dynamic zero-Covid policy saying the rule changes are simply “optimizing and adjusting prevention and control measures” and should not be considered relaxing prevention and control, let alone a sign they are ‘opening up.’

Nonetheless, the excitement over the changes being a major first step in a relaxation of rules and a subsequent return of Chinese demand had the market up overnight.

In other news, CPI data showed consumer price increases have slowed, with October data coming in lower than expected with inflation at 7.7%, versus expectations of 8%+. The slower increases in consumer prices have analysts more confident in a slowdown of rate increases, with those still calling for a pivot saying this is the first sign one could be coming soon.

Fed members remain steadfast in their desire to curb inflation, though all agree the rate hikes will become smaller and less frequent, with benchmark rates likely to remain elevated for longer once the increases are complete. The better-than-expected data release hit the dollar hard, with it experiencing its worst day of trade since 2015.

Markets remain strong this morning on the back of China news, with traders closely monitoring any developments out of the Geneva meeting between top UN officials and senior Russian delegates.

Corn up 4 to 6

Beans up 15 to 22