What's Got The Market Excited This Morning?

22/01/13 -- Dryness in South America, that's what. Specifically southern Brazil and much of Argentina. There's very little rain in the forecast for the next fortnight too as the map courtesy of World Ag Weather shows (click to enlarge - don't be shy).

Cordoba, Buenos Aires and Santa Fe typically produce around 80% of Argentina's soybeans and corn. Entre Rios is the fourth top producing state for both, according to the USDA.

There's precious little precipitation in the forecast for any of these over the next couple of weeks as you can see. Ditto across the border in neighbouring Brazil where the dry spell ahead stretches into southern states of Rio Grande do Sul and Parana.

Parana is Brazil's second largest soybean state and ranks top amongst the countries first crop corn producers. RGdS meanwhile is Brazil's third biggest soybean and first crop corn state.

Here, soybeans are entering the flowering stage and need decent rain over the next couple of weeks to maximise production. They didn't get it last year and output dropped by half on many farms, whilst growers further north where soybeans mature earlier enjoyed strong yields.

Whilst all this is going on, US soybean exports are pouring out at an unprecedented rate and look likely to overshoot the USDA's current forecast for the 2012/13 season (with 89% of that target on the books already). In addition the US crush is 10% up on last year versus the USDA's prediction of a 5.75% drop.

So it looks like the USDA are under-estimating both exports and domestic demand, and even with those numbers they still only peg 2012/13 ending stocks at 2 1/2 weeks worth of demand. Yikes! It's no wonder that the market is so sensitive any kind of potential South American production problem.

And that's before we start thinking about the inevitable supply disruptions from South America due to logistics. Meanwhile China are said to have sold almost 4 MMT of their state-owned soybean reserve stocks in 2012 in an attempt to contain rising prices. They're gonna need replacing at some point too. Let's hope that they give Brazil/Argentina PLENTY of notice.

I went to a soybean conference once, and they gave us all a pen with about 3 or 4 soybeans inside a clear housing in the upper part of the body. I must have a look around and see if I can find it, it could be worth a few bob for delivery at short notice to China a few months from now....