- HEADLINES: US inflation retreats in November; Arctic cold for the central US/dryness for Argentina; March soybeans near $15.00.
- Chicago futures are higher at midday with US financial markets rallying strongly following a less threatening November inflation reading, while Argentine dryness causes the addition of weather premium. Weekend Argentine showers were welcomed, but the forecast is arid for the next 10 days. With the end of the spring planting season approaching in mid-January, the market is getting concerned about how many acres Argentine farmers will seed. We argue that there remains time, but that Argentine weather forecasts must be monitored closely. If farmers are to extend their planting season, they will plant more corn. It is corn acres that benefit should the Argentine dryness persist.
- Chicago brokers estimate that fund managers have bought 4,500 contracts of wheat, 6,300 contracts of corn, and 5,100 contracts of soybeans. In the products, funds have bought 3,600 contracts of soymeal and 3,200 contracts of soyoil.
- The November inflation reading was up 7.1% year on year, but up just 0.3% in November due to rising food costs. The core inflation rate rose just 0.2%, which on an annualised basis would equate to 2.4%. We doubt that this is the new natural rate of inflation with energy/food and housing costs to stay volatile at historically high levels. And wage pressures are likely to accelerate in 2023 on tightening labour markets. The 2023 recession will be different from any that has been experienced with the unemployment rate to stay low while the US’s GDP rate slows to 1% or less. Stagflation is one reason why we expect that the US Central Bank will hold rates higher for longer. The rising and lofty rates are a drag on future GDP growth rates.
- EU wheat exports in 2022/23 are up 6% at 15.38 million mt. Demand for EU wheat is up due to its stable political position in relation to the Ukraine war. Algeria has taken 2.05 million mt of EU wheat, which is up 17.1%, followed by Egypt at 1.59 million mt which is up 9%, and Nigeria at 1.15 million mt, up 7%. EU wheat exports have slowed recently due to the aggressive offers of the Black Sea. US wheat export demand is at a standstill will fob offers well above other key exporters.
- Questions abound as to whether the Argentine drought is more bullish to which soy product. Our view is that Argentine crop losses have a more bullish impact on soyoil due to the US being out of the export area. The US cannot afford to allow its soyoil be exported due to the coming renewable diesel demand. WASDE is waiting for new plants to come online before accounting them in their biofuel demand category. The US must continue to export soymeal.
- The midday GFS weather forecast is like the overnight run with dry weather forecast for the entirety of Argentina and RGDS in Southern Brazil. Extreme heat will return in the next few days with highs returning to the upper 90’s to lower 100’s across Argentina/RGDS. The heat/dryness will cause farmers to be slow to seed any additional crop. Outside of RGDS, Brazilian weather looks to be favourable with crop yield potential likely to rise. Near to above normal rainfall and seasonal 80’s to lower 90’s will be ideal for Brazilian soy/corn crops. A pattern change is needed in Argentina and Southern Brazil for the return of regular rains. Subsoil moisture levels are depleted following 5 months of acute drought.
- Additional Argentine weather fear must be placed in the market for end users to chase rallies. For now, the market is adding Argentine weather premium at measured pace, but we note that the price premium in corn/soybean futures is already sizeable for mid-December. We would look for March corn to rally to $6.60-6.80, while March soybeans seem to struggle to hold rallies above $15.00. Soyoil should gain on meal as US domestic demand for renewable diesel prevents export.