synopsis:
It was late January, and the arid regions of South America generally ushered in precipitation, and the U.S. bean plate also ushered in a decline. Although the logic of retelling the inflection point of the US beans in mid-January is slightly old today, the ups and downs of this round of South American speculation are still a good target for re-trading, and the strength of subsequent production cuts is still divergent.
This article will talk about our views on the actual production situation and price market in South America from the following three points:
1. Review the previous South American hype - mid-January may be the inflection point
3. How to determine the level of yield reduction - the stage of crop growth is the determining factor
Revisiting previous South American hypes – mid-January could be an inflection point
Although the market and the system determine that U.S. soybeans are the basis for the pricing of global soybeans, as South American soybeans occupy an increasingly important position in the world market, the market's response to every unexpected event in South America has become more and more intense. Therefore, when the Twin Peaks La Niña weather occurs this year, an important reference for its impact on the market is the time dimension and intensity of the market reaction when the same event occurs in history.
Source: Wind, CITIC Construction Investment Futures
From the perspective of Twin Peaks La Niña, in the past 40 years, Twin Peaks La Niña has appeared 5 times, of which 3 times there have been yield increases in the following year and 2 times there have been declines. This means that whether it is a twin-peaked La Niña event or a single La Niña event, the impact on Brazilian soybean production is not fixed, and the hype with the concept of bimodal La Niña is difficult to justify. In fact, it is more likely that the strength and duration of La Niña, which can really affect soybean yield data, is the timing and intensity of the disk hype when the real drought causes production cuts.
Source: USDA, NOAA, CITIC Construction Investment Futures
Looking back at the sharp reduction in south American production caused by La Niña over the past 40 years, there have been 6 significant reductions in Brazilian/Argentine production, that is, La Niña has caused great disturbances to South American production. This year's La Niña also caused a very severe drought, with southern Brazil, Argentina and Uruguay experiencing drought and low rain and high temperatures throughout December, and the drought in some areas continued into mid-January. Therefore, although the market is divided on the damage to production, the perception of production loss caused by La Niña this year is consistent, and the need for market reaction compared to the production cuts caused by La Niña in previous years has been highlighted.
Comparing the market reaction in different years, we can see that in addition to the year without data, every time The Production Cut Caused by La Niña in South America in the future, the hype start period is basically from the beginning of October to the beginning of December, and the hype peak time is at the latest in mid-January. From the perspective of the impact of the hype, the lowest position since the beginning of the hype, by the time the hype peaked, the price increase during the period averaged about 210 cents.
Based on this in the early stage, combined with the wet and dry turning time of the Weather in South America, we came to the conclusion that mid-January is the inflection point of the market. Looking back now, the 1422 cents of U.S. beans on January 7 may have built a top for this round of speculation, and as the weather improves, the possibility of a breakthrough again is greatly reduced, which also makes this round of speculation fail to escape the objective law of the time of the South American hype to build the top.
The law of agricultural products unchanging – the highest point often occurs at the worst moment of expectation
Trading expectations are an important feature of the market, and there is a strong mass base for injecting weather premiums into the plate at the planting stage, and the resonance of area & yield is expected to naturally construct a bullish atmosphere, and this atmosphere has untrueable properties.
We conclude two peaks of oil and fat supply trading: agricultural products are naturally shrouded in a spider's web model, so supply-worried expectations of trading will peak, or a moment when bulls should take profits. The first emotional peak occurs when the certainty of planting area shrinks and the weather shows bad signs, which usually occurs around the end of planting. The second emotional peak occurs when the definitive yield declines, usually half a month before the critical growth period, the drum stage.
If the current hype peak is established at 1422 cents on January 7, it corresponds to what we consider to be the first emotional peak, that is, the moment when the weather is bad around the end of the planting period. At that time, 98.8% of the seeds were sown in Brazil and 86.9% in Argentina. And on January 3, after the Minister of Agriculture of parana State shouted out an aggressive forecast that a dry December would bring about a production reduction of 8 million tons, business institutions followed in the next few days, and the agency expected to reduce Brazilian production from a relatively consistent 144 million tons in December to 131-134 million tons, and the reduction expectation of 11-13 million tons was to stimulate the market to refill soybean bulls and complete the peak of soybean prices.
This also means that this round of hype has not escaped the shackles of emotional law, and the planting period corresponding to the emotional peak has also become the internal driving force of the time law of the peak of soybean prices objectively.
How the level of yield reduction is determined – the stage of crop growth is the determining factor
Putting aside the regular summary, observe the actual situation at present. At present, there is still a huge divergence between institutions on South American production, with the USDA and the Rosario Grain Exchange having a difference of 6.5 million tons in Argentine production, while for Brazilian production, the more official agency has given a forecast of 139-140 million tons and the general expectation of 131-134 million tons for commercial institutions is 8 million tons.
A key question is how to judge what the real yield loss of crops is. Standing at a time when the early soybean harvest is just beginning, it is obviously difficult to obtain yield data directly, and we believe that a reliable way to determine the extent of the impact on crop growth during droughts. Since soybean planting in different regions is different from the time of drought, the actual yield reduction caused by drought needs to be discussed separately.
The production losses in Parana, where the most intense production cuts are speculated, are real, but the volume and extent are difficult to reach the level of 8 million tons.