Thought of the Week
This week we are interested in the weather conditions in Brazil as we approach the harvest of the first corn crop and the planting of the safrinha crop. Over the past 4 weeks a north-south rainfall divide has persisted in Brazil. In the corn regions in Goias and western Minas Gerais rainfall has seen above average for the time of year while in southern corn regions (e.g., Rio Grande do Sul, Parana and Sao Paulo) conditions have been drier than average (Figure 1). The dry conditions were partly influenced by the strong La Nina conditions in December 2021 which continued into January 2022. This has meant that for the first season crops some areas further north have been too wet while some areas in the south have been too dry.
In the beginning of January, the central and southern corn regions have seen much needed rainfall, so we are interested to see if this will continue. We now look at a short-term rainfall forecast and forecast for mid-February to investigate the upcoming rainfall conditions for the corn regions.
The 1-5 day forecast is showing relatively low rainfall rates for most of the Brazilian corn regions. Drier than average conditions are expected to be in place, with the largest deficits occurring in Sao Paulo and Minas Gerais. The 6-10 day forecast shows a different story for the southern regions. Wetter than average conditions are expected over central and southern corn regions. Good rains are forecast over Sao Paulo, Parana, northern Rio Grande do Sul. Drier than average conditions are expected to continue over Minas Gerais, however, greater rainfall is forecasted for this region than for the previous 5-day forecast.
Looking ahead to mid-February our sub-seasonal outlook (Figure 2) suggests drier than average conditions will prevail once again over the southern corn regions. The largest deficits are forecasted for Rio Grande du Sol. Regions further north in Goias and Minas Gerais are forecasted close to or above average rainfall. Interestingly, this north-south rainfall anomaly pattern continues when we look at our seasonal forecast. The forecast for February/March/April highlights a dry signal over southern and central Brazil (e.g., Mato Grosso, Mato Grosso do Sul) which could be an issue for second season corn production.
Short-term Fundamental Market Conditions
Supply of corn can be calculated and displayed in different ways. With our focus on the short-term fundamental market conditions, we usually prefer the magnitude of the variation of supply, not the nominal volume of supply.
The data displayed in Fig. 1 supports the claim that the 2nd stage of the price rally came on the back of demand, not supply-related factors. Hence, we have been convinced since end of Q2 2021 that the price at that time was not sustainable – see the divergence that appeared between bars and price. The market finally caught up with the reality early Q3. More recently (Aug-21 onwards) the situation started changing in the opposite direction with tentative signs of tighter supply – see blue arrow. The price of corn is indeed listening.
We have documented the exceptional demand strength in all our publications since Q3 2020 (see bars on Fig 2) and the market reacted accordingly.
Our proprietary metric for weekly corn “Implied Demand” suggested that the positive demand shock has dissipated after week #24 and the corn price agreed with this conclusion.
The data for Q4-21 pointed towards renewed demand strength which was one of the reasons behind the price trend that we observed on the market since week #41. The 2nd half of January and early February are likely to see weaker demand as the re-stocking ahead of the Chinese NY comes to an end.
Currency values were strongly supportive for the early stage of the on-going rally – see the values of our Currency Impact Index between weeks #4-14 as indicated with Figure 3. Subsequent dip in the FX model during weeks #15-18 was ignored by the market as the spot demand was already flying (see discussion in Demand section).
Time horizon in which FX is expected to leave its mark on the corn price is 4-8 weeks out. The market strength since week #36 was justified by our FX model suggesting firm purchasing power of end-users. Our FX Impact Index reversed in early December which suggested weaker than initially anticipated January demand – see previous discussion.