Nov 22 / Pedro Schicchi

Grains, Oilseeds and Livestock Weekly Report - 2023 11 22

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"Unfavorable weather conditions in Brazil, including scarce rainfall and high temperatures, are affecting the soybean crop, prompting concerns about production.
Chicago soybean prices are unusually responsive to the Brazilian crop situation, with export premiums typically shouldering this role. The reason is a tight soybean balance in the US, coupled with potential lower Brazilian production.
Brazilian farmers, already hesitant to sell, are doubling down on their stance due to increased concerns and the possibility of higher prices. Slow sales are being reported, leading to a strong local cash market and a simultaneous rise in both futures and premiums.
Despite some improvements in short-term weather forecasts, challenges persist, with the El Niño pattern expected to endure until early 2024."

Navigating the (lack of) Storm: Impacts of Brazilian Weather

Chicago soybean prices have gained support due to concerns over the crop in Brazil

Although the troubling weather pattern is not a recent development – we've been discussing it for the past couple of months (refer to the reports on Sep 22 and Oct 24) – it only became a focal point after mid-October. This shift in attention happened when the debate over US production started to settle, prompting the market to turn its focus to the Brazilian crop.

The planting season, which began on a promising note, has slowed down significantly since then due to the observed weather conditions. While precipitation tends to grab the spotlight in discussions about weather and crops, it's crucial to note that temperature also plays a significant role.
This season not only has rainfall been scarce, but temperatures have also been unusually high, exacerbating the issue.
CBOT Soybean March-24 Delivery (USDc/bu)

Source: CME

Brazil Soybean Planting (%)

Source: Safras

In the short term, forecasts are not encouraging, but they are slightly better than before

The divide between dry and wet areas has shifted northward, from the middle of Paraná in last week's reports to the middle of Mato Grosso do Sul in the latest ones. This is good news, especially considering that there are approximately 32 million tons of production between these two states.

However, it's crucial to temper our expectations. The situation in Mato Grosso and Goiás still involves below-normal precipitation and above-average temperatures, although to a lesser extent than in previous model runs. These two states together are expected to produce more than 60 million tons.

The optimistic viewpoint is that there's still time. Just as "beans are made in August" in the US, Brazil's soybean crop is defined between December and January.

So, there's still an opportunity for recovery, even though some damage is likely already permanent. The challenge is that the current weather maps indicate an El Niño pattern expected to persist until early 2024, which doesn't inspire much hope.
Precipitation and Temperature Anomaly – Last 30 days (mm/d and °C from normal)

Source: CME, NYMEX

Precipitation and Temperature Anomaly – Next 14 days (mm/d and °C from normal)

Source: EPA

Interestingly, Chicago is responding more strongly to concerns in Brazil than it typically would...

... – usually, export premiums handle this role. However, with a tight soybean balance in the US, the prospect of lower production in Brazil suggests increased foreign demand for the American market, competing with the strong domestic market.

As a result, futures at CBOT have been more sensitive to the weather maps for Brazil, even showing some weakness as better forecasts emerged last week. Nevertheless, for now, the cash market in Brazil doesn't seem convinced that the amount and consistency of these rains are enough to bring significant change.

Reports suggest that farmers in Brazil were already hesitant to sell, and with heightened concerns and the possibility of higher prices, they are likely to stand firm on this stance. With slow sales, we anticipate a strong local cash market. This has led to an unusual scenario where futures and premiums are rising simultaneously.

Even though support for premiums is generally expected, it's even more likely when CBOT quickly responds to improved weather forecasts, while the local market remains skeptical, as observed in the previous week.

One final aspect to monitor regarding the premium is that, despite relatively high production cuts, there's still a big chance that output in Brazil will still be substantial.

With low farmer selling and storage capacity deficits, premiums will likely be under pressure at harvest time – perhaps not as much as last year, but still notable.

What to make of all this?

In summary, considering these factors, we estimate Brazilian production at 160 million tons, a slight decrease from the previous estimate of 162 million tons. While there's potential for further cuts if poor weather conditions persist, there's still much uncertainty, and it's challenging to make definitive claims before the crop's reproductive stages in December and January.

Despite improved rainfall forecasts, the local cash market does not appear to be buying it. CBOT prices are more volatile and respond faster to new model runs, premiums, however, may continue to find support on low sales.
Soybean Prices for Mar-24 – CBOT and Brazil export Premiums (USDc/bu)

Source: CME, NYMEX

Brazil Soybean – Area, Yield and Production (M ha, ton/ha, M ton)

Source: EPA

Weekly Report — Grains and Oilseeds

Written by Pedro Schicchi
Reviewed by Alef Dias


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