Dec 26 / Pedro Schicchi

Grains, Oilseeds and Livestock Weekly Report - 2023 12 26

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Recent estimates indicate a reduction in the expectation of soybean production in Brazil, due to unfavorable weather conditions.

The increase in the biodiesel mandate in Brazil can drive domestic demand for soybeans. However, the return of Argentina can reduce soy oil exports, offsetting part of this effect.

Projections suggest a moderate increase in total oil demand, resulting in a growth of 1-2M tons in soybean crushing.

The Chicago market, which was sensitive to Brazilian weather conditions, has been ignoring a bit the recent developments. US exports and Argentine production in 2024 are the main factors behind this behavior.

Soybean Complex: Brazil, Argentina and Chicago


Until a few weeks ago, the average private estimates for soybean production in Brazil hovered around 160 million tons. In recent days, we have seen increasingly lower figures being published, and this average is likely around ~156 million tons today. Our official number, revised in the first half of the month, is 160 million, but there is a prospect of a decrease in the next revision given the observed weather conditions.

Although much lower than the initial crop estimates, these numbers are still close to the harvested quantity in 22/23 – ranging around 155-160 million depending on the source. Of course, most Brazilian states will continue going through critical development stages until the end of January. Thus, if poor weather conditions persist, there may be further losses.
Fig. 1: Soybean Brazil – Area, Yield and Production (M ha, ton/ha, M ton)

Source: Refinitiv

On the domestic demand side...

...each percentage point increase in biodiesel blending represents an additional consumption of ~410K tons of soybean oil, given current diesel consumption levels in Brazil and the historical proportion of soy oil use.

Assuming diesel demand growth, in addition to the announced increase from B12 to B14, as per recent news, there would be an addition of approximately 1.1M ton of soy oil to Brazilian demand. This would translate to approximately 5.5M ton more of soybean crush needed, all else equal (domestic consumption and oil exports).

However, a crucial factor to consider will be the intensity of the reduction in oil exports. With good production in Argentina, the largest exporter of the commodity, we may see a significant reduction in this line of the balance.

Currently, we estimate this cut between 0.8-1.0M ton YoY, but it could be even higher. Taking both factors into account, we would be looking at a more moderate increase in total oil demand, something between 0.2 to 0.4M ton more than in 2023. When translated to soybeans, this gives us a growth of 1-2M ton in crushing.

On the other hand, domestic demand for soybean meal has been growing at lower rates than for oil, and therefore, there is an increasing surplus of It in Brazil. In 2023, the country was able to export significant volumes due to the lack of Argentine meal.
However, in 2024, Brazil will likely need to continue increasing crushing to meet the soy oil demand, but the "excess" of meal produced may not find such warm demand due to increased competition with Argentina.
Fig. 2: Soybean Oil Brazil – Supply and Demand (M ton)

Source: CME, NYMEX

Fig. 3: Soybean Oil Argentina – Supply and Demand (M ton)

Source: EPA

But what about Chicago?

As mentioned in previous reports, Chicago had been more sensitive to the Brazilian weather market than usual due to the tight soy balance in the US. Thus, lower production in Brazil would mean lower exports in the country and therefore, higher demand for the US.

Also mentioned in last week's report, futures at CBOT gave back some of the gains observed between October and November. This would make them more prone to an upward movement. However, over the week, there were lower production estimates, and Chicago was still down. Why?

There are two factors to consider, and they have opposite effects on prices.

The first – and more direct – is that the lower Brazilian production only affects the American balance if exports increase in the US, which has not happened on a larger scale yet, but may begin to happen soon.

The second is that Argentina may add spice to this mix. With a much better production volume in 23/24, the country can export more soybeans, contrary to its usual profile of selling by-products. This factor is only strengthened by recent news of the equalization of the soybean complex export tax, which increases the competitive advantage of the exporter versus the industry.

In summary, there are still elements for the reduction in the Brazilian crop to have bullish effects on Chicago prices, but attention should be paid to Argentina, which will play a crucial role in 2024.
Fig. 4: Soybean US – Export Sales (M ton)

Source: CME, NYMEX

Fig. 5: Soybean CBOT – Futures for January and March 2024 (USDc/bu)

Source: EPA

In summary

We believe in good production out of South America in 23/24 and, therefore, in lower prices in general. Still, a combination of market factors could add some support to both corn and soybean prices in the short term.

Weekly Report — Grains and Oilseeds

Written by Pedro Schicchi
Reviewed by Alef Dias


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