ANALYSIS: US drought fears clash with Brazil's huge crop, basis fall all along the curve

Brazil’s Paranaguá soybean basis fell deeper into negative territory all along the forward curve last week amid further signs that the world's two biggest bean producers were pulling in opposite directions.

Key to the diverging dynamics was the landing of Brazil's largest ever bean crop at a time when US investors in the Chicago futures market were fretting over dry conditions across the Midwest.   

Investors have bought into the US complex, sending prices higher at the same time as Brazil's burgeoning supply sent bids for deferred positions into three digit discounts to Chicago. 

In the middle of last week, FOB Paranaguá August loading was traded at 65 c/bu under the August CME future, while bids for September loading reached 15 c/bu discount to the September CME future and Agricensus assessed the month at parity to the Chicago contract.

However, August's outright price was virtually flat during the week at $498.25/mt the highest price since May 15, with the surge in the CME soybean futures mostly compensating the basis downward trend.

Into 2024, and bids for March were heard at a 105 cent discount to the March 2024 contract.

Drought concerns over the US supported the movement as the US Department of Agriculture stated that 57% of the soybean production is within an area experiencing drought, a 6% increase from last week.

At the same time, the US soybean crop rated in good-to-excellent condition decreased to 54% from the prior’s week 59%.

These higher CME futures and sustained flat prices stimulated trades in Brazil’s domestic market as farmers were still digesting recent months’ sharp drop in prices.

“This Chicago’s (CME futures) highs come in a good time, at least to limit a little the effects of lower premiums and US dollar against Real”, said Daniele Siqueira, analyst from Brazilian consultancy AgRural.

The movement was not limited to 2023, as many traders also reported large volumes sold domestically throughout the week for 2024, despite buying levels being in three digits discounts for the year.

“Even with these low basis levels for 2024, great volumes were traded FAS Paranaguá”, Aldo Lobo, Granopar’s analyst told Agricensus.

Higher CME’s futures compensated for the lower basis, while the spread from July to November and July 2023 to July 2024 got tighter and also facilitated new crop trades, a trader said.

On Thursday last week, FOB Paranaguá positions were heard changing hands for February 2024 loading at minus 80 c/bu and March loading at minus 90 c/bu, both discounts to CME’s March soybean future.

At the same time, March loading bids reached as low as 105 c/bu discount to March CME future, greatly lower than the same point last year when March 2023 loading was assessed at a 53 c/bu premium over the March 2023 future.

When asked why farmers would not wait for further, higher prices before selling more soybeans from their stocks, as US drought concerns increased, Siqueira said: "Indeed, Chicago's (CME futures) have an increasing potential to higher prices in case the US drought gets worse, but Brazil still has soo much soybean to sell that the export basis would not allow prices to surge that much."

"With these doubts, they are opting to sell," Siqueira said. 

“There is an exchange relation between soybean prices and the inputs needed for the next crop planting, which is considerably greater when compared to the same time last year,” Lobo told Agricensus.

“As farmers are also still scared by the market’s turn-around - the sharp drop in soybean prices last months - there are great volumes being sold for 2024, something that did not happen last year”, he added.

“Even with minus 80 c/bu being traded for February loading FOB Paranaguá, theoretically, there is still space for importers to 'test' new lows on prices until the break point. Which no one knows where it is,” Lobo said.