Crop is in a spot of bother

This has seen China turn to the United States for its soybean shopping and pushed Chicago soybean futures up for the fourth consecutive week.

South America's upcoming harvest is vital to replenishing tight global soybean supplies.

But a second consecutive year of below-average rainfall across the southern half of the continent means yields in key production regions are headed for substantial falls relative to long-term averages.

During a La Nina event, climatic conditions in South America favour higher than average rainfall across northern Brazil and below-average rainfall for southern Brazil, Paraguay and Argentina.

And that is the exact scenario playing out so far this year.

The drought that slashed last year's safrinha corn production in southern Brazil has extended into 2022, and the drought-affected area in Argentina has expanded dramatically in the past few months.

In Paraguay, lack of rain in December and January has decimated this season's soybean output by as much as 50 per cent.

Soybean production estimates were cut in last Wednesday's update to the World Agricultural Supply and Demand Estimates (WASDE).

But, if forecasts by some South American-based analysts are to be believed - as they are closer to the action - then the US Department of Agriculture (USDA) has some way to go.

The agency lowered its production estimate for Brazil, the world's biggest producer and exporter, by another five million tonnes to 134 million tonnes in last week's update - putting production 2.9pc lower than last year.

That is a cumulative drop of 10 million tonnes in the past two months after slashing the same quantity off its forecast in January.

The very next day, Brazil's national agricultural agency Conab informed the market that it expected Brazil to harvest the smallest soybean crop in three years - slashing its production forecast by 15 million tonnes.

It now forecasts the country's farmers will reap 125.5 million tonnes after optimistically predicting a record 140.5 million tonnes crop in January.

But, like the USDA, Conab has a reputation for being conservative.

So, a cut of this magnitude does not augur well for final production.

Late in January, AgRural was one of the first forecasters to go sub-130 million tonnes - trimming its crop outlook to 128.5 million tonnes.

This was down from a previous forecast of 133.4 million tonnes and much lower than its original projection of a record 144.7 million tonnes.

The trend is very similar to that of AgResource, which originally expected 141 million tonnes before cuts to 131 million tonnes in early January, and then to 125 million tonnes in late January.

Local agricultural consultancy Safras & Mercado cut its 2021-22 soybean production estimate on Friday to round-out a trifecta of crop downgrades for the week.

Citing the extremely dry weather in southern Brazil, it is now calling the crop at 127.1 million tonnes - which is 5 million tonnes lower than its previous forecast.

While higher production in the northern states is partially offsetting losses in the south, the extent of the problem became evident when harvest commenced in Parana and Mato Grosso do Sul, according to the forecaster.

In Paraguay, the situation is dire.

Paraguay is the world's fourth-biggest exporter of soybeans. But the flow into the international market will be pretty slow in the 2021-22 marketing year, with drought destroying crops and drastically reducing production.

The USDA cut its crop forecast from 8.5 million tonnes to 6.3 million tonnes in last week's WASDE update.

However, there are reports of corporate farms that expect to harvest less than half of their initial projections.

Yields in some areas are as low as one tonne per hectare against a long-term average of 2.8t/ha.

This led to the country's minister for agriculture and livestock suggesting the crop could be as low as 5 million tonnes this season, compared to almost 10 million tonnes last year.

In its February update, the USDA also clipped Argentina's soybean crop - taking 1.5 million tonnes out of global supply to land at 45 million tonnes.

The Rosario Grains Exchange was far more ruthless in its production cut, comparing the crop outlook to that of the 2018 disaster when production was only 38 million tonnes.

While not down to that level just yet, if the dry weather forecast for the rest of this month comes to fruition, further cuts to its 40.5 million tonne estimate are possible.

The Buenos Aires Grain Exchange sits in the middle after lowering its forecast by 2 million tonnes to 42 million tonnes 10 days ago.

Meanwhile, China has been busy booking new crop soybeans out of the United States, with January sales as high as 1.9 million tonnes.

While this is down from a record 3 million tonnes last year, it is well above average for the period.

China has been chipping away in the old crop market as well, snapping up cargoes here and there.

But that is expected to change, with the South American woes almost guaranteeing China will have to turn to the US to satisfy some old crop demand.

The diminishing soybean outlook in South America has ignited Chicago soybean futures.

The March 2022 contract traded higher on Friday to close the week at US$15.83 per bushel ($815/t).

That was the culmination of a four-week run that has seen the price rise by 15.6pc from a close of US$13.693/4/bu ($705/t) on January 14.

The market has closed higher on 15 occasions in that period.

But there have only been four down sessions.

The high soybean prices will certainly ration global demand.

The USDA took 3 million tonnes out of China's 2021-22 soybean imports in last week's WASDE update.

But that is dwarfed by the 18.2 million tonnes it has wiped off South American production in the January and February reports.

The yield issues in South America will push the global carryout significantly lower year-on-year.

How low will depend on the consumer reaction to the rallying market.