Perspective: Mid-Day Commentary for December 13

By: Arlan Suderman, Chief Commodities Economist

Fri, 13 Dec 2024, 17:29

Perspective: Mid-Day Commentary

Arlan Suderman

Chief Commodities Economist

December 13 - The Dow Jones Industrial Average is poised to have its seventh consecutive losing day, while the Nasdaq posted a fresh record high before giving way to profit taking today. Regardless, stocks are generally weaker as we close out the week amid rising Treasury yields ahead of next week's meeting of the Federal Open Market Committee to revise its monetary policy, with Fed fund futures trading odds of just two rate cuts between now and June, versus three yesterday. The VIX is trading back above 14 at midday, while the dollar index is trading near 107.0 after hitting fresh 17-day highs. Yields on 10-year Treasuries are surging to fresh three-week highs, trading near 4.39% at midday, while yields on 2-year Treasuries are trading near 4.24%. Crude oil prices are more than 1% higher, while the grain and oilseed markets are mostly lower again following some chart failures earlier this week.

Brazil will produce 169 million metric tons of soybeans this year according to USDA, up from 153 mmt the previous year. Some private estimates are as high as 173 mmt, based on current weather conditions as the crop heads into the final phases of the growing season. That would be a 20 mmt increase in production year-on-year, or 735 million bushel increase in one year, representing the bulk of what we're expected to export to China this year. The graphic below shows how Brazilian production has been rapidly ramping up in recent years, especially since 2011. Correspondingly, Brazil's real has been steadily weakening versus the dollar since 2011. I could lay a chart showing how many reais equal a dollar on top of the below chart, and it would look very similar. A dollar could buy 1.53 reais in July 2011. Today that same dollar could buy nearly four times as many reais - 6.06 to the dollar. Brazil farmers sell their soybeans based on the Chicago market in dollars, and then convert those dollars to reais. Soybeans sold for $13.50 per bushel in 2011 would translate 20.6 reais. Soybeans worth $10 today translate into 60.6 reais, which is roughly three times what they were worth in 2011, even though futures prices are more than 25% lower than in July 2011. The difference isn't all profit, since the weak currency makes imported fertilizer and other supplies more expensive. But the weak real versus the dollar clearly helped develop Brazil's massive soybean and corn productivity.

China is a value buyer. Brazil's cheap currency means that its soybeans will be cheaper than U.S. soybeans shipped to China, if Brazil has soybeans available. It takes roughly 7.25 Chinese yuan to buy $1 worth of soybeans. However, one yuan equals about 0.83 real. So, it takes a lot more yuan's to buy a dollar's worth of soybeans from the United States than it does to purchase the same quantity of soybeans from the Brazil. We can talk geopolitical tensions with China all we want, and they are real, but the biggest factor over the past decade plus has been currency exchange rates that have increasingly spurred increased corn and soybean production in Brazil to facilitate increased exports to China at the expense of the U.S. export program.

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