Analysis: the scissors with two cutting edges that threaten corn

Two months ago, Corn growers were very hopeful of a good economic performance in the 2020/21 cycle. When sowing they bet on high yields and the market showed an encouraging evolution.

Today they are threatened by a “scissors” with two very sharp edges. The first is climate: the dry season is unforgiving and in many fields in the core zone the maize will be cut off due to insufficient development, poor pollination, unevenness and overturning. Thus, many crops implanted with hybrids with high yield potential and high doses of fertilization will be chopped in the coming days to feed farms that no longer manage to meet their nutritional requirements with the natural field and cultivated pastures. Of course, in this hostile context, many second-rate crops that were programmed in the rotation will not be implanted.

The other cutting edge of the scissors is the closure of corn exports, which causes volatility and uncertainty about the evolution of the price of the cereal in the coming weeks.

In this context, it is not easy to make decisions for producers. They have the expectation that the market could follow a downward path, which should prompt them to make future sales, but they do not issue new orders because they do not know how much they will actually harvest. The memory of the wheat harvest is still fresh, in which many registered losses of up to 50% of the estimated yield at planting.

Many doubts ahead

In a free market scenario, prices fluctuate according to what happens with the free interplay of supply and demand. In an intervened market the behavior is different. Thus, in a scenario of low supply due to being a climatic complicated year, prices may remain depressed due to demand restrictions. In this potential context, low yields would not be offset by high prices. Moral: gross margins will depress and interest in planting the cereal will plummet in the 2021/22 cycle.

It should also be noted that it is difficult to dismantle this type of intervention in the markets. Once activated, after time, when you want to deactivate them, you have to see how the international market is. If fundamentals are positive for prices – as you see it – the market will be one notch higher than today, limiting the possibility of returning to a normal market from March onwards. If Argentina withdraws international trade during January and February 2021, it is very likely that FOB prices will rise in Brazil and the United States. In this situation, it is difficult for the current government to assume the political cost of reopening the corn market with high prices, which can negatively influence inflation in an election year.

The authors are market analysts at AZ-Group

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