Kub's Den

In a few days' time, while Santa Claus is out on his sleigh delivering toys to all the nice children all over the globe, what happens when he crosses the equator? Doesn't he get hot under all that fur-lined red velvet? Maybe he trades his winter cap for a Panama hat. I hope he lets the reindeer make frequent stops at water troughs.

I see the high temperature forecast Dec. 25 in Melbourne, Australia, is 87 degrees Fahrenheit. Cape Town, South Africa, and Buenos Aires, Argentina, are also expected to see temperatures in the 80s during the next week. Back in the Northern Hemisphere, Shanghai could see a daily high of 48 degrees on Christmas day; Vienna, Austria, is expecting 47 degrees, and Chicago, Illinois, likely won't be any warmer than 23 degrees.

Given the way that the sun and our tilted planet work together, weather in the Southern Hemisphere at Christmas is like our experience of late June, when the days are at their longest and corn plants in Illinois are just starting to let their silks bloom. It's therefore justified, at this time of year, for grain market participants to become obsessed with the day-to-day weather forecasts for Brazil and Argentina. Newly planted soy and corn fields down there are at great risk of facing stressful temperatures or insufficient precipitation during this critical phase in the plants' biology.

As it happens, DTN's forecast for southern Brazil and northeastern Argentina suggests that scattered showers will arrive and be "very beneficial" for previously stressed crops in those regions. No doubt, that outlook has helped to drive the lower trend on the soybean futures charts.

But there is more grain produced in the Southern Hemisphere than just the stuff coming out of Brazil and Argentina. Santa shouldn't forget all the little children in African villages, and neither should we. These people's consumption of feed grains, and the grain they produce on their own, all feeds into the global supply-and-demand picture, which is presently rather bearish. Globally, coarse grains are expected to have a stocks-to-use ratio of 17% in the current marketing year. Anyone who wants to see the price of corn move higher should be willing to look anywhere on earth for a supply disruption that could potentially tighten those inventories.

It's a common trap during our own summers for grain traders to get too hung up on the weather that happens in our own "backyard" (North America), and we forget that Ukrainian soybean production has been growing by an average of 16% year after year, or forget that China is the world's No. 2 producer of corn, harvesting almost 8.5 billion bushels this past year. The weather in these growing regions matters, too.

So I wondered if my own analysis of global grain production in December 2017 was suffering from a similar style of tunnel vision, focusing on just two countries -- Brazil and Argentina -- when there was an entire hemisphere of summer weather going on. I wanted to see if feed grain production was, in reality, as geographically concentrated as most grain market analysis seems to be.

This involved a few geography lessons from Google Maps. (Quick, can you answer whether Mauritania is in the Southern or Northern Hemisphere?) But once I had the world's grain-producing nations sorted into hemispheres, I could see that Brazil and Argentina truly are dominant in Southern Hemisphere feed grain production, expected to harvest over 66% of that half of the globe's crop (11% of the total global crop). For comparison, the United States alone produces 34% of the Northern Hemisphere's crop of feed grains (about 29% of the global crop).

Crucially, this was not just a study of corn production, but rather the total sums of barley, corn, millet, oats, rye, sorghum and "mixed grain" from all the many countries who may not even plant or use any yellow field corn at all. Niger, for instance, grew 3.2 million metric tons of millet in 2017 (the world's second-largest producer after India), as well as a healthy amount of sorghum, but no significant quantity of corn. The most recent batch of World Agricultural Supply and Demand Estimates from USDA demonstrated the importance of the interplay between these different feed grain varieties. The 50 million-bushel (mb) increase in the projection for corn used for ethanol in the United States was directly tied to the 50 mb of sorghum (milo) that is now expected to be taken out of our domestic ethanol grind and instead exported to China.

Every little shift matters. As technology adoption improves or as land use changes, it will be important to continue watching not just the big, obvious grain-producing countries for potential supply disruptions but all the regions growing all the feed grains all across the globe. From Newfoundland to Swaziland, from the North Pole to the South Pole, I hope Santa finds his way to cheer the home of every hard-working agricultural producer across the world this Christmas. Merry Christmas!

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(AG/BAS)

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