Saturday, March 5, 2016

Politics, Soybeans,Drought,FX and Frank Underwood $$$$$$$$$ Game Changer

Brazil farmers and commodity funds were caught off guard this week.

We had been trading about 4:1 Dollar/Real the previous two weeks.

With the Brazilian farmer about 60% sold on his soybean crop combined
with some regions losing production on a daily basis, he is holding
on to remaining production using it as a currency hedge.
The idea among locals is that we should be trading 4.25:1 by now given
the political and economic instability.

Out of the blue, the Federal Police have illegal campaign contribution proof
on Dilma and they took Lula in for questioning on kickback schemes from his
administration and operation Car Wash involving Petrobras. What did he know
and when did he know it? Reminds me of Iran/Contra and Reagan Admin.

It was like being in an episode of "House of Cards" Friday. I was flipping back
and forth between NetFlix and Twitter updates on the state of the Brazil politic.
I kept asking myself, if Lula was Frank Underwood, what would he do next?

The stock market and FX market exploded higher thinking that the Feds finally
have the Goods on the PT.

I stopped by my local butcher this morning. He hung his head low. I am sad he said.
I am embarrassed. I voted for Lula two times. My god how they have been stealing
from us all this time. I did not want to believe it, but now I have too.

Lula exited his term as president with 90% approval ratings. He will die
being known as a common criminal now. Reminds me of the Madoff scandel.
It was all an illusion.

The FX rallied to 3.65:1 before selling off back to 3.75. No one was expecting
this !!! Domestic soybean prices are selling off at a rate of 2-3% per day.
This is the worst nightmare for the Brazilian farmer. A static/weak CME and a stronger
REAL- they cannot control their risk and protect cashflow gross revenues.

It was fun on the way up, CME at 9 bucks and weaker REAL. They did not need to do
anything. Now we have had a 9% drop in FX and CME rallies maybe 2%.

Part II

Many videos have come out of Bahia, Maranhao, Piaui, and Tocantins. The situation is not good.
We have seen this movie many times. We have a state that produces X and commentators
come out and talk of 10-20-30% losses. Many times we hear of losses of 1-2 million tons.
In the end, the loss of production ends up being about 500,000 tons.

Is it the same thing this time?

The timing is bad to be optimistic on production. Late planted soy in December and January
are at high risk. The soils tend to be sandier in the NE and have less staying power to hang in there.

We have a Conab report on Thursday March 10th.

Conab, as with USDA, is always compiling data from 30 days ago. So Conab would be putting
together data as of mid-February. Until then, yields in Mato Grosso were coming in better
than expected. So we could see an adjustment higher in the interim in some states.

From mid-February until March 5th, we have seen a rapid deterioration in the soy crop in
the MaPiToBa region. This extends across northern Goias and into the Eastern 1/3 of
Mato Grosso.

Recently, we have seen various cropcasters increase their soy crop size potential for Brazil.
The ranges have narrowed to 98.5 mmt to 101.5 mmt.

What do I expect the next 30 days. I think we have seen the high water mark for Brazil
soy crop size. The question will be if Conab makes further adjusments lower in March
or do they stand pat and then adjust lower in April.

The point being, that if Conab would increase slightly in March, they will likely decrease
in April and May. The markets will anticipate this.

The last 33% of the Mato Grosso crop will have very low yields. This will affect the final tally.
MaPiToBa could be 500,000 tons to 2 million tons overstated as of today.

The Parana crop will likely be same size as last year. This means a 500,000 to 1 million
ton cut there.

Mato Grosso do Sul has suffered some losses due to too much rain at harvest. It has been called
a 7.5 million ton crop, but will likely edge lower to 7 million ton in time. This is a tough call
because some producers harvested their best crop ever in the state.

Rio Grande do Sul has a very nice crop on deck. Their production could actually be understated.

In closing, with Friday´s market action in CME and FX, we will likely continue with the soy rally.
Brazil farmers will not sell the balance of their production.
We will likely see some weather premium come into USA market if the hot and dryish pattern
continues.
A rally to 9.20 seems likely now. Could we see 9.50-10 bucks by June?
yes, I think we can.

I think the talk of 8 dollar soy has been negated now by the change in FX and the shrinking
Brazil crop size. The last 10 days have taken its toll in some regions.

Thus, with a weekly reversal, and technical breakout(maybe next week), the fundamentals ranging
from lower yields from later soy, FX, CME rebalance, domestic premiums, and spring weather
for USA, should allow us to stay above the 8.50 lows just put in and the trend should be
higher and not lower in the coming weeks.

I think we are putting in some very long term lows here. I am mildly bullish as we get through
this harvest process. From May forward, higher prices should be the theme.

Thank you for the new subscribers in recent weeks.

I will be at the Lucas do Rio Verde Ag show the end of March.
I will attend the ground breaking for the new Corn ethanol mill there.

April newsletter should go out on March 31 or April 1.

Clients that signed up for the 3 month VIP trial period back in December have now
renewed for 1 year.

If you have interest, drop me a note, maybe we can work something out that fits your
needs.

Kory





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