Tuesday, April 12, 2016

Sunday´s vote- more than just politics- could be soybean paradigm shift- long term

I am sure many reading this and watching the international media coverage of
Brazil´s impeachment vote must think everyone in Brazil is nuts. I sure would
if I was on the outside looking in. I am sure those same readers think that
Sunday´s vote has nothing to do with me. For those who think Trump will
"Make America Great Again", need not read any further. Go elsewhere.
Kim Kardashian has some new nude photos posted. They are much more interesting.

I will start by saying that it is impossible to predict anything in the near future
for Brazil governance. More than likely the next 6 months will look like making pizza
than anything else. Sunday´s vote is just the beginning, it is not the end of anything
or anyone.

Sunday´s vote by the House of Representatives is basically putting Dilma in the
penalty box for up to 6 months. Dilma/PT could survive this yet. It could happen Sunday,
it could happen in the Senate, it could happen via Supreme Court, it could happen
in 6 months once a final vote is made.

The final vote count is set for Sunday evening. It is HOT and DRY in Brasilia.
Hundreds of thousands of people are set to be camped out there pro and against
impeachment by Sunday. People will be thirsty, hot, some drunken, and tempers could
flare at any sign of unfairness. Even if Police and Military control things on site,
there is nothing stopping people from turning to the streets and vandalizing the city or
government buildings. Where does the losing side expel their energy Sunday?
Where and what form does the orgasm come in? Passions are running high on both
sides. As the Rolling Stones would say "I can´t get no satisfaction"

If I were looking at Brazil from the outside, I would wonder how the hell can this
country produce 100 mmt of soy, 85 mmt of corn and 630 mmt of sugarcane? One must
understand that Brazil Ag is an Oasis in a vast wasteland of Brazil politics.
It is the only sector holding the country together- by a thread.
The Brazil ag potential is staggering if it were allowed to run free, be taxed less,
and have decent infrastructure.

This is where my blog is going tonight. I am looking at three possible outcomes
of the current political and economic mess. One of the three is status quo.
Not much of anything changes. Two more years of fog and we limp along.
Depending on the Person(s) and government that replace this one, we could look
back in two years and wish that was the case. We will look back at old days and say
that was not so bad.

Staus quo case

Dilma holds on to power by a thin margin vote- be it Sunday or 6 months from now-
markets and FX react violently. The Dollar/Real moves from 3.50:1 to 4.30:1 in
a few days. Talk of 5:1 in near future. Business gives up and throws in the towel.
More stimulus and help for poor. Brazil prints more money and burns foreign reserves.
Foreign investment disappears. Inflation is rampant. Brazil soy farmer encouraged
to plant everything to soybeans. Soybean prices collapse in time affecting USA
farmer in long run. Two more years go by with not much change.

Extreme case #1

Dilma is impeached and Supreme court decides that new elections will be held in
60 days. Keep in mind this could be 6 months from now after a trial and final vote.
In other words, late 2016 elections.
New candidates position themselves in coming months. Some old candidates rise to the
top mainly because of name recognition, public trust, and calm the PT party down.
A possible candidate is Marina Silva. She is known as the environmentalist.
If she would come to power as a default candidate, this would wreak havoc on
Brazil agriculture to epic proporations. All land expansion would stop.
Strick enforcement of current Forest Code and burdensome fines for producers
not in compliance. Belo Monte Dam project shut down immediately. This limits
Brazil´s long term energy growth. Energy prices continue to increase. Inhibits
maufacturing and GDP. Brazil ag area would likely start to contract. Production would
start to decrease. Production would switch to Argentina with pro-growth government.
China would react in fear because Brazil is the only country that can surge to
meet their protein demands in the coming 10-20 years. Brazil would become the
ODD MAN out in the world. Tree huggers would love us and everyone else would
come to see the alligators and panthers. Brazil Ag would start to die.
Boon for Argentina and American/East European farmer.

Extreme case #2

This is probably the one I would prefer. Dilma is impeached. A new government
is installed. A pro-business, pro investment candidate rises to the challenge.
Who that is today? I have no idea.
Limits on foreign ownership of land are incrased to 100,000 ha +.
Foreign investment is encouraged. Brazil market is opened up to the
world. The REAL strengthens. This is a short term head wind for ag,
but with renewed sources of credit and Brazil economy growing
again, prices adjust and ag works through this short term head wind
for the long term goal of better markets, infrastructure, and competitive
advantage long term. This is what the modern dynamic Brazil farmer wants.

Are there other possible scenarios? sure

I wrote this blog to help better educate the American producer that yes, Sunday´s
vote will affect him at some point. It is an inflection point for Brazil.
If they get it right, as per Argentina´s recent "Ag Renaissance", Brazil´s
best day´s are ahead of her yet. I am optimistic yet. But, if they get this
wrong and we start to look like Venezuela, the phrase " God is Brasilian" can
be changed to "God help us All."

I repeat, Sunday´s vote is not the end but the Beginning. The beginning
of a process that will make many want to vomit.

This vote will go down in history as the vote that changed Brazil for the
better or for the worse 10 years from now. And the form of the new government
will likely dictate soybean fundamentals for years to come as a result of the
law of unintended consequences kicking in at some point.

I am working on a new newsletter. It will feature the switching of 1st crop
corn to soybeans in Brazil since 2008. Now with FX gone wild, and Brazil exporting
all its corn and at the same time as a drought in the Cerrado, we will likely see
the reverse happen in 2016/2017. The southern livestock growers need more corn
earlier in the season. Mato Grosso is pushing corn out the Amazon and inverting
the normal flow of things even with record crops.

The point is, we can soon see a scenario where Brazil soy area starts to
shrink in near term. Details in next newsletter.

Enjoy Brazil Super Bowl Sunday !!!

It might not be football, but the emotions will be running high on Sunday

Kory






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