Saturday, April 20, 2019

April 20th blog update

It seems like most private crop forecasters have the
BR soybean crop at 115-118 mmt.

This is a marked increase since February.
Most everyone was in the 111-114 mmt club.

Aprosoja was the outliar saying the crop could
be as small as 101 mmt. 

I think it is worth noting how significant RGDS is in
soybean production. With the losses in Parana, RGDS is
the 2nd largest soy producer behind Mato Grosso at 18.7 mmt.

If we look back to the previous major drought for the southern
states, that was 2011-2012 crop year. RGDS came in at 6.5 mmt.
It was bad. Since then, acreage shift away from corn, rice and
productivity gains have allowed RGDS to rebound to near 19 mmt.
This is + 300% from their low point. This has nothing to do
with deforestation or expansion in the northern areas. This is simply
good farmers doing their best. 

We can look at 2018-19 crop year two ways. If this crop is at 
115 mmt+, then last year's crop was greatly understated. If we assume
8-10 mmt were lost from peak potential, that means last year was
a 123 mmt+ crop size and this year we had 125 mmt at one time. 

The flip side is: If last year's crop was 120 mmt, then this year's crop
size is too high and we need to look at Conab's numbers at 113.8 mmt
as being more accurate. 

Ths USDA at 117 mmt and the Brazil FAS office at 113.6 mmt is very
confusing. Does the left hand know what the right hand is doing?

Going into 2020, it sure looks like we can pencil in 125 mmt for a 
starting point for next year's crop. This is not what the USA farmer
wants to hear and the Brazilian farmer needs to grasp that there
are too many beans in the world. The trade war now has everyone
on equal terms. The 2018 BR windfall is over. That was a once in a 
lifetime illusion. March 2020 soybean premiums are only 8 cents
over CME. 

China now has North and South America by the short hairs. 

At the moment, FX is helping the Brazilian soy and corn farmer.
FX is helping them maintain profitability. 

The 2nd crop corn in Brazil will be beyond fantastic. 75 mmt + 25 mmt
for 1st crop should allow for a total corn crop output of 100 mmt+.

FS bioenergy has announced the site for their 3rd corn ethanol mill.
The plan is for two more- right place at right time.
The first mill is pumping out 1.5 million liters per day of ethanol +
DDG's. 

There is talk of a truckers strike starting April 29th. Contacts tell me
it is just a few on social media stirring the pot. Nothing will happen. We will see.
Brazil cannot handle another shutdown like last year. 
The new admin is between a rock and a hard place. They encouraged
the truckers last year as it was a political windfall for them to have this happen.
Now, the shoe is on other foot. Crude oil keeps rising and FX is near 4:1.
This was not in the plan back in January. This puts pressure on Petrobras
to keep increasing fuel prices every two weeks and this is squeezing the
truckers again. Soy sales have been slow, so there have been trucks hauling
freight for below the minimum price table. This table is still being reviewed
for its constitutionality. 

The new admin wants to privatize Petrobras, but just last week the govt
intervened and asked Petrobras to delay a fuel price increase as per fear of
a truckers strike. They cannot have it both ways.

The FX market looks at these shenanigans with fear that the govt will also
fold their hand with regards to pension reform. Thus, we are hugging
4:1 again, which was not forecasted by anyone in January. We should
be trading at 3.30- 3.50:1 given the optimism at the beginning of the
year. Therefore, Brazil GDP forecast has now been lowered to 1.8% for
the year. 

I have heard that Representative Collin Peterson from MN, who is also the
Ag committee chairman, will be coming to Brazil and Argentina soon
on a fact finding mission to see how the trade war has affected and/or
stimulated other countries at the expense of the American farmer. 
How is China helping AR and BR with infrastructure?
I am happy to hear they are coming. I feel they are 20 years too late.
Given some of the projections I have seen for Brazil's production
by 2025 and 2050, we need not be producing soybeans north of I-94
in the USA. 

Climate change, resurgence in Chinese soy demand post ASF, FX
distorting and incentivizing production, and railroad expansion will
all play into Brazil's hand in the coming years. 

I mentioned this to clients several years ago as China evolves
in her food needs. I said, what if China can't get soybeans fast enough
because of factor X?  Maybe they decide to buy Brazil Foods, turbo-charge
chicken and pork production within Brazil, keep the beans here, crush and
make into feed here, and then just ship the end product to China?

If ASF would last a number of years?  Is the above such a crazy idea?
Of course this would be a boon for livestock producers around the world
as China searches for protein in the mean time.

If something like that were to happen, think of how that changes Brazil's
logistics needs?  We flip from huge bulk grain volumes at ports to 
refrigerated warehouses storing meat in containers. We would need
more soy crushers and more corn ethanol mills. DDG's would be in
high demand. Huge increase in Brazil soy and corn storage capacity to
hold grains year around for processing. Could that be Brazil's future
by 2050?  Damn right it could be, maybe even by 2030 if a renewed
search for protein ensues. 

Thank you for all the newsletter renewals and VIP retainers.
I have been doing this for over 15 years now.
I am not sure where the time has gone.
My son is taking Brazil college exams and also the USA SAT is
given 4X per year here in Goiania. Who wudda thunk? 

The more Brazil trys to change- the more she stays the same
i.e. Petrobras and fuel pricing drama.

For those outside South America, one needs to watch the ARG election
in Oct. It will be important that Macri wins again. If ARG would go LEFT,
combined with weak FX in Uraguay and Venezuela problems, that would
be a stiff head wind for Brazil to tolerate going forward. It would lead to
a weaker REAL. 

Regards

Kory

Keywords:  BR soy and corn, corn ethanol, trucker strike, FX, 
protein shift dynamic long term, USA Ag committee junket to BR and ARG, Trade war,
ARG election Oct 2019







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