Saturday, March 15, 2014

March 15 update

Things I am watching:

1. 2nd crop soy area
2. Machinery sales at upcoming ag shows
3. Condition of sugarcane crop as harvest starts
4. Early yield results coming out of Argentina
5. Quantity of Chinese soy cancellations or roll forwards
6. Election potentials for Oct and reshuffle of cabinet. (already started with new Sec of Ag from Mato Grosso)
7. Land values as we start a new season of transactions
8. China economic tremors

Conab gave us a very interesting report this week. I did not expect them to drop 4.6 million tons
in one month. I have been saying since the beginning of the crop year that Brazil had a 93 million ton
potential. With this new info, we are circa 8 million tons dis-counted from the full potential.

As I think back to the 2012 drought, Brazil had a 75 million ton potential and after the drought
we had 68 million tons. A drop of 8 million tons.

Since 2012, Brazil has expanded 2 million hectares for the 2013 crop and another 2 million hectares
for the 2014 crop. The expansion has come from aggressive conversion of pastureland and the switching from 1st crop corn to soybeans.

It seems as though the law of diminishing returns are kicking in for Brazil. One could make the argument for both soy and sugarcane.
Brazil keeps expanding area of each crop, but the amount of gain using national averages keeps getting harder to achieve.

Last year Brazil had a mini drought in Northeast. A few million ton of potential were lost. This year we expand 2 million hectares (5 million acres) and we add 4 million ton to the tally year over year.
We need to clarify that the new lands are not the yield lag. The new lands are doing quite well.
The irony is that the more Brazil expands new areas, the lower the established yields are in the
old "baseline" states. This is a direct influence of unusual weather patterns.

Now we have a situation where farmers are planting a 2nd crop soy instead of corn or cotton.
This is terrible agro-nomics, but it sure helps put a band aid on a "light' first crop. Farmers plant their own seeds again with a nominal cost of production, and in many cases the 2nd crop soy will be the better return than the first!!!!!

The 2nd crop soy is less risky and will make it before a frost comes. The 2nd crop corn is always a crap shoot in the south due to frost and drought in the north.

I wish I has better data from the crop consultancy´s and government agencies when they talk about
total soybean production. When they say 85 mmt, is that first crop only?  Or total tally with
both crop potentials. The area of 2nd crop soy has now grown to such a number that it warrants
a 2nd crop classification in my mind. This is a new world. 2 or 3 million ton ghost tons could hit the balance sheet by May/June. I am not sure how many grasp that?

Same story with sugarcane. The frost and drought 2 and 3 years ago inhibited the sugarcane´s ability to rebound.
Add into the mix 5 and 6 year old stands that needed renovation, the sugarcane industry was
entering into a crisis situation. A new credit plan was announced to help renovate stands. Large multi-nationals that had capital invested heavily into new plantations. It takes 12 to 18 months to see the fruits of these investments. Companies such as Bunge invested heavily in new plantations. 2014 was the year they should be reaping the rewards for their efforts.

What happens?

A serious drought centered smack dab on top of the heart of the sugarcane region of Brazil.

In the season which they should be harvesting 120 tons per hectare, they will now be lucky to
grab 80 or 90 tons for year ONE of the crop cycle. They will harvest the cane later than normal
in order to get more growth. What happens for 2015? Can the stand rebound to full potential?
I do not know.

What I do know is that the grandiose forecasts released by some for sugarcane potential of
1 billion tons by 2020 is not going to happen.

Sugarcane and soy are doing the two- step. Two steps forward and one step back.

More and more money is being thrown at the two crops with diminishing return on the overall
crop size. This bares watching going forward.

We have various ag shows coming up. We have a new Mato Grosso BR163 Safra show at Lucas do Rio Verde, Mato Grosso at the end of March.

We have Rio Verde, Goias Agri show in early April.

We have the granddaddy of Agrishow´s the end of April and early May.
This show is at Ribeirao Preto, Sao Paulo. I plan to be there.

I keep my VIP clients up to date in real time as per the items mentioned above and other
market related happenings.

It has been a dynamic two weeks in the world.

Just when I thought the world was going to be awash in soybeans, we lose 8 million tons.
It is just enough to keep us on the edge of our seats for one more year.

I do not think you need to buckle up for 2014, but make sure your airbag is ready to deploy.

Those Texas dust storms sure look like the stories from 1936. Let us hope that is not our future.
High prices are great, but 25 dollar soybeans would drive us all batty ;>)

Good luck in 2014,