Saturday, March 7, 2015

Contrary to popular opinion, I am optimistic on Brazil

March 7

For two to three years now I have been writing blogs and newsletters about what could go wrong
with Brazil. All I saw were problems. I was not sure what the catalyst would be for a correction
in the Brazilian economy. I knew that dollar at less than 2:1 and the otherwise irrational exuberance
was the illusion and not the norm. I never dreamed that Brasil´s golden calf company, Petrobras,
would be the domino that started a chain reaction throughout the country exposing so much
corruption, incompetence, and lack of planning in multiple sectors at once - energy,
manufacturing, water, hydro-electric,banking, and ag infrastructure/roads-trucking.

The dollar is now 3.05:1. My old friend has returned. After the trillions the USA has spent trying to
stimulate its economy, I never thought I would see 3:1 again. I lived through dollar 1.55:1 twice.
I was the poor gringo surviving while the Brasilians went on global spending sprees. It was other
worldly to live through. My maid drove a nicer car than I had. I thought maybe I should be working
for her.

That illusion has come to and end. 3:1 is more normal for Brazil historically. Some say we are headed
to 3.5:1. I do not know. If we do trade there, it will be for a short period of time.

I am becoming more and more optimistic on Brazil. I know human nature is to tend to run the
opposite direction when there is crisis. I tend to be more like Warren Buffet and am attracted to the
things out of favor and be cautious when the herd is running in the same direction.

Back in 2004, Brasil ag land reached a hysteria phase with regards to demand and prices. The dollar
had been 3:1. There was much expansion and easy- high interest credit to fuel the fire.
In recent years, Brazil land has gotten expensive relative to returns. The cost of production is over
twice as much as back in 2004. Therefore, I have been hesitant to predict a new wave of expansion in
Brazil soybean area. Current prices are a godsend to those interior farmers who planted a soybean
crop in September/November looking at guaranteed losses. They are now seeing profits. But, they
must be careful as they plan ahead to 2016.

3:1 dollar makes Brazil land look mildly attractive again. The caveat to this is that wealthy people
tend to invest in fixed assets during these inflationary times. That tends to prop up prices and it
feeds on itself.

Overall, I am becoming more optimistic on Brazil. It is not that I know of some magic event around
the corner that will fix everything, but more so where we are at in the cycle. We are closer to a
bottom than a top. Brazil will likely go through some social and economic convulsions in the coming
months, but that will likely mark a capitulation in current events and then things will start to get better.
For those looking at Brazil, now is the time to be doing your due diligence. Do not wait for the
Economist or Wall Street Journal to tell you how great Brazil is. By then, we will be well on our
way again.

I will be in Mato Grosso the end of March on a crop tour and research mission.
April newsletter will have details of my trip.