Thursday, May 26, 2016

Mid Year Turn

Seems like many things are flipping polarity from what we have become accustomed to
in recent months.

For months we heard the SA soy and corn crops would be big.
In the end they got smaller and continue to do so.

El-Nino is now offically neutral and flipping to La-Nina later in 2016.
This means SA weather will be 180 deg opposite last year´s experience.

Soybeans are trading 11 dollars in Chicago. Soybeans are trading at a
record high price in Brazilian Reals of $91.00/sac.
2017 prices are much the same. These prices in Reais are higher than
when soy was trading US$ 18.00 in Chicago Sept 2012.

Fertilizer sales are outpacing last year´s volumes. Lower FX
is pulling sales forward.

We have a new interim President. Everyone said that after Dilma
is gone, the Dollar:Real would trade 3.30:1. Yet today the
FX is closer to 3.60:1

Dilma said opposition was fabricating numbers saying the economy
was worse than it is was and using this as a reason to start the
impeachment process. Dilma is an economist. To the chagrin of many,
the budget deficit projected prior to impeachment was too small.
The number has jumped from R$ 100B to R$ 170B after the impeachment
votes. More and more money is needed just to maintain par muchless
come up with stimulus $$$.

We have chickens dying from starvation in Santa Catarina. We have
chicken packers shutting down in Parana May 31. Many coops are
90 days late paying their producers.

We have Brasil JBS wanting to domecile themselves in Ireland to have
cheaper access to credit. JBS made billions on their currency hedges
in 2015. Processing anything seems almost a secondary business now.

The new administration is looking favorably at overturning the limit
on foreign land ownership.

China has made some initial purchases in Brazil Agri-business,
and I would bet that is just the beginning.

The rains shut off on April 13th this year. Those who pushed the
envelope and planted 2nd corn into March 5th-10th like the previous
five years, now have corn of the cobless variety. Zero

This was forecast by many in late 2015. But with corn contracts at
R$ 18-R$ 19/sac and a short soybean crop, the will to keep planting something
to make up for losses overrode reason.

2nd crop cotton losses will be 30% on a widespread basis.

The current 2 dollar+ rally in soybeans has come at the right time
to help producers who took it in the shorts this year. They have some
positive cashflows to work with to deal with creditors and bankers
for the year ahead.

For the last 6-12 months in Brazil, it has been nebulous to try
and see the future. There were so many possible scenarios that
if one event happened it would unleash one set of events. If another
event happened, the end result would be 180 deg opposite the other possibility.
It has been frustrating.

But as we make the mid year turn, I feel like I see the sun is starting to
peak through the clouds as the fog slowly lifts. There are still many
things that can happen to drop the veil over us and keep us lost in the fog.
However, given the rise in prices, announcement of govt ag funding plan,
stable FX, and generally a peaceful transition of power, I think we
can start to be more optimistic as we go into fall.

Many will argue that I am 6 months to 1 year too early on this.
I may very well be.

But specifically the ag sector, we can see tremendous possibilites for
profit in 2017 with decent weather and production.

Sugarcane and coffee are good. Edible beans are at record high prices.
Soy and corn are at record high prices.

Barring any sudden changes in govt, riots, and FX moves, I think we can
start to see the Ag economy on a nice upturn that will seep into the
industrial sector and give us some positive GDP and growth again in Brazil.

I hope the govt does not start to tax soybeans either at a state level in
Mato Grosso or nationally as per an export tax. Both have been proposed
but so far do not have legs. If they start to tax the one sector that
can get them out of this mess, I may have to modify my optimism.

I believe we are in the mid-curve turn in Brazil. G forces are kicking in
and we know we are about to change direction. Let us hope we don´t hit the wall
as we pull out on the straightaway.

Thank you for all the renewals of late.
Thank you for your confidence.

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Friday, May 6, 2016

Politics, weather, 2nd crop corn, China, Maggi, and look ahead to 2017

There has been much in the news lately. Many things have been spun
as a positive development, but if one looks at bigger picture,
it is a sign of the times and in many cases a "House of Cards."

The vote in the Senate to remove President Dilma while the impeachment
trial starts will happen on May 11th. At this time, it looks like she
will step down for a bit. She could call for new elections and interrupt
this process, but she remains defiant.

Today, the Supreme Court ruled that the Speaker of the House step down
on corruption charges. He hid a few million in Switzerland. We have known
about this since late 2015. One must ask why this ruling came after the
impeachment vote in the House three weeks ago. Would the vote have been
different three weeks ago if he was charged prior?

We have news tonight that Senator Blario Maggi might be the new
Secretary of AG if Temer, the Vice President, assumes office next

All of this is happening while the Olympic flame is making its rounds
through Goias state and Brazil in the coming weeks. People are standing in
line waiting for H1N1 vaccine to show up and yet the Olympic facade progresses.
I talk to business owners and they tell me their traffic is down 50% and their
costs are up 30% in recent months. Rent, water, energy, taxes, gas, labor
are all higher. Many are fit to be tied.

Farmers in Goias state are extremely worried. It has not rained in over a month.
It looks like dry season has kicked in. Brazil weather guy says no rain in the
Cerrado until into October. When it does start to rain, it will rain steady.

Ranchers are already liquidating cattle herds. What will it be by September?
Dead pastrure, fires, lack of water are all very much on deck in coming months.
Chickens are coming to slaughter light. All a sign of lack of feed.
Corn prices are at record high prices in domestic currency. Soybeans are
at or near their record highs.

If one reads the headlines this week in Brazil, one would assume the
2nd crop corn is 50% gone. This is not the case on a national basis.
But in some states like Goias, Eastern Mato Grosso, Minas Gerais,
parts of Mato Grosso do Sul , Sao Paulo and Northern part of Parana,
this is very much the case. 50% shot.

Much of this corn is pre-booked for export. Many of these orders
need to be canceled and originate from USA. The kicker is much of
Brazil corn goes to Middle East. Will Iran want corn from the
Infidel´s? Not sure..... If I were Muslim, I would buy all the corn
I could before the Trumper says I can´t have any.

This dovetails into the Chinese purchase of a Mato Grosso grain
merchandiser. Is it as simple as opportunity presented itself and
a willing buyer found a willing seller? or is there more to it?
Yes, the grain merchandiser is going through a restructuring.
Yes, the Chinese have tried for years to buy land, build soy
crushers, railroads, ethanol mills, and buy soy direct. All efforts
have failed. They could not find a dance parter. Now they have access
to direct soy, port access, and in the future- rail service.
I cannot help but think that Trumps recent rise to top of Republican
ticket has sped up their decision to enter the Brazilian and Argentine
markets with gusto. They need access to protein in the future irregardless
of trade issues with USA. There are too many unknowns in the new political
environment we live in. It is time to hedge some bets and put our money
where are mouths are- quite literally. The new China/Brazilian/Gaucho
marriage will be interesting to watch. The Chinese do not like Polka
and Gaucho´s don´t eat Chinese. However, in my own experience, I have found
that a 1/3 Japanese/ 1/3 Italian/ 1/3 Brazilian female to be near
"Perfection". Trumper would approve

Where is all this going?

IMEA earlier in the week threw me and many others a curve ball.
They have been using satellite imagry to measure corn area in
Mato Grosso. They found an extra 500,000 hectares producing
an extra 6 million tons of corn from "last year´s crop".
They then added another 200,000 ha to the 2016 crop.
This is a 700,000 hectare swing from year to year from
what we thought the state´s baseline was.
With the two years combined, they "found" an extra 9 million
tons of corn even with the drought conditions to date !!!!

If we look back to last year´s record exports, we can kinda start
to believe that this data is on the right track.
With domestic consumption+ last year´s exports = more than
the country produced last year.

So thus, yes, Mato Grosso must have produced more corn in 2015
than we previously thought possible. Was it 26 million tons?
Do we really start subtracting from 26 million tons for the
2016 crop that is shrinking each day?

The kicker with this new data is that it cuts both ways.
Let us assume Mato Grosso did plant 4.2 million ha of
2nd crop corn for 2016. Let us assume an average yield
of 5.5 tons/ha. This = 23 mmt.
Last year the avg yield was 6.5 mmt. Thank you GMO technology !!!

But, the more area we plant, that means even more hectares were
planted outside the ideal planting window which is said to be as high
as 25% of the area. 1 million ha could yield zero.
1 million X 5.5 = 5.5 million cut from which number?
26 or 23 mmt?

Before this analysis came out, we were using 3.5 M ha and 5.5 tons/ha
for a 19.5 mmt crop. This seemed reasonable to me.
Take 20% off for drought and we stabilize at 16 mmt +/-.

But now if we take 5.5 million off of a 26 mmt potential,
we still have a 20 mmt crop as if there was no drought at all!!!!!

Mato Grosso befuddles me with corn. When 700,000 ghost hectares
are "just found" and yields always tend to come in higher than
expected, one must just sit back and watch the show here.
Soybeans are much easier to estimate than corn- assuming you have good data.

For the nation, I an a believer in the sub- 50 mmt club. It is bad.
But in the future, we will need to be ready for 30 mmt MT corn crop and
60+ mmt national 2nd corn crop as the new norms.

However you slice things going into fall of 2016, it looks like
Brazil corn price will remain above historic avg.
In the May newsletter I outlined where the acreage switch
has come from in recent years from 1st corn to soy.

Many assume that all expansion in recent years from 24 M ha to 33 M ha
has come from Brazil expanding in new areas. This is simply
not true.

I believe that in the last two years, Brazil has, in essence,
"blown her wad" on soybean area expansion.

1. no more 2nd crop soy i.e. late planted soy soy/soy for 2017- illegal
2. switch from soy to 1st crop corn up to 2 million ha
(am I predicting this today?- no- but potential exists)
3. Many big farms are in bankruptcy or in a restructuring phase
4. Many medium sized farms only harvested 35-40 bu/acre soy this past year.
(they made no money)
5. MaPiToBa region just harvested their 4th drought crop in a row
(This one was the worst) major losses and bleeding taking place
(Farmers in MaPiToBa and Mato Grosso will be hesitant to plant more sandy areas into soy)
6. Higher interest rates
7. uncertain political future and FX stability- in the end all speculation
8. Livestock sector in need of huge volumes of corn to stabilize the domestic market.
9. Soy high cost of production, but likely to be a bit cheaper than last season.
(Fertilizer has helped cut costs lately)
10. Mato Grosso and Para rate of increase cannot out pace the other switching
11. lack of quality soybean seed in Southern Brazil- too much rain at harvest-
(incentivizes switch to 1st crop corn)

I will be watching this in coming months.

Much of this will be determined by the USA crop.
Can we trade 4.25 corn?
Can we trade US$ 11.00 soy
If late start to Brazil planting in Oct, how does this change things?
If we flip to La-Nina- Southern Brazil and ARG flip to drought.
Ideal conditions for Cerrado
Does China really need 84 mmt tons?

What if Brazil soy crop drops to 96 mmt or the same as last year?
Brazil runs out of soy by December.....

What if soybean prices in USA are US$ 7.00 by Oct?

What if FX is 4:1 and corn is still gold in Brazil this fall?
Could Brazil switch more than 2 million ha back to 1st corn?

Nothing boring about Brazil.

Things keep changing- that is a given here.

Throw in some Trump curve balls or a USA August
drought, we will have ourselves a soybean Olympics yet.


Thank you all


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