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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