Saturday, April 15, 2017

Big crops, econ, politics, and looking ahead

2017: a year it did not pay to be conservative with crop size estimates for South America

It looks like the Brazil soy crop will shake out at 110 mmt+.
Given some of the weather concerns back in November for southern
and NE Brazil, I would have thought it was not possible for Brazil to jump from
95 mmt to 110 mmt in one year. The fertilizer sales data for 2016 was
telling us to be optimistic, but weather patterns were telling us to be cautious.
In the end, top notch seeds, fungicides, and nearly ideal rainfall for most of
the country gave us record yields. 2017 soy crop was all about productivity.
The acreage expansion for soybeans was only 1.4% this past season.
The rate of expansion has been declining lately. We need to look back to
the 2005/2006 timeframe to see an acreage reduction year over year.

Rio Grande do Sul stands out for me this year. They are at 17.5 mmt and some
think it could be as high as 19 mmt - larger than Parana. Who wudda ever thunk that?
Remember the drought year of 2011/2012? RGDS was at 6.5 mmt. Therefore, it is hard
for me to grasp that an established ag state could triple soybean production in a few
years from a low period to a peak period. These new soy genetics are down right

I am still hearing of a few guys converting pasture to soybean area for 2018.
With big crops, even if prices are low, they still have the equity to bring
more land into production. The economics are not there for expansion, but
if one has the land just sitting there, the idea is to make the best use of it.
Hope for the best...

2nd crop corn is zipping right along, and I think we will see similar results
with it. Crop estimates of 91 mmt for Brazil and 26 mmt for Mato Grosso could very
well end up being close to 100 mmt for Brazil and 30 mmt for MT.
(Mountains of corn) Brazil needs about 55-58 mmt for her own needs.
The rest is EXTRA.

Inflation is under control and central bank dropped interest rates again last week.
The country seems to functioning in a Zombie state. The poor are doing whatever they
can to survive. The middle class is disappearing. The rich, well they are rich. Some rich
seem depressed because they have less money than before. But these same people drive
new Land Rover´s and think nothing of spending R$ 100 for a nice breakfast in the
morning. Apartment prices are coming down albeit slowly. However, new buildings
keep popping up and I have even seen one new one here in Goiania where the cheapest
apartment in it is R$ 3.5 million. The high end apartment was R$ 5 million.
This is obviously not the norm, but I bring it up because there are those buying these
units yet. The have and have nots gap is defintely widening in Brazil during this
downturn. One cannot compare Brazil to USA in 2009-2010 time frame. In USA,
properties are foreclosed on and flushed thru the system at 40-50% on the dollar.
Not here, one maybe will see 10% drop in price for cash and finance in house for
a bit and not at a bank. They will work with you and in the end get close to their
price. Shopping malls and retail stores are different. There are deals to be had on cars
and appliances etc. If you have cash, 40-50% discount can be negotiated these days.
Brazil does not function as per the normal rules of economic cycles and supply and
demand. She has a rule book all to herself. It is up to the resident to figure it out
depending on where you are at in any given economic environment you may find
yourself in. Econ 101, take the book, set it on fire, and throw it out the window in Brazil.

The operation car wash investigation has now encircled everyone. The current President
has received kickbacks and this past week even Blario Maggi is said to have received
campaign funds from Odebrecht construction. No one´s hands are clean.

Elections are due again in Oct of 2018. President Temer will do everything he
can to run out the clock in the coming months. If this situation would accelerate
at the Supreme Court and or Congress that the whole Rouseff/Temer ticket should
have been nullified, this gets complicated quickly. This means that the impeachment
of Dilma was started by those with the most dirty hands to begin with. "The pot calling
the kettle black" quite literally.

Someone like Marina Silva has name recognition and is still considered honest and
not entangled in kickbacks. She lives a very humble lifestyle. She might be good
for Brazil, the poor and environment, but she would not be pro-development in the
Amazon and forget about railroads if she becomes President. So one could ask the
question? Is she good for Brazil or not at the end of the day?

I am trying to look ahead and remain optimistic. With the Dollar:Real at 3.15:1,
Brazil seems very expensive yet. With the economic and political risk in the coming months,
it seems to me the FX should be more like 3.50:1.

The next Presidential cycle will include a new group of faces. Lula has said he will
run again. I doubt it will go anywhere, but he could throw his support behind a new
guy and start to form a coalition again. This would be dangerous for the country and
if something like that would manifest, we can start to see Brazil looking like Venezuela
quickly. I doubt this will happen, but the risk must be monitored.

Temer is trying to cut out waste by reforming retirement programs i.e. social security.
He has cut back funding for international education programs. He is getting much
kickback from the public.

This will go on as long as the poor and working man will allow it. At some point,
the poor man will say to the rich man- enough !!!!

The middle class became to indebted the past 10 years in Brazil. The poor were able
to milk the food stamp system for his family and work on the side for cash. Life
seemed better for him. He had access to a car and flat screen TV. Lula was a good
guy in his eyes. The middle class started to act like the wealthy classes and bought
way too much and now he is in decline as per his quality of living. The rich have
their stress too as per the social contract they make with the public. I will take
care of you, but you need to do this for me. With some businessmen feeling the
contraction of the economic cycle in their business´s, they feel the loss of status
and for them this can be crippling. The king was wearing no clothes at the end of
the day.

The Mitsubishi car plant at Catalao, Goias announced last week that they will
cut production yet again. They were at 350 cars per day two years ago.
They cut back to 150 cars per day. Now they will only produce 80 cars
per day- Yes 80 !!!!!

For now, we will keep an eye on the Ribeirao Preto ag show the 1st week of
May. It should be good, but farmers are pissy at the moment as per soybean
and corn prices. They did not sell enough in advance.

Ag equipment manufactures are gearing up for a rebound this year.
Expect a 20% increase in sales and manufacturing from last year´s
very low numbers.

Early corn harvest will begin in Mato Grosso in mid-May. Silage first and
then into wet corn. We will have an idea of yields then.

Sugarcane crop looks to be a copy of last year. +/- 1%.

The industry is hoping to restart the import tariff on ethanol again
in the coming months. Brazil imported large amounts from USA in
recent months. It has depressed prices. They are looking for a way
to prop the ethanol industry up again after kicking it in the balls
for the past 7+ years.

Drop me a note if you have any questions:

Keywords: Big soy and corn crops, BR politics, BR econ, anecdotal BR comments