Tuesday, March 31, 2020

BRL:USD 5.20:1 and record high soybean prices

We are well.

We are now in week three of full Brazil shutdown.
Brazil has never been so quiet.
Brazilians love their noise, music, and movement in general.
They like to be going somewhere or getting back from somewhere.

As a Norwegian, I find this social distancing quite refreshing.
In the Brazilian culture, hugging and kissing when greeting
someone or saying goodbye is normal protocol.

What has happened the past three weeks is so anti-Brazilian
as per the cultural norms. Brazilians are like cats. They like to
purr and be petted. Yes, they like to hiss sometimes when
their latin blood feels betrayed for some reason or another,
but it quickly passes.

I link this in with the Gaucho tradition of sipping chimarron
tea in the morning and passing the cup around to everyone
in the room or office- even strangers.

Corona virus has disrupted Brazilian culture - to say the least.

Personally, I enjoy the isolation and slower pace.
So long as Mcdonalds, Burger King, Dominos, and
Pizza Hut stay open, I am good but getting fatter.

My son is using Zoom to connect with colleagues and
school classes.

The ambience of my building has changed. Older people are
worried and do not want to interact anymore- if they do, it
is from a distance. Three weeks ago they would touch you
and not let you go. The main stream media has scared the
bejesus out of them.

The Brazilian economy is slowing down as per the rest
of the world. This is having a weakening effect on the
Real. I included some charts back in February in my
March newsletter. One chart showed the Real going to
5.20 area and another discounting inflation showed
a potential for 7:1.

At the time I published them, I did not believe it was
possible to trade 5:1. Low and behold two weeks later,
it became reality.

This has been a boon for farmers with physical soybeans
and corn to sell. On Monday, March 30, Sorriso soybeans
traded at a new all time high price of R$ 86.00 per sac.
New crop bids are following and are in the R$ 80.00
per sac area for 2021. Many farmers have all their soybean
inputs purchased for 2021. Some were locking in input
prices in January when FX was 4:1. This is a perfect world
for Brazilian farmer at the moment. Win win win......

At some point, even if it is a year from now, this high
FX will bite them in the ass. Even if you can stay on top
of your variable costs such as fertilizer and chemical, eventually,
the high FX will seep through all costs of production and we will
see higher and higher depreciation costs. The new JD combine,
planter, or tractor will not go up 5% in a year, but maybe 20%
in one year - ouch.

Brazilian interest rates have dropped to 3.75% which is also a record
low. Interest rates will need to stay low because when a farmer
needs a new tractor or combine in the future, the starting price will be
anywhere from R$ 2 million to R$ 2.5 million Reais to start with.

I am sure JD will be offering zero% on new 500,000 dollar toys in
USA soon. In Brazil, ponder paying 6 or 7% on a new R$ 2.5 million
item and do that in multiples.

For the current year and the year ahead, Brazil farmer is in the
drivers seat. Some will have 40%-50% return on variable costs
to plant soybeans and corn in the year ahead.

There will be much land clearing and prep for the year ahead.
Hang on to your nuts- the numbers will be impressive when they
finally get counted which might take 1 or 2 seasons before Conab
or IMEA gets a handle on things.

We have seen this the past year with 1 million ha increase in soybean
area. That prep actually started during the trade war year of 2018.

I have had consults recently on Rumo expansion and also the
implementation of new soybean and corn traits into the Brazilian
market- Conquista, Intacta, and Xtend are all on the horizon and
will be adopted quickly in Brazil.

Stay safe up there

Drop me a note if you are interested in becoming
a subscriber or a VIP client.



Corona, Brazil culture, BR soy expansion,
soybean profitability, Brasilian Real FX

Saturday, March 7, 2020

In Brazil, Corn and Soybeans are now sub-products of FX

I have been sending out regular updates to subscribers
on the current pricing dynamic in Brazil.

I have been pounding the table about FX for months.

The underlying theme has been when USD:BRL gets above
4:1, Chicago becomes less and less important as a hedging tool
and price discovery mechanism within Brazil.

I sense the North American producer is not grasping this
and its importance. As long as MFP 3.0 comes, one can
continue to ignore this South American phenomenon.

I must admit, I too am surprised that we are trading
above 4.32:1. We hit 4.67 on Friday. 
There is more talk of 4.80-5.0 in the coming months.
What I have experienced in the past is that when these forecasts
come in, either to an extreme high or low, they tend
not to quite make the projection.

With the BRL, there is never anyone that forecasts that the
new trend i.e. 4:1 to 4.67, but when the break out comes,
everyone sees it going to 5:1. This is called bullshit.

In January, when FX was 4:1, the projections by major banks
were for 3.80:1 for the year. When we broke out of the 4.32:1 
Nov 2019 high, then the forecasts flipped to how high we can go. 

To the chagrin of many, the Brazilian economy is quite stable.
Low inflation, low interest rates, and an admin that has and still
wants to cut spending. The Brazilian GDP has been cut from 2.5%
to 1.5% for 2020 because of Corona, but even so, this is quite
stable. It looks like Brazil will cut the Selic rate to 4% soon.

The Brazilian farmer is selling his crop quickly and getting 2021
sold too. Soybean prices in Mato Grosso are trading at the highest
level since July 2016(the drought year). Meanwhile, Chicago soybeans
are trading near contract lows. Corn prices in Mato Grosso feel like
US$ 7.00 per bu in Chicago. 

When we talk about sub-products with soybeans and corn, we
tend to think of ethanol, DDGs, corn syrup, soybean oil and meal.

The value of soybeans and corn in Chicago are derived from what
the sub-products are worth on the global stage.

In Brazil, when FX is at 4.60, we can start to think of corn and soybeans
as sub-products of the USD FX. 
If the Corona virus wanes and economic activity picks up and the Dollar
declines, we can get back to normal.
However, if we do trade up to 5:1 on a USA/Global meltdown, the
Brazilian farmer need not even look at a Chicago quote screen.

It will not matter. FX is the driver- not supply and demand. 

The Brazilian farmer and USA farmer live in two different worlds
at the moment.

The Brazilian farmer sees a bull market and is preparing for 2021
and 2022 accordingly i.e. expansion of production. 

The USA farmer sees a bear market and is preparing accordingly i.e
crop insurance revenue protection, PLC/ARC payments, and potential
for MFP 3.0. In other words, producing for below the cost of production
unless max yield is achieved. This reminds me of the LDP mindset of the

Lots of interest in RUMO these days. Railroad expansion and who will
get the Ferrograo concession scheduled for June. 

For those paying attention, now is the time to send money to Brazil.

Drop me a note if any questions.


Happy Easter