2009 was a roller coaster ride for many in Brazil. The normal pattern of buying, selling, and locking in ones cost of production became inverted in 2009.  In early March we witnessed the low on the Brazil stock exchange and a dollar exchange at 2.30:1. I have friends in Mato Grosso that were borrowing in “dollars” the previous two years of 2007/08. With the dollar on a long term slide from 2.20 to 2.00 to 1.80 to 1.60 over a period of 24 months, they could payback borrowed money with an ever weaker dollar. From late 2008 into early 2009 they had to payback those dollars while the dollar kept getting stronger. So even though soybean prices were good, by the time they paid the bank back in mid 2009, their profit margin was greatly reduced.

 

With the credit crunch affecting producers inside Brazil, the banks were reluctant to let the money back out again. I know many producers in Mato Grosso that are operating in the 2009/10 season on “name” only. They have a good reputation and crop input suppliers are willing to work with them on a short term basis until the soybean crop comes in.

 

In 2008 fertilizer prices were on the rise and it paid to buy early. In 2009 many producers decided to buy early again. They locked in “trade” prices for soybeans in exchange for “X” tons of fertilizer back in May and June 2009. The irony is the price of fertilizer kept dropping until the start of planting in mid- September.  It paid to wait in 2009. When farmers were doing their trades for the crop now growing they were thinking the dollar would stay in the 2:1 range. They have a cost of production of about R$ 1300 reais per hectare for soybeans this year. If they produce 50 sacs and can sell for R$35 per sac or better this would give them R$ 1750 reais of gross revenue in early 2010. This would be a nice profit of R$450 reais per hectare or about US$ 90 dollars per acre. However in recent months the dollar has dropped to 1.70:1 and thus reduced their gross revenue projections to about R$ 1500 to R$1600 reais per hectare. This now calculates to a profit of US$ 45-50 dollars per acre.

 

Early soybean deliveries in January will receive a premium bid from local soybean crushing plants or port bids for export. With the Tsunami of soybeans on the horizon being produced by both Brazil and Argentina, February through April local bids drop like a rock. The range is US$ 9.25 per bushel for January delivery and drops to US$ 7.40 per bushel for February and later. For those that need to deliver in March or April and exchange dollars at R$1.70:1, a breakeven sinerio quickly becomes a reality for un-priced bushels.

2010

As of early January 2010, I think about 50% of the Mato Grosso soybean crop has been sold. 33% was traded for crop inputs and the like. Another 20% has been sold on cash market for early delivery.  The question now remains what will farmers do with remaining 50%? Some farmers have started to show interest in locking in fertilizer costs for 2011. If they can trade 20-22 sacs of soybeans for ONE ton of soybean mix fertilizer(0-20-20) for 2011, they are likely to do it. With Chicago soybean prices remaining strong combined with low dollar and falling potash prices globally, this will help fertilizer mixers close some business early. They will be able to hedge off their risk in Chicago and this season they have a better feel for their raw material costs of the fertilizer. In early 2009 the fertilizer dealers had tremendous carryover stocks left in inventory. Those stocks have now been liquidated and inventories can be replenished.

 

Corn prices have been extremely low in Brazil- especially in the interior. Mato Grosso has liquidated 30% of the 2009 winter crop via government sponsored freight auctions. This system allows farmers to get a minimum price for the corn and send it to warehouse storage. The freight subsidy helps feed dealers and exporters in other regions of the country compete with local market and global price for corn. The US$ 100 dollars a ton to move commodities out of central Mato Grosso tends to make corn uncompetitive in the global market place. Corn traded as low as US$ 2 dollars a bushel at the end of corn harvest in August in Mato Grosso. This is great news for the blossoming livestock industry there with cheap feed for hogs and chickens. However with the strong REAL, exports of pork and chicken have also suffered in 2009. There is talk of a new dairy coop being formed in central Mato Grosso.

 

With the glut of corn within Brazil and the relatively high price of soybeans after last years South American drought, producers throughout Brazil switched acres from 1st crop corn to soybeans for the 2009/2010 crop. ONE million hectares of 1st crop corn did not get planted. Combine this with a few hectares of expansion area from pasture, cotton and rice; we have 23 million hectares of soybeans planted in Brazil. This is only 300,000 hectares below the record area of 23.3 million hectares back in 2004/05 crop year.

 

We must keep in mind that sugarcane has expanded 2 million hectares + in the previous 4 years post hurricane Katrina. Soybean area surge potential is greatly inhibited by strong domestic currency, lack of easy credit, and strict environmental oversight making it difficult to expand in newer more remote areas.

 

What does all this mean for the year ahead?

 

I think Brazil and Argentina have maxed out their soybean surge potential for now. In 2011 corn acres will revert back to a more normal rotation. Sugarcane expansion will slowly resume to meet domestic and global demands for sugar and fuel. Cotton area in 2011 is likely to start to rebound after a 25-30% reduction in area the previous two years. Argentina is out of balance with its domestic need for cereal grains. I expect some sort of rebalancing to occur in Argentina in 2011.

 

If it comes via government intervention or the market place, I don’t think we will see Argentina continue to expand soybean area. If they do not change course soon, it might be possible while dining in Buenos Aires that a waiter will come to your table and say “ I am sorry we are out of bread; would you like a bowl of soybeans with your steak tonight?”

 

Argentina is hands down the low cost producer of soybeans in the world. Black-fertile soils combined with a weak currency puts them in the drivers seat. Brazil with a strong currency and expensive logistics forces Brazil to focus on productivity per hectare and not expanded area. With high cost of production because of poor soils, freight, and multiple fixed applications of fungicides to prevent Asian rust; Brazil must focus on planting only the best areas with high base saturation of nutrients and in areas with stable climates to reduce the risk of crop loss. Brazil must focus on productivity. It is not possible for Brazil to grow a 30 bushel  per acre soybean crop anywhere and stay alive. Argentina can produce a 30 bushel crop and still survive another year. Brazil must produce 50 or 60 bushel every year. No exceptions.

 

In conclusion:

 

I expect soybean prices to decline in coming months. This will take the incentive out of any expansion for 2011. In my opinion it would take soybean prices in Chicago at 20 dollars per bushel for an extended period of time to get Brazil excited again. Brazil as of January 1 has a B5 mandate for biodiesel. Brazil has a 25% blend of alcohol in all gasoline. The demand base is there for biofuels. Land prices should remain stable for now. There is always land for sale in the interior. However, the asking price in sacs of soybeans tends to stay the same. The factors that change are prices in Chicago and dollar exchange rate.

 

Argentine groups continue to expand area in Brazil. They tend to rent the land and hire everything done. It remains to be seen if this business model is sustainable in Brazil. 

 

Market history reminder:

 

We live in a new world as per currency/commodity relationships and money flow from Funds. I remember back to the end of April 2004 when soybeans were 10.60 per bushel in Chicago and the dollar was 3:1 REAL. Brazil was in a state of Soybean Euphoria.  China had pre-booked many boat loads of soybeans at the time. Once the crop size was known, they “the Chinese” found a few seed treated soybean seeds in one of the cargos. They threatened to send the load back to Brazil and cancel purchases. Soybean prices fell 2 dollars in 2 weeks.

 

I often wonder what a “rumor” like that would do to soybean prices today?

 

Just the rumor of cancellations would be catastrophic.

 

As of January 3 2010, Supply risk is behind us. Demand reduction risk is the unknown going forward.