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Sept 21, 07
I try and give clients the best overview of Brazil I can in a short
amount of time.
So many factors come together and to a first timer to Brazil all
this new info can be overwhelming. When trying to predict
where a given commodity or business idea will be in 5 years we have
to break down where we are today - cost of energy, exchange rate,
price of raw commodities, disease and insect pressures and
environmental issues that include the Amazon, irrigation permits and
the planting of GMO crops. We also need to look at the price
and profitability of cattle.
Since 2004 the following has happened:
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The dollar has fallen
from 3:1 to 1.88:1
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The price of diesel
fuel has tripled. Fertilizer is up 50%.
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Raw commodities such
as soybeans and corn have rebounded from all times lows to the
highs seen back in April 2004.
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Asian rust remains a
chronic problem and corn insects are becoming more and more of a
problem because the planting of GMO corn is prohibited.
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There is dispute of
the defining of the Amazon biome. There is also federal
enforcement of the legal reserves that prior to 2004 were
somewhat lax.
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In states such as
Bahia there are limits to how much water can be pumped from
wells for irrigation purposes.
Since hurricane Katrina
hit New Orleans, we had a price surge in alcohol prices and sugar
prices simultaneously. This has created a euphoric situation
the past 18 months in Brazil.
Currently Brazil produces about 7 million hectares of sugarcane. 50%
is used for sugar and 50% is used for making of alcohol for cars. I
have heard many forecasts for sugarcane to double in area by 2012.
Given the glut we have seen in alcohol during this years harvest, I
now have my doubts on how much more sugarcane area is needed. If the
ethanol tariff were eliminated to the USA, Brazil could not produce
enough sugarcane alcohol. I own land in Minnesota, so how could I
ever be in favor of eliminating the tariff? However I think that
sometime in the future the alcohol tariff will be reduced in
exchange for easier market access to the Brazil market with products
from North America. Technology items such as laptops, original
software, misc high tech gadgets, and Nike tennis shoes are all 100%
too high priced in Brazil. The growing middle class of Brazil wants
all the things we take for granted at discounted prices in the USA
shopping malls.
So thus I think Brazil sugarcane production will stall in the 7
million hectare range for now.
This is important because the 1.5 million hectare expansion we have
seen recently has come for the most part from old soybean baseline
acres. These soybean acres need to come from newly developed areas.
Since the 2004 peak in planted area of 23.3 million hectares of
soybeans, we dropped back 2 million hectares during the farm crisis
the past two years.
This is the cushion Brazil is now bringing back online for 2008.
What happens after 2008?
Soybeans are now 10 dollars a bushel in Chicago. This equates to
about 41 reais per sac of soybeans at a Brazil port. Back in 2004
during the last high, soybeans were valued at about 66 reais per sac
a Brazil port. From a Brazil producer perspective, there is no
incentive to be clearing new land given these economics. The
situation is compounded by high energy costs, Asian rust problems,
and environmental restrictions regarding new permits for clearing
land. If a permit is granted in the Amazon biome, it can mean a
mandatory permanent reserve of up to 80% of the land area. Only 20%
can be opened and planted to crops. We hear all the large numbers of
how much cerrado there is to be opened for production in Brazil.
This is true. There is copious amounts of barren land that can be
modified and improved for commodity production. The problem is that
much of this land is barren for a reason. The problems could be
remote location, low rainfall, lack of irrigation potential, slope
of the land, or is currently pasture for cattle.
Going forward I do not see large amounts of new land being opened.
I think it would take soybeans to trade 13 dollars a bushel for an
extended period of time to start the land fever again in Brazil.
There are some cerrado regions closer to the ports that will become
more and more attractive in the next land speculation wave. I think
increases in productivity per hectare will be the best place to look
for increased production. In my opinion soybean prices will have to
reach a level that makes it discouraging for a cattle producer to
continue to range feed his cattle herd. This is where Brazil
can expand quickly with regards to soybean and corn production if
need be. However, we are no longer talking about a culture of
clearing trees and brush for soybeans, but a whole culture
transition from cattle to soybeans. This is where Brazil's next 10
million tons of soybeans will come from, old pasture ground. The
problem is cowboys are not soybean farmers. So thus land
prices will have to rebound to a level that encourages the cowboy to
liquidate his cattle herd and let the soybean farmer take over.
Predictions:
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In 5 years or less Brazil will produce 70 million tons of soybeans.
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In 2 years Brazil will produce 60 million tons of corn. However if
new varieties
come on line with GMO characteristics Brazil can produce 100 mmt of
corn.
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Cotton area will continue to grow at about 10% per year or 100,000
hectares per year.
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Sugarcane will plateau at 7 million hectares for now. If the USA
alcohol tariff is reduced, then Brazil will double sugarcane area
again. As of today there is no incentive to continue rapid
expansion.
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