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Nov 25, 2007
The rate of deforestation in Brazil has
been greatly reduced. In some instances one can find
cerrado being cleared or a producer finishing a project in the
forest that was approved a few years ago for clearing. The acreage
amounts are nominal. A few hundred acres here and there are being
prepped for production. Many analysts assume that if the CBOT
reaches a high enough price that Brazil will expand X %. Given the
weak dollar, I am a bit pessimistic on Brazil’s ability to expand
quickly like in the past. We all know Brazil has millions of
acres of pasture that can be prepped for soybean production.
The question will be at what price level does the rancher sell or
move his cows to a new area and then prepare the old pasture for
soybeans? In my opinion Brazil needs about 18 months to gear
up the expansion machine like we witnessed back in 2000 to 2004.
Double digit expansion of area will not be seen overnight. Single
digits is all we can expect for the next 1 to 3 years. To
bring new pasture online one must apply large amounts of lime and
fertilizers to increase the base saturation of nutrients. This
takes time for the soil to build. New land might only produce
30 bushels of soybeans per acre the 1st year. The subsequent years
the yields will increase and become at par with established land.
The costs of fertilizer are very high globally and this is also a
disincentive to risk taking on new speculative lands.
In southern Brazil a soybean farmer will break even at about 30
bushel per acre. If he produces 50 bushels per acre and can
sell at $9.75 per bushel, he will make some good money in 2008.
The potential is there to net 200 dollars per acre growing soybeans.
The southern Brazil producer does not have any new area to expand
to. He is locked into his soybean/corn and sometimes wheat rotation.
Sugarcane has also expanded on old soybean baseline acres and thus
keep those acres tied up for another 4 years.
For the interior Brazil producer his break even yield is about 40
bushels per acre. If he can sell his extra production for
$7.50 USD per bushel in 2008 and produce 50 bushel per acre, he will
make about 75 dollars per acre on his soybeans. This is a lot better
than the previous 3 crops, but still not to exciting to bet the farm
on new expansion. Keep in mind back in 2004 when soybeans were the
same price in Chicago, an interior Brazil soybean producer could
make about $150 dollars per acre. This was turbocharged by the fact
that the dollar was 3:1 and thus gave the farmer a lot of buying
power with $450 reais
per acre profit in domestic currency. Today the profit in domestic
currency is only $130 reais per acre. 1/3 the bang for your buck.
In summary, I think Brazil will continue to expand at about 5% per
year in soybean area as as long as Chicago stays above 10 dollars
per bushel. I don’t think Brazil can expand any faster if soybeans
trade 13 dollars per bushel or 20 dollars per bushel. It will
take some time to get the expansion machine going again. 5% of
60mmt is about 3 mmt per year. This is a realistic forecast
for the future. I believe Argentina will increase production 1
mmt this coming year. Paraguay, Uruguay, and Bolivia are also
expanding. Their weak local currencies make it more feasible to
expand soybean area. Look for these 3 countries to add 1.5 mmt to
global supply in 2008.
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