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20 June 2008
Food - Fuel - Environment
- Floods - Exchange rate - Cost of Production-Ethanol
Corn is at
7 dollars and climbing. Soybeans are at 15 dollars and climbing.
Phosphate fertilizer is 1000 dollars a ton and climbing. Cattle
prices in Brazil are 100 Reais an arroba.
This
equates to about 90 cents a pound US for beef. This is a 250%
increase from just 2 years ago. The environmental hawks are circling
watching the Amazon biome closely.
Sugar cane
area has expanded by about 1.5 million hectares in the past 2 years.
There is a glut of ethanol in Brazil at the moment with prices at
the pump about US $ 3 dollars per gallon. A gallon of Gasoline in
USA is above 4 dollars per gallon. It costs about 50 cents a gallon
to transport ethanol to USA.
What does
all of the above mean as of June 20, 2008?
I continue
to read reports from countless commodity analysts on how the USA and
the world are going to balance the supply/demand tables. It is
assumed that CRP and some acreage switching from other crops will
help balance the USA supply/demand tables.
Without
some sort of demand rationing scenario via feed usage or ethanol
production, the USA will run out of corn in 2009.
If corn
prices stay firm and we assume a corn/bean ratio of 2:1 then
soybeans will also stay very strong. 15 dollar per bushel soybeans
in Chicago seems to be a sure thing. The question now will be how
much will Brazil expand in soybean area? USDA is forecasting 7%
increase for 2009. The 2008 Brazil soybean crop was 60 million tons.
They are assuming a 64.2 million ton crop for 2009. If weather is
perfect throughout the whole country, this is an accurate statement.
However, weather is never perfect throughout the whole country.
At this
time I think 64 million tons of soybeans is optimistic for 2009.
Why?
Dynamic producers bought their fertilizer back in January and
February.
They are
looking forward to 2009. The biggest problem for them at the moment
is the inability to price 2009 grain. Multi-nationals are a bit
hesitant to lock in a delivery price for 2009. Margin call exposure
was intense for them in the past 6 months. Some grain buyers
experienced a shortfall in delivered contracted bushels; thus a
double whammy for them. With fertilizer composing 50% or more of the
cost of production for a Mato Grosso producer, there is very little
margin left after all expenses.
Average
production for Mato Grosso producer is 50 sacs/ha or 44.5 bushel per
acre.
The current
price for Mato Grosso soybean is 40 Reais per sac+. This is 2000
Reais per hectare gross revenue. If this could be locked in for
2009, producers would be ecstatic. However, rumors for 2009
contracts are 5 dollars per bushel under Chicago.
10 dollars
per bushel (locally) = 35 Reais per sac.
50 times 35
Reais= 1750 Reais gross
The cost of
production is estimated to be about 1600 Reais per hectare in 2009.
This would
include cost of land, fuel and depreciation. In summary, there is a
small margin for true profit in 2009 today. One must not forget the
carryover debts from years past for many producers that also need to
be paid.
Many
producers have received FINES for over clearing on certain tracts of
land.
This new
era of environmental strictness can also be a drag on ones ability
to expand area.
If you are
on a blacklist, grain companies cannot buy your production. The
grain is impounded.
There are
many areas of the Cerrado that are conducive for soybean expansion.
Many say upwards of 190 million hectares of pasture are available.
That is true. However we must keep in mind that land is pasture for
a reason. The land might be sandy, have a slope, or be in a remote
area that has a history of cattle production. I have traveled
extensively in northern Goias and Tocantins. I ask myself why there
are not more soybeans here. The response is: Kory, we make money on
cattle, why change? Why take the risk?
I look at
their numbers for what they make on cattle or pasture rent with
little or no work and I then see their point. Now with cattle
futures in Sao Paulo above 100 Reais per arroba for fat cattle, it
will take a lot more incentive to sell or rent the farm to a soybean
farmer.
In these
intense cattle regions, there tends to be a lack of grain silos,
fertilizer dealers, and equipment dealers. Someone could convert 500
ha into soybeans easily. It is quite another to convert 10,000 ha
into soybeans. The local communities are not set up for this type of
volume of scale and transformation of the landscape as of today.
Mato Grosso
is the BIG MAMA as per expansion. She provides 30% of all Brazil’s
production of soybeans. Last year she expanded 8%. Will she expand
in 2009? As of today I don’t think so. I think some cotton ground
may switch to soybeans. It will depend on the availability of
fertilizer. There seems to be more supplies of Urea available. This
could provide incentive for more 1st crop corn. How
much? I don’t know. The states of Goiás and Rio Grande do Sul
expanded 1st crop corn last year. If USA corn prices are
strong this fall, I think Brazil will continue to expand 1st
crop corn area. On top of that sugarcane area continues to expand.
The rate has slowed, but once those new areas are planted into
sugarcane, they are tied up for 5 years. In many cases these areas
were old soybean baseline acres.
Given the
cost of production to grow a hectare of soybeans and the
profitability of pasture for cattle today, I don’t see a major shift
of land resources for 2009. Steady as we go will be the theme. The
dollar at 1.60 will be an anvil over the Brazil soybean farmers’
ability to expand.
If the
dollar would bounce back to 2:1 and soybeans remain strong in late
2009, then I think we would have the ingredients for a new
speculative phase in soybean land expansion.
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