|
15 April 2009
In my February 09 newsletter I outlined, for subscribers, the
potential losses for South American soybeans because of the drought.
I eluded to 18-20 MMT tons may be at risk. As I write this the
markets are now grasping the idea of 20 MMT of soybeans in South
America that are no long available. The latest number out of
Argentina is 36 MMT. 50 MMT was expected. Brazil will be 55-56 MMT.
Brazil was expecting 60-61 MMT for the season. If we add in losses
from Paraguay we start to see that 20 MMT has evaporated from
initial expectations. Prior to the global financial meltdown, many
market analysts were telling us that it is imperative that South
America expand soybean area to help meet world demand. 20 MMT or 740
million bushels later we are still in balance?
I cannot help but wonder if this same drought scenario would have
played out in the Spring of 2008; just how high would soybeans have
traded? 20 dollars? 25 dollars?
For those that have been reading my newsletter know that sugarcane
business is in the dumps too. The lower crude oil values slowed
Brazil exports of ethanol. The credit crunch has slowed the pace of
sugar exports. Many sugarcane mill projects that were approved some
time ago are now on hold. Everyone is waiting to see what will
happen. Many sugarcane suppliers are still waiting to be paid for
sugarcane delivered in 2008. Do you think they will be eager to
deliver 2009 production to same mill?
Sugarcane tends to get planted on fertile soils. Once sugarcane gets
planted it is good for 5 to 7 years. Thus those new projects that
expanded post hurricane Katrina in 2005 are still locked into their
rotation for another 3 to 4 years. Once a project has reached its
acreage goal, that is when producers start to rotate out 20% of the
base area each year. They will disk down 20% and then plant 20% back
into cane on new ground. New projects that have started since 2006
will be reluctant to continue to expand area with current economics.
The state of São Paulo is sugarcane ground zero. They produce 60% of
the cane.
Pre-hurricane Katrina Brazil planted 5.5 million hectares of cane.
In the last 4 years that area has grown to circa 8.5 million
hectares for 2009. I think Brazil will plateau here. Without higher
crude oil prices I think this area could actually start to shrink
in 2010.
Many clients ask what is Brazil's potential for expanding its soybean
area. I have been consistent in saying that with the high costs of
production and environmental enforcement of the frontier areas, it
is very difficult for Brazil to expand its AREA. In earlier essays I
have stated it will be a battle between cowboys and soybean farmers.
The cowboys have been making money with cattle until recently. No
reason to change. Could a few hectares get switched from pasture to
soybean ground? The answer is yes. However it will be very nominal
amounts for the 2009/10 planting season that starts in September.
With this stand off it is very difficult for Brazil to get above the
60 MMT soybean crop potential.
I have told clients that even though some nominal expansion takes
place in the frontier, back in the states of São Paulo, Goiás, and
Mato Grosso do Sul they continue to plant sugarcane - 3 million
hectares have been planted the past 4 years. Some of these hectares
came directly from pasture. However, a good number of these hectares
were what I call old soybean BASELINE acres. Some of this land has
been farmed for 20 or 30 years. It was very fertile and a ripe
candidate for sugarcane when the economic conditions fueled the
transition.
Remember those 5.5 million hectares of sugarcane I mentioned above?
20% of those hectares need to be rotated and replanted each year.
Thus about 1 million hectares will be disked down later in 2009.
Given the economic fundamentals at the moment in cane, I would
suspect that some of those hectares will not be planted back into
cane. This is where Brazil can increase some soybean production for
2010 crop. Soybeans will show a nice profit on fertile ground and
the producer will at least get paid on time.
Early 2010 soybean crop forecast:
-
If above average amounts of fertilizer are purchased for 2010, this
can bump the soybean crop 1.5 MMT. If we take 500,000 ha of cane and
rotate back into soybeans with a yield of 3000 KG/HA, we can find
another 1.5 MMT of production.
-
If we assume a 60 MMT baseline we can now foresee a potential 63 MMT
soybean crop. If cattle prices continue weak and soybeans continue
strong in Chicago with a dollar exchange rate of above 2:1, we will
then see expansion of soybeans at the expense of cattle. However, I
think it will be the 2011 crop before it is noticeable. This is what
will take Brazil to 65 MMT+ in soybean production. It will not be
from newly deforested areas of the Amazon.
I will update newsletter subscribers during the year as to how this
theory is unfolding.
|
