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30 July 11
LAND LAW
 It has been one year
since the pre-election posturing by Dilma Rousseff’s party to limit
the ownership of land by foreigners in Brazil. The land market for
big farms-to --foreigners is soft. Many Brazil farmers are using
this opportunity to expand. I know of several deals that are unable to
close because of this new law. However, I do know of a few smaller
deals that are in the process of closing now. Lawyers and investors
are devising alternate legal structures to circumvent the 51%/49%
requirements. It is not hard to do but does require trust and faith
in the legal system to protect all parties. Generally speaking
Brazil farmers are open to foreign investment. They see new capital
in the interior as a positive for everyone.
The Dilma Rousseff administration has had a generally positive
start. In general they are continuing the Lula economic platforms
and making a few changes such as privatizing airports. They are
doing this to help stimulate pro–forma as per the construction and
preparation for the 2014 World Cup and 2016 Olympics. To date they
are running behind schedule.
THE MARKETS
 The administration has
been tweaking the domestic financial markets. They have imposed a
tax on short term money that is invested here for 90 day periods.
The carry trade to invest money inside Brazil remains attractive. They now want to tax currency derivative trades to help
curb the long REAL and short Dollar trades. This gets to be a
nebulous layer of regulation. There are multinational corporations
that need to hedge off risk while their products are en route to
international destinations and until the transactions are closed. A
grain trading company will have positions on in Chicago but still
will want to hedge their Dollar/REAL risk on the Forex. From what I
understand these transactions will continue to be un-taxed; so long
as they are hedge positions. Who is to say where the hedge ends and
the
spec position starts. These are all grasping at straw type
regulation to try and weaken the REAL. It is tremendously
over-valued. China imports of all products into Brazil are booming
and Brazil manufactured exports are imploding. Ag exports are
hanging in there because of the global “Agflation” and demand for
food. With profitability in agriculture showing a decent return,
farmers can tolerate the strong REAL on the sell side so long as
fertilizer and chemicals are stable or actually decrease in price in
“Dollar terms”. Any type of weakness in Chicago with regards to
soybean prices, the strong REAL will become a major issue in ag
sector.
Brazil has become an expensive place to travel and live. São Paulo
is now South America’s most expensive place to live. In some areas
of Brazil, residential real estate has doubled in the last six
months.
Brazilians are traveling to USA and Europe to buy electronics,
clothes, jewelry and take vacations.
The ability for Brazilians to access “reasonable rate” credit
(relatively speaking from historical levels) has become very easy.
The amount of consumer debt in Brazil has risen exponentially in
recent years.
With the dollar at 1.50:1 and the internal inflation, one can “feel”
the price increases inside the country.
For anyone that has not been to Brazil in the last three years, they
would be very surprised as per the cost of things. The international
“Big Mac” index says it all. SIX US$ for a Big Mac today inside
Brazil.
The number
of flex fuel cars sold inside Brazil in recent years has been
remarkable. The demand base for bio-fuels is growing faster than the
investment in sugarcane plantation and milling can increase. Five
years ago Brazil was going to drown the USA in cheap ethanol. Today,
Brazil is importing ethanol from USA to fill in the gaps in its
blend ratio of 25% ethanol in gasoline. They are trying to maintain
this blend and to curb inflationary pressures. This year’s sugarcane
harvest is coming in 15% less than last season’s to date. Some of
this is due to the lingering drought of 2010 and a second part is
due to the yield drop in aging stands of sugarcane planted post
hurricane Katrina. Year ONE sugarcane can yield 100 tons per ha.
Year FIVE sugarcane yields 60-70 tons/ha. Millions of hectares of
sugarcane need to be replanted and also the area needs to expand to
handle global sugar demand and domestic fuel needs. Subscribers to
my newsletter were forewarned of this potential several months in
advance of harvest.
Soybeans and Corn
Last year was a “La
NINA” year. Last season I forecast a soybean crop sub 70 million ton
for Brazil. This turned out to be wrong. I said Argentina will
produce a sub 50 million ton soybean crop. This turned out to be
correct. Last week the ARG government reduced their crop size to
48.8 million tons.
I cannot elaborate adequately just how “lucky” Brazil was last
season. Rains came in the nick of time to save Rio Grande do Sul
soybean crop and they ended up producing a record. Northeast Brazil
in the area known as
MAPITOBA received beneficial rains throughout the “LA NINA”
cycle. They had above normal yields on expanded areas.
Mato Grosso and Bahia surged in cotton planting for 2011- plus 60 to
70% increase YOY. I originally forecast a larger switching of
soybean area to cotton. This happened. However, the rate in pasture
conversion to soybeans last season out ran the switch from soybeans
to cotton. The end result was a net increase in soybean area and a
new record production for Mato Grosso. This pasture conversion is
continuing as we speak. I look for about + 500,000 hectares of “new
lands” to come on line for the 2012 crop year.
The caveat for the 2012 season will be soybean area in the southern
states switching back to first crop corn. Domestic corn prices
remain very strong inside Brazil. This is due to the reduced
production of second crop corn due to frost in Parana and drought in
Mato Grosso. Domestic corn prices are at a premium to CBOT.
From what I am seeing and reading as per the USA crop, we are going
to have an average USA yield in the low “150s” per acre. A situation
similar to last season. Thus the carryover stocks in USA for both
corn and soybeans remain tight for another crop cycle or circa 8 to
10 months. Commodity prices should remain firm baring a macro-
economic black swan event. Since 2008, Brazil switched 1.9 million
hectares of first crop corn to soybeans. These hectares are the
“Flex”hectares in Brazil. These hectares can be “bought”. Thus, even
though Brazil is expanding by + 500,000 hectares in new lands, we
can see a switch back of 500,000 hectares (or more) from soybeans to
first crop corn and sugarcane. Thus the YOY change in planted area
net to soybeans could be “unchanged” even though new lands are
coming online. If we have 8 dollar corn in September in Chicago, we
could see planted area of soybeans decrease YOY. The possibility
exists.
Once the planting season begins on Sept 15th and the growing season
gets underway I will increase the number of newsletters I send out
and flash updates to subscribers.
CRYSTAL BALL -
BRAZIL
As of Aug 1 my crystal
ball looks like this:
I think we will have a normal start date to soybean planting on Sept
15th.
I think Brazil will plant 24.2 million hectares of soybeans with a
production potential of 72.5 to 73 MMT for 2012. (I do not think
Brazil will repeat its national yield average as per 2011)
First crop corn area will surge and likely yield 40 MMT or more in
early 2012.
CRYSTAL
BALL - ARGENTINA
Argentina will plant 19
Million hectares of soybeans with a production potential of 55 MMT
Argentina will also plant large amounts of first crop corn and
likely produce 26-27 MMT
I expect corn and soybean prices to remain firm until early 2012. If
the above crop production potentials are realized by FEB 2012, this
is when I expect the bear market to begin in commodities.
With one more cycle of South American crops combined with Australian
wheat harvest in the bin, the world stocks will finally start to
increase whereas we will have a “cushion”again.
By early 2012, the perception will be for record planting of corn in
USA and planted area of wheat in Europe and Russia will have
rebounded with record crops being forecast. |
