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Letter from Brazil

Logistics Chaos...Where?

You've heard plenty about logistics chaos in Brazil, but why?

You've probably hear a lot about the chaos of logistics in Brazil, but I ask this question: why?

The fact is that with a record crop, we need many trucks to bring the beans to our ports, then the most basic premise of the market asserts itself:

Supply v. Demand

There is a great demand for trucks to drain the soybeans in Brazil, but the truck fleet hasn't grown at the same pace as our production. That means freight is restricted.

Keep in mind that Brazilian production should increase by about 25% compared to last year. Meanwhile truck production fell 40% and the record of licensed trucks fell 20% - according to data from ANFAVEA from 2012. In other words, our fleet does not track with the growth of our production. And this is only related to soybean production.

Now let's take a look at the flow of soybeans into our ports. Considering the volume of exported soy, corn and soybean meal, Brazilian exports rose 15% in 2012 compared to 2011. And it clearly demonstrates that even with losses we had in the past soybean crop we continue to export in full swing. Considering that exports of soybeans in 2012 topped 32 million metric tons nearing the record 32.95MMT shipped in 2011. And that was with the old record production of 75 million tons.

That same record production in 2011 created large inventories and got 2012 started in full swing, with record export volumes of 1.011MMT in January 2012 and 1.568MMT in February 2012. That's extremely atypical export behavior compared to volumes of the last 12 years.

So to get to the best possible decision making we need to compare garlic with garlic and not garlic with oranges!

In January 2013 soybean exports practically did not exist in our country and even recorded a volume of 30,000 tons of imports. That can be explained because we consumed our carryover stocks at record levels, and production of early varieties, primarily in the state of Mato Grosso, was not enough to supply our market.

Now let's look at the data for February 2012 we set a new export record of 1.568MMT - in 2011 that number was 663,000MMT, and the 10-year average was 612,000MMT. In February 2013 the number topped 959,000MMT, or about 33% less than 2012.

If you look and compare volumes exported with 2011, this year we had our soybean production record and we exported 328% more soybeans in 2012 and that beat the old 2007 record by 23% for soybeans. I know that's a lot of numbers, but these numbers are essential in defining whether there is logistical chaos in the country or not.

And these numbers prove that there is no chaos in logistics here! Yes roads are in poor condition that results in much of the cost of our freight; and our railroads are tiny and with limited access. Not to mention new laws that will impact our truckers that will soon take effect.

The reflection I am proposing to you is that even with the logistics infrastructure that we have had in the last five years, we've seen a 40% increase in exports of soybean, soybean meal and corn and the last 10 years we have had an increase of 159%.

I know that many readers may question my comments here, but it serves as a warning to you producers. The long lines of trucks at our major ports now end up posing pressure on the port - the lack of grain to export creates a positive premium (something we observed from August to January). But if there is an excess of grains in port, the premium is negative - which is happening now and tends to increase the discounts.

Looking ahead a range of predictions look toward record exports, with CONAB saying 36MMT, USDA at 37MMT and our forecast which indicates exports above 40MMT. And even with this record export volume there is no correlation that says prices will be higher.

Looking toward 2013, USDA says North American soybean production will be higher than 93MMT. Add in South American production of 150MMT and we will have a good recovery of world grain stocks.

Another extremely important point is than in February, much of the global demand for soybeans was located in South America. The decrease in U.S. exports tends to negatively impact the international market even if the U.S. has to import more than 9MMT until harvest to meet domestic needs.

In conclusion, I look at the situation globally and in Brazil and shows us that even with record export volumes we see margins falling. The high cost of truck freight will combine with greater discounts at the ports to push down prices.

I ask that the reader seek cooler reflection on the situation, leaving sensationalism behind. Seek risk management for your farm and work to preserve margins.

The title of this report was provocative on purpose, because my intention was to get you to read the long test to the end. Thanks for reading and remember not to be blinded by half-truths. Brazil can deliver the grain to the global market, the logistics "chaos" you hear about…it's not real.


João Carlos Kopp

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