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Letter from Brazil

Massive South America Crops

Looking ahead, weather and production are lining up to set some records.

It's a pleasure to me back to write for Farm Futures, now with my official Blog.

Me and my delegation had a great visit to the 2012 Farm Progress Show, where I made a presentation about South America crops, and we had a lot positive feedback, and from now I will do my best to explain for Farm Futures readers, how the South America Markets works and influences the global grain market..

South America Agriculture is so young and has a lot things to learn with American farmers. And south of the Equator we are blessed with a perfect weather that provides us two season of summer crops, plenty of rain and good soil conditions; but everyone knows, that Brazil doesn't have enough infrastructure to move grains from field to market and Argentina (top 3 Soy producer) has governmental barriers that hurt incoming farmers.

Farmers in Brazil and Argentina don't regularly go to exchanges to lay off risk. In fact less than 1% of farmers go to the exchange to make a hedge, and in Brazil it is too diffcult and expensive to cover costs of these positions. Given this obstacle, farmers adopt a strategy of producing more and more, trying to cover consecutively more expensive inputs, and try to raise profits through production.

Last crop year, South America was hit with a severe drought, like our friends in the U.S. are seeing now, due to the weather and a challenging La Nina. And even with those challenges, Brazil is running a new soybean export record. And there was a record corn export market too.

So far, Brazil has exported 31.614 million metric tons (1.1161 billion bushels) of soybeans, and last year it was a record with total exports of 32.985 MMT. In fact, this year we only need to export another 1.371 million metric tons - about 50.38 million bushels - to set a new record in soybeans. For soybean meal, we're seeing a big slowdown in exports. Already they have slipped 10.223 MMT - or about 375 million bushels - against 14.355 MMT - 527.5 million bushels - in 2011. Even if we export the best month we've had in 10 years, meal exports will close under that 2011 number.

King Corn is another situation altogether. The big recovery in Brazilian corn due to exceptional rainfall for the second crop had Mato Grosso producing 107% more corn than in 2011. Mato Grosso do Sul is up 83.5% and Goias is up 44% from 2011. With that, Brazil will hit a total of 73 MMT - or 2.68 billion bushels. And that number could reach 76 MMT (2.792 million bushels), because we have a lot of grain stored in the open - believe it or not!

I inserted a photo from a Brazilian website to show you just what is happening down here.

Brazil has already exported 9.42 MMT - 346 million bushels - of corn which is more than all the exports made in 2011 (9.177 MMT); and is close to reaching a new record above 10.618 MMT. If we consider the three-year average, Brazil could close the year with 13.154 MMT. However, that drop in soybean and meal exports may give corn more room to register higher monthly records. With that, we could end the year with close to 15 MMT in corn exports - thats 551 million bushels.

All this corn is a strain on the logistics systems of the country. If we consider the best month until March, Brazil could export 3 to 4 MMT. That won't help the U.S. situation much, but would be a relief to Brazil. We have a huge volume of corn and it could be a tremendous headache for our farmers because exporters are already fully stocked with corn for shipping and there's a lot of grain to pick up from farms until December.

We could be carrying out 11 MMT - or 404.21 million bushels of corn - and while that number seems small to Americans, it is a huge carryout for Brazilians. It is a big question and a big problem because we are seeing a jump in freight costs. And South Brazilian states need corn, but where to put it? I don't have the answer.

Here's a look at some projections.

Last year we were the first to estimate the Brazilian soybean crop under 70 MMT - 2.572 million bushels; and Argentina's crop under 40 MMT - or 1.469 million bushels. We're seeing a year when there was an increase in soybean acres due to higher prices and more farmers raising soybeans than corn. That's a total reversal than U.S. farmers where corn offers more profits than soybeans.

In my projections we will see a good acreage of soybeans in Mato Grosso, rising 13% and with yields of 3.190 kg/ha we can see total production of around 24.938 MMT (or 916.39 million bushels) up from 21.849 MMT in 2011 and adding 3.089 MMT - or 113.51 million bushels - to Brazil soybean production. Part of this is a move of cattle off of pastures - which will be planted to soybeans - and an intensification of cattle production into more feedlots.

The great recovery that i expect from the South States - in Rio Grande do Sul for example, is an increase of 9% and I assume production of 2.845 kg/ha - or 43.914 bu/acre - and that could actually rise to 3 kg/ha and 46.3 bu./acre. Last year CONAB  - the national supply company - estimated 43.8% in losses, I considered 50% for Rio Grande do Sul with normal weather conditions and the region will produce 12.66 MMT - or 465 million bushels - adding 5.134 MMT from the 2011/2012 crop.

In Parana there's another great surprise. While the region was hard hit by drought it wasn't as bad as in RGDS. Parana could produce around 16.48 MMT - or 605.6 million bushels - which would be a recovery in yields for the region to around 3.360 kg/ha - or 51.86 bu./acre.

For finished soy estimates I add in Goias, Mato Grosso do Sul, Bahia, Sanda Catarina and Minas Gerais for another 2.370 MMT - or 87 million bushels. With the weather we've had, I estimate total Brazilian soybean production willhit 83.370 MMT - or 3.036 billion bushels. Considering actual conditions, however, we think Brazil soybean production may come in more at 82.5 MMT - 3.0316 billion bushels.

In Argentina, we expect to see a good soybean season too with acreage between 20 and 21 million hecares - or about 42 million acres. And total production could top 53 MMT - 1.947 billion bushels and may even reach 55 MMT - 2.021 billion bushels. Paraguay will probably hit about 10 MMT, but could reach 11 MMT (404 million bushels). Uruguay can product around 1.5 MMT - or 55 million bushels.

Considering the best weather conditions until harvest, South America could bring a massive 151 MMT (5.5548 billion bushel) sobyean crop. I know that we have to see harvest confirm that number, but now with actual climate conditions and projections, South America will help rebuild world soybean stocks. Watching this we could see a slow down in Chinese appetite for Norh American soybeans, because the cheap beans will be in South America.

My big concern is how will South America handle massive volumes, with a poor infrastructure and a lack of storage facilities. Hopefully Brazilians will use more silo bags like they do in Agrentina.

I'll bet a lot of people reading this will be shaking their heads and thinking that last year they heard the same projections with super crops in South America, but don't forget that in the 2010/2011 season Brazil produced 75 MMT (2.756 billion bushels) and Argentina hit 52 MMT (1.910 billion bushels). This year we don't have La Nina and it's better in central-west of Brazil to have a weaker El Nino. A stronger El Nino will provide even more rains for South Brazil, Argentina and Uruguay. In effect, we have everything lining up to see a massive crop.

If anything changes, I hope to be the first to tell you the true conditions as we did last year. Thanks so much for reading this first blog.
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