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Corn+Soybean Digest

Sizing Up South America

(Note: This is a partial summary of what I learned on my most recent trip conducting marketing seminars in Brazil.)

I was again amazed at the huge potential for increased corn, soybean and cotton production. While I look at this potential, I also see a lot of problems that still exist.

The good news is that with growing global food and fuel demand, prices and profits are likely to improve in the U.S., Brazil and Argentina for the next few years. Economic growth, good growth and the ability to buy more food are the dominant features through-out Latin America, India and China.

Here's my current estimate of the corn and soybean crops out of Argentina and Brazil. Argentina could have a record corn crop at 19 million metric tons (mmt) and a huge soybean crop of 43 mmt. Brazil farmers could harvest a corn crop of 45 mmt with a soybean crop of 56 mmt.

Farmers in Brazil face three major problems:

  1. Transportation is difficult and expensive. As I traveled in the eastern state of Bahia, Brazil, cash soybean basis bids were $1.85 below the Chicago Board of Trade (CBOT). Further west in the state of Mato Grosso, the bids are $2.25 below.

  2. Credit is still expensive with a huge amount of carryover debt from operating losses the last two years. With farm loan rates of 2% per month, the interest bills are huge and growing.

  3. Rust is now manageable in most areas — but the cost of spraying three, four or five times really hurts bottom line profits every year.

At marketing seminars, these are the five questions that Brazilian farmers had for me as a U.S. farmer and commodity advisor.

  1. Who makes the decisions to buy and sell for the commodity funds?

  2. How much in farm subsidies do you get, and will you get an LDP this year?

  3. How do you get such huge corn yields?

  4. How big will the drop be in planted soybean acres next year as U.S. farmers plant more corn?

  5. Why do farmers pay so much rent when they can barely make a profit?

In summary, it appears that the Brazilian farm crisis has bottomed out.

When I first went to Brazil, profits were booming with high soybean futures and low currency values. As an example, in 2004 the U.S. CBOT soybean futures market was at $10.24 and the Brazilian real was at 34.22. Farmers were selling soybeans at 29.88 real/bu. Today the real is at 47.02 — and May 2007 soybean futures are trading at $7.25. Farmers are getting about 15.13 real/bu. This is up from the record low price of 11.4 real/bu. last fall. At this price, most farmers can break even or show a slight profit if they can get a yield of 50 bu./acre or more.

Now get ready if the May 2008 futures rally up to $8.50 or more. If they do, you can anticipate a 5-10% increase in planted soybean acres for the 2007-2008 growing season.

We will see more South American soybean production and larger U.S. corn production. Both continents' farmers can profit as global food demand grows.

The Worst Is Over

Despite the all of the problems I've listed, it appears that the Brazilian farm crisis has bottomed out. The $1.60 rally in the soybean futures market has helped, as has the potential for record or near record yields for most areas.

The Brazilian cattle industry, also an important part of the Brazilian profit equation, has rebounded from 30-year lows and begun to show improved prices and profits.

Alan Kluis is the president of Northland Commodities LLC, based in the Minneapolis Grain Exchange, Minneapolis, MN. You can contact him at alan@kluisnews.com or call toll free 888-345-2855.

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