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The next crop of soybeans and corn has been planted in Brazil. My wife’s family finished just last week. They typically like to get everything in by December 1st, but with heavy rains it pushed the planting window back a week. Other areas like the Mato Grosso were ahead of schedule, beating their five-year planting average by several days or more. This would indicate that Brazil’s crop prospects are firing on all cylinders. The sooner the crop gets in, the better odds they have of producing a bumper crop. Ag consultants are already busy putting together crop estimates. Celeres estimated they see the crop being between 123 MMT on the low end and 130 MMT on the high end. This is notable as last year was 119.5 MMT. So even on the low end, they would set another crop production record, adding another 3.5 MMT or roughly 130 million bushels over last year. That is the low end of the estimate. On the high end, they could add as much as 385 million bushels over last year’s record production.

The general consensus was probably already leaning towards reducing soybean area and increasing the corn area. Based off of the information above, it only increases the argument for reducing bean acres next season. The soybean market relationship with the US and Brazil reminds me of the oil market situation between OPEC and the US. As US technology has improved, oil output has been gaining, reducing the need for oil imports. This created an oil glut from exporting nations. To reduce the supply, OPEC has gradually been cutting production. While this has temporarily provided support to prices, the US simply increases output, essentially replacing OPEC market share with that of its own. I see the same happening with the soybean market, but not in our favor. The US will look to cut soybean acres, and while this will provide a temporary support for prices, Brazil will simply step in and increase output, taking over whatever market share was forfeited by the US.

While some of those soybean acres move to cotton or wheat, the bulk of it will move to corn. This is not a bullish sign either, as the corn market has problems of its own. While long-term corn demand has shown signs of reducing year end carryover, it is not yet ready to take on the burden of shifting large acres to more production. It seems the corn market has only just begun reducing carry over stocks to under 2 billion bushels, and it would not take much to move the needle back above that number again. For those who are optimistic, it may pay to be contrarian, as a resolution to the trade wars with China would most certainly have a positive response to the market….at least initially. This should create a major rally at which crop sales targets should be executed. Assuming this happens, and that is still a big assumption, the euphoria will eventually give way to reality. The reality being that regardless of China buying our soybeans again, global inventories are still quite large.

SLC, a publically traded farm production company in Brazil with nearly 1 million acres of corn, soybean and cotton under production, recently stated that there is still well over 100 million acres of land in Brazil that can be converted to grain production. Many assume that this is all rainforest but that is not the case. With over 200 million head of cattle on pasture, Brazilians are finding that much of that land can be successfully converted to row crop production, increasing the value of the land. While it will take many years to convert this land, current economics are working strongly in its favor.

Typically when you have a strong production year increasing supply, market prices drop, offsetting profit potential. Prices in Brazil are challenging the typical supply and demand trends as prices remain favorable, mostly due to increased exports to China. It is the best of both worlds. Record production AND good prices. It seems to good to be true, and so naturally analysts begin to question how long it can last. As I write this, the basis in Rondonopolis, Mato Grosso is about U$1 under Chicago. That is impressive considering that it has been historically closer to U$2. There are places in North Dakota that reportedly have more or less the same basis. This seems difficult to believe that the farm gate price in North Dakota is nearly identical to that of places in the Mato Grosso which has some of the cheapest grain on the planet due to its remote location and lack of transport infrastructure. And yet here we are.

The other thing to consider is the potential for Brazil’s second crop of corn, which has quietly been gaining in size the last ten years. Timing is critical as the second crop of corn is double cropped immediately following the soybean combines. While some of the earlier planted soybeans can begin harvest in January, it is possible that soybean harvest could begin before Christmas in some areas. It is still early in the growing season, but this will only increase potential for the second crop of corn yields to reach new production records as well.