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South America’s Changing Face

Agriculture.com Staff 03/12/2014 @ 11:26am

By Jacquie Voeks, guest columnist

There are some things going on in South America right now that can affect the current situation for soybean prices, and also paints for us a longer-term picture of South America as a world supplier of beans. Brazil is the largest producer of soybeans in the world, and so what happens there, either weather or political, is of interest to U.S. agriculture.

According to a respected agronomist I follow, Dr. Michael Cordonnier, the way Brazil is responding to its infrastructure problems may have implications we’ll need to keep an eye on. Here’s the scoop:

Brazil is in the process of changing all their major highways into toll roads. They are about one third finished right now, and by the end of next year 100 percent of their roads are expected to be converted to toll. What this means is, depending on how far a Brazilian crop farm is from the nearest port, costs for transporting that crop increase significantly. If you are in Mato Grosso du Sul, and you are hauling beans or corn to either the Port of Paranagua or the Port of Santos, the two major ports in that region, it adds approximately 44 cents per bushel to go to Paranagua and 50 cents a bushel to go to Port of Santos. The state of Mato Grosso, Brazil’s  largest soybean producing state, is 2.3 times farther away than Mato Grosso du Sul. This is a straight out, added expense.

What this could do down the road is change the export picture. It will increase their prices. It could even encourage increased livestock and corn ethanol production in Brazil to increase internal usage of beans and corn.

Take this infrastructure situation and couple it with the fact that their currency has been devaluing – this is true for both Argentina and Brazil – while the U.S. Dollar is getting stronger, you add another twist to the picture. All of their products are priced off of U.S. Dollars, but paid for in their local currency. So the weaker their currency gets, the more they are actually getting for their products! This dynamic could encourage expansion of agricultural production. And yet, many Brazilians and Argentinians are unwilling to let go of their products because they would be paid in the local currency, in which they have very little confidence. They would be letting go of a physical product that has value in U.S. Dollars.

So we have this strange set of dynamics going on in one of the largest crop producing areas of the world, and these are things most U.S. producers do not think about. We don’t see this happening as we go about our daily work. Public policy in this part of the world has almost as much impact on prices as does weather. And, like weather, politics and local economies are unpredictable.

This is why U.S. producers need to be prepared for multiple price scenarios. We may believe that prices are going to go a certain way based on fundamentals or weather reports. There could be other things brewing behind the scenes that we are unaware of. And even if we do learn about them, it is impossible to predict what politicians will do with their pens. As long as seasons continue to turn and politicians cycle in and out of power, markets will be unpredictable. The wise producer will be strategically ready to act when the next price move happens, whether that is up or down.

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