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Your Profit: Watch South America

U.S. farmers had another challenging crop-production season in 2013. This created a lot of volatility in the spring when planting delays threatened corn yields and in late summer when a drought took its toll on soybean yields. As combines are being put away, U.S. farmers ended up with a great corn crop and a fair soybean crop. The record 14 billion-bushel corn-crop projections proved to be too optimistic, and it appears it will be another year of disappointing soybean yields.

Going forward, it looks like a contest to see who can project the largest soybean crop from Brazil. However, it is way too early for those projections. Corn and soybean planting is in full swing in South America, where the early indications are for a 3% to 4% increase in soybean acreage in Brazil and Argentina. Private forecasts are for a record Brazilian soybean crop of 3.3 billion bushels and an Argentine soybean crop of over 2 billion bushels.

In the last year, the Brazilian real dropped about 32%. The real has dropped from being worth 66¢ in February 2012 to the recent low at 41¢. If the low from 2008 at 40¢ is taken out, the next major support is at the 2004 low at 30¢. The hard drop in the real is a mixed blessing for Brazilian farmers. They are now selling cash soybeans at a near-record 34.80 reals per bushel. The bad news is the large number of reals it takes to buy fertilizer and other inputs. The bottom line: In 2014, Brazilian farmers will increase soybean acres and reduce corn acres.

I agree with the forecasts for more soybean-planted acreage in Brazil. However, I question if that will automatically result in a record crop, and here are three reasons why.

1. Cerrado

The northern areas of Brazil where the acreage will increase are in the Cerrado region (the undeveloped prairie). Converting the prairie from grassland to productive farmland takes at least two years.

In the first year, farmers have to tear out the grass and small trees and plant a cover crop. The soybeans that are planted in the second year have about 50% of the normal yield potential, as farmers apply lime and fertilizer to get the right soil tilth, pH, and fertilizer placement.

2. El NiÑo

An El Niño weather pattern is developing. The warming of the Pacific Ocean historically results in dry weather and lower yields in Argentina and southern Brazil. If an El Niño weather pattern develops, then recent history suggests below-trendline yields in Argentina and Brazil.


3. History

The early projections for a record soybean crop in Brazil have been wrong in three of the last four years. I have noticed a pattern over the last 10 years showing Brazil having a good crop one year, followed by disappointing yields the next year. Brazilian farmers had a great crop in 2013. So it is very unlikely they will have another bin-buster yield in 2014.

Now what?

Here are some suggestions for what to do with your 2013 corn and soybean crops. This year, the merchandising decision is pretty easy. Start by looking at the alignment of the corn and soybean futures markets.

The corn futures market shows July 2014 corn is trading at 26¢ over the December 2013 corn contract. In the industry, this is called a carrying charge. I am not super bullish on corn futures; however, I am friendly to cash corn. If you add the 26¢ carry onto a 20¢ to 40¢ basis appreciation, then you can see that holding cash corn into the first or second quarter of 2014 can make you an extra 46¢ to 66¢ per bushel or about $50 to $70 per acre.

For soybeans, it is the opposite. The July 2014 soybean contract is trading at 50¢ per bushel less than the January 2014 contract. This is because anticipation of a large soybean crop in South America is being built into the futures alignment. In trade lingo, this is called an inverted market. This means even if your cash basis improves by 20¢ to 40¢ per bushel, it does not make sense to store your 2013 soybeans past early January 2014.

After you meet with your tax person, you may want to consider selling your soybeans in December 2013 or January 2014. If you still want to maintain ownership of part of your soybean crop, then the best move is to make the cash sale and then to buy the July 2014 call options or bull call spreads.

Is this risky? Yes, but if you understand how options work, then it is actually less risky than holding on to your cash soybeans in the bin.

Final thoughts

Farmers learned a valuable lesson in the bull market run in 2012 and the bear market sell-off in 2013. Those producers who used a combination of marketing tools (including cash sales, hedges, and options) had a lot less risk. They consistently seemed to end up with a better average selling price than farmers who just held and hoped.

Hope is not – and never will be – a good marketing strategy.


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