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Plan C

By Staff | Aug 28, 2020

Part 1

Do you remember Plan B?

I was concerned about the growing competitiveness of Brazil 20 years ago. They were the up and coming soybean producing competitor. My idea was to use the loan rate in the farm program to support our soybean price and roll acreage from corn into soybeans so that we would temporarily flood the global market with cheap soybeans and crush Brazils fledgling soybean industry. Sounds like something Donald J. Trump would do, right?

We had a floor under soybean prices and we would make money from what corn was grown. There was interest from U.S. farmers but they want the “government” to control things like this. These are the same farmers who say they want “government to be small.” I know it is confusing.

U.S. farmers are farming for the government today and not getting paid very well. Our global ag competitors are doing well and are expanding their market share. What concerned me then about growing Brazilian ag competitiveness in the global soybean market has become my fear coming true. The trade sees Brazilian soybean production growing another 8% next season. They are vaulting to be the No. 1 soybean producer and they are profitable while we are not.

What is even more concerning is that they are about to take the same leap in corn and few are even talking about it. Farm leaders are most concerned about bringing home the next subsidy check from Washington. That is how they think they are graded by producers. At the recent meeting with Secretary of State Pompeo here in Iowa, I was told that our farm board leaders kiss up something terrible to the administration hoping to get kissed back. The ethanol industry got a swat not a kiss. There is currently no farm policy in this country. There is no ag trade strategy. Trends are against us and no one is even formulating a response. We lose and the USDA reimburses us. How long do you think that can work? Our president narrative is that farmers are doing so well they need to buy new tractors. Why doesn’t this delusion register with farmers? They know that it is delusion but are sticking with him.

Go to: https://youtu.be/i7JsQO-qxgo

My son Matthew and I are going to take a deep dive into the competitive differences between Brazilian and U.S. agriculture in a special report called Plan C.

In December 2001, Matthew and I traveled to Brazil and when I was introduced there it was noted that I was the American with “Plan B”. Our objective was to evaluate the potential of Brazilian ag.

They had minuses back then. They had development costs and they had a lack of transportation farm to market kind of infrastructure that the U.S. had the comparative advantage in. We have since not improved ours, still talking about new locks and dams, while they have made significant progress investing in new transportation infrastructure down there. We also discovered that they lacked risk management tools that U.S. farmers enjoyed. They had a comparative lack of access to capital that kept U.S. ag well financed. They compensated for a lot of those things in their land costs. We never discovered that they had any great advantage in labor or regulatory costs.

Brazilian ag was new and they didn’t know what they didn’t know. What we learned is that one on one, single crop season versus single crop season we were neck and neck on soybean growing economics. They had the ability to scale up production that we do not have. In Bahia, where we were, cotton became the high value crop that made money. Yields there improved and one year, Matthew’s corn yield in Bahia beat mine in northwest Iowa.

Bahia had a slightly shorter growing season which made double-cropping unworkable compared to other regions in Brazil. The Mato Grosso is Brazil’s Iowa and they’re double cropping corn after soybeans is what makes them the money. Not unlike Iowa, they have grown value added industries in the Mato Grosso producing livestock and more recently corn-based ethanol. As they expand their internal ethanol production, using corn, that will circle back to kick us too as they will import less of ours. That will hurt our ethanol corn demand unless we can find a replacement buyer. They had been our best ethanol buyer pre-Covid-19. Our current EPA will not even support the 15 billion gallon RFS mandate. Matthew’s in-laws in Minas Gerais have a dairy, feed cattle and grow coffee which diversifies their soybean seed operation. They double crop both corn and sorghum there after soybeans, something that makes money. They are the most competitive coffee producer in the world and are expanding that production too.

USDA forecast that U.S. farmers will produce 381 millon metric tons (mmt) of corn this year versus Brazil producing 101 mmts. Roughly 30% of Brazilian corn production is single crop and the rest is safrinha double crop corn. China bought 2 mmts of corn this week which was a pleasant surprise. Next year they forecast that Brazilian corn production will reach 110 mmts, up 9 mmts. Brazil and the U.S. can produce all of the corn that China will buy. The problem is that Brazilian farmers are doing it profitably and we are not. Currency valuation and land costs makes them profitable. I wish that they were manipulating their currency but frankly the valuation fits the condition of their country. It is not good. Matthew’s in-laws sold corn last year off-season for the equivalent of near $5 bushel. I was surprised to read that ag resources calculated that Brazilian safrinha corn farmers were making a 50% return while we are losing money. I put Matthew, who has a decade’s experience farming corn/soybeans and cotton in Brazil, onto confirming that and he will crunch the numbers to see where their profit comes from in part 2 of this special report…Plan C.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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