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Plan C

By David Kruse - Columnist | Sep 28, 2020

Part 3

In my son Matthew’s Brazilian safrinha corn production costs laid out in Part 2 of our special report Plan C, I had Matthew attribute a percentage of the rent/land cost to corn relative to the percent of revenue of the two crops, corn following soybeans. By shifting some of the land cost from soybeans to corn it would make their soybeans more profitable. The bottom line is that they have a margin above costs that we presently do not have. Disparate land costs make much of the difference. When allotting a share of the land cost to the safrinha corn crop he still gets a 26% return. As Matthew noted most Brazilian farmers put all of their land cost charged against their soybeans and consider their safrinha corn crop, if they can plant one, to be a bonus. If you eliminate the land rent attributed to corn it lowers their production costs to 217.62 acre and boosts their operational margin to 46%, comparing very closely to the ag resources number. They double crop about half of the acres in the Mato Grosso, a percentage that will continue to grow given their profitability.

Brazilian corn farmers are eating us up from several directions. They have lower land costs; they are growing their domestic demand base for corn and they have a currency advantage when sold for export. The Mato Grosso is similar to Iowa except that they have a longer growing season facilitating double cropping. Imagine what it would do to our cost structure if we could grow soybeans followed by corn in the same season and not pay any more cash rent. They will build up their rent cost in time but are reaping developmental benefits now. Midwest farmers grew crops and learned that they could add value if they walked the grain off farms as livestock. Livestock production is seeing strong growth in the Mato Grosso. They are shipping pork rather than corn for export. We more recently built an ethanol industry to make motor fuel from corn along with DDGs for livestock feed. They are building corn ethanol plants to do likewise in the Mato Grosso. They had been importing ethanol from sugar cane growing areas to the Mato Grosso and now they can export corn feedstock ethanol from the Mato Grosso to meet Brazilian fuel demand and eventually compete with ours for export. They don’t get the pushback from a petroleum industry that we do against ethanol. They are growing a domestic corn demand base. This has taken a long developmental process. Domestic internal corn prices have improved. With the development of local demand their market opportunities have expanded as well. 20 years ago, no one could get a new crop corn bid to forward price that did not have too much basis risk. Today that has changed and Brazilian corn farmers can price corn ahead which gives them more confidence that they can grow it for a profit. Why would you not grow something for $101 acre profit as a second crop?

I may have told this story before but I will again paraphrase. U.S. farmers on Matthew’s and his wife Carol’s Brazilian tour last winter visited a farm in the Mato Grosso. The tour asked the Brazilian farmer for his cost of production and he, at first, scoffed, asking them if they wanted him to lie to them. He had visited the U.S. and asked a U.S. farmer for his cost of production and felt he has been lied to “because the numbers he was given would have resulted in a loss and that could not be.” The tour assured him that they were accurate. We are not making any money. He could not conceive of that.

20 years ago, they did not have corn varieties that performed well in the Brazilian climate. They have made huge strides since in corn genetics. If they are profitable, every year adds expansion which leads to a thriving dynamic. John Deere enjoys a growth market in Brazil where every year they need more equipment to farm more acres. The way Deere makes money here is to sell technology. Unfortunately, that technology has not made the difference in our profitability. We have the lead in technology and technology adoption but it is not enough to overcome other impediments to our profitability or to swing competitive advantages our way. There are limits to Brazil’s corn expansion. It is regional to where the season accommodates double cropping. That doesn’t include northeast Brazil. One other advantage that they have is that they get enough rain in the Mato Grosso so they do not need irrigation but the soils drain well enough to limit the need for tiling. Here in the U.S. it takes irrigation to grow a crop corn in the plains and field tile to grow corn in Iowa. Both add to our land cost. There is some double cropping of soybeans behind wheat limited by region in the U.S. Double cropping in Brazil is a structural advantage to them that we frankly do not have an answer for. Not all of Brazil can take this advantage. Not even the locals knew the consequences of such advantages 20 years ago.

U.S. farmers reduced their corn production by 3% this year while Brazilian farmers plan to increase theirs by 8%. They are soaking up the market share of U.S. corn production that we are surrendering. The Ukraine and Russia are doing likewise. Was it not for our farm subsidy payments, we would be growing a lot less corn. While we see their weak currency as a subsidy, ours are paid in cash from USDA. I asked my daughter in-law if they received any subsidies for their farm and she answered an emphatic “no!!” You do not need subsides if you are making money. I think that U.S. taxpayers are growing tired of paying us to grow corn and we need to find a way to grow it for the market again.

In part 4 of Plan C will look at currencies.

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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