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May 14, 2014

WASDE Gives Downbeat Assessment of 2014/15 S. American Crops

In the May WASDE report released last week, the agency made their first estimates concerning the 2014/15 crop production in South America and it was generally a downbeat assessment of what they think will happen in South America during the next growing season.

2014/15 South American Soybean Production - For the 2014/15 Brazilian soybean crop they are estimating a production of 91 million tons. That would represent only small gain in area and yield compared to 2013/14. At the start of the 2013/14 growing season, we were estimating that Brazil would produce 90 million tons of soybeans (that was before the drought that hit southern Brazil in December and January), so a 91 million ton crop would represent slightly more than a 1% increase.

In both Argentina and Paraguay, the 2014/15 WASDE estimate represents a hold even or a slight decrease in soybean production compared to 2013/14. In Argentina they are anticipating a slight decrease in soybean acreage being offset by a slight increase in yield with a production of 54 million tons. For Paraguay, they are anticipating a smaller production next growing season compared to the last growing season.

In my view, these are overly pessimistic expectations for the next growing season in South America. The only way that I see these estimates coming to fruition would be if there is a significant drop in soybean prices due to a record large soybean production in the U.S. and a decrease in demand for soybeans from China. There are several reasons why I view these estimates are overly pessimistic.

The general rule of thumb is that if the May futures are in the range of US$ 11-12 per bushel soybean expansion continues in central Brazil because soybean production would remain profitable. Additionally, the market often times provides an improved soybean price just at the time when Brazilian farmers are selling their crop. The improved prices could be the result of acreage concerns, weather disruptions, or tight supplies in the U.S., but whatever the cause, Brazilian farmers are now conditioned to expect that soybean prices will improve in the spring or early summer as they are selling their crop. It happened again this year as soybean prices improved due to limited stocks in the U.S.

The greatest potential for expanded soybean acreage is in central Brazil and farmers in that region had good yields last growing season and they are now selling their soybeans for very good prices. Therefore, farmers in central Brazil will be well capitalized going into the new growing season. I realize production costs for the 2014/15 crop will be higher and that is a concern, but production costs can be controlled somewhat whereas prices cannot be controlled. As long as there is the expectation of good pricing opportunities next spring, Brazilian farmers are more willing to take the risk of expanding their acreage this fall.

Another consideration is the way that soybean expansion has been occurring in Brazil in recent years. Instead of clearing new land to produce a single crop of soybeans, much of the current expansion occurs from the conversion of pastureland to row crop production that involves a first crop of soybeans followed by a second crop of corn. This method of expansion is cheaper and faster than land clearing and the second crop of corn spreads out the risk and gives additional revenue opportunities.

Brazilian farmers are sensitive to prices of course, but they are not as sensitive as American farmers. In the U.S., farmers usually must choose between corn or soybeans, so it is an either/or proposition. That is generally not the case in Brazil since most of the corn is now produced as a second crop following soybeans. That makes corn in Brazil much more sensitive to price than soybeans. I think farmers in Brazil will continue to expand their soybean acreage because soybean production is the basis of their farming operation. If they don't grow soybeans, what are they going to produce?

Having said that, if soybean prices weaken, then the expansion will not be a robust as the 8.3% increase in acreage that occurred this past growing season. Instead of 8%, I would estimate that the Brazilian soybean acreage would increase 3-5%.

I think the 54 million ton estimate for Argentina is also a little on the pessimistic side as well, but it is probably closer to reality than the Brazilian estimate. Argentina has a lot of economic problems that is making producers become very cautious about their production. If soybean prices decline due to a big crop in the U.S., then Argentine farmers are not going to be very anxious to expand their soybean production.

2014/15 South American Corn Production – The 2014/15 corn production in Brazil is estimated at 74 million tons which would be 7 million tons less than the country produced two years ago. In Argentina they are estimating a production of 26 million tons of corn in 2013/14.

For Brazil, they must be anticipating very weak corn prices in order to be that pessimistic concerning next year's production. As I mentioned, corn production in Brazil is much more sensitive to price than soybeans. Corn is more of an add-on crop and you don't need to grow corn in order to stay in business. If the prices are attractive, you expand your second crop corn production. If corn prices are not attractive, you don't need to grow as much corn or any corn at all. Growing safrinha corn is not a requirement to stay in business, it's an option.

Therefore, if corn prices weaken significantly, then I agree that Brazilian farmers will reduce their corn production. For Brazilian corn production, a July futures price of about US$ 4.50 per bushel is probably the breakeven point for Brazilian corn acreage. As I mentioned earlier, Brazilian corn production is more sensitive to price than are soybeans, so if corn prices weaken, then I can't disagree very much with their estimate of the 2014/15 Brazilian corn crop.

For Argentina, I think a 26 million ton estimate for the 2014/15 corn crop is probably a good starting point.

On a side note, most meteorologist are now expecting an El Nino to develop by summer or fall and generally El Nino conditions result in good growing conditions in South America, so that is another reason why I feel their Brazilian soybean estimate might be too low.