January 19, 2009

A Comprehensive Look at South America

SUNDAY, JANUARY 18—A three-hour meeting Sunday morning with John Grossmann and Gabriel Ramos, both with ADM in Paraguay. We’re at the “three corners” where Argentina, Brazil and Paraguay meet, so it was about a one-hour trip for the ADM guys. ADM has been in Paraguay since 1997.

PHOTO 1: Gabriel Ramos of ADM in Paraguay talks about the South American market.

John is responsible for ADM operations in both Paraguay and Uruguay, but he was a great source of information on South America in general, including Brazil and Argentina. His colleague, Gabriel Ramos, also provided some powerful information on current production and potential production in the primary South American nations.
Some takeaways from this conversation:

- John said that South America cannot be viewed as a whole. One must consider each nation separately. “Mato Grosso is not South America. Even though you could fit the seven main U.S. Corn Belt states inside Mato Grosso, it is only a portion of South America,” he said. “Brazil is the locomotive for South American agriculture, but each country has unique opportunities and potential.”

PHOTO 2: John Grossmann of ADM in Paraguay discusses the logistic challenges of transporting agricultural products in South America.

- While areas of Mato Grosso hold potential for 2.5 to three crops per year, Paraguay is actually doing it. The difference is rainfall. In Brazil, there is a rainy season and a dry (very dry!) season. Not so in Paraguay, where rains occur throughout the year. As a result, farmers in Paraguay plant soybeans followed by a winter crop of corn in the north or wheat in the south—and then another crop of sunflower or canola. This triple-cropping helps spread out risk and increases the output per hectare.

- Paraguay is the 4th largest soybean exporter in the world. Typical yields are 41 bushels per acre (acre, not hectare) for soybeans and 62 bushels per acre for corn. Grossmann said that farmers don’t really invest in corn. It is considered a second winter crop, and many farmers grow their own varieties by holding back seed at harvest and planting it the following year.

- Argentina is experiencing its worst drought in 40-plus years. As a result, the 22 million metric ton corn crop estimate has been lowered to 14 million.

- Agribusiness companies are serving as the financial services provider for farmers in Paraguay. ADM helps finance everything from inputs to diesel fuel. In return, ADM insists that farmers market their crops through ADM and, if they plant corn, they must plant commercially available hybrids, not the homegrown varieties. ADM has had to offer financial services because the banks are reluctant to do so. In recent years, banks did start to get into ag lending but have pulled back severely in the current financial crisis. ADM also has 60 agronomists on staff to help their customers.

PHOTO 3: John Grossmann talks with David Merrell of Nebraska (left) and Gary Schmalshof of Illinois.

- Argentina is number one in the world in terms of exports of soybean meal and soybean oil. Brazil leads the world in poultry and cattle exports—and is fourth in pork exports.

- John stressed several times that a South American farmer’s success is not based solely on the commodity price. The value of currency can have as great an impact on profitability as the price on the board. For example, a one percent change in the value of the Brazilian reais can affect the per bushel price by 12 to 15 cents. In other words, beans worth $12 per bushel when the currency is worth $1.55 will result in roughly the same level of profitability as $9 beans when the currency is worth $2.40. While currency value affects U.S. farmers as well, it’s a bit more pronounced in South America given the number of nations on the continent.

- Paraguay is becoming an attractive place for outside investors in agriculture, particularly Brazilians. There are also American, Japanese, German and other landowners and operators in Paraguay. “There are state of the art farms in Paraguay of a level that you don’t even see in Brazil,” Grossmann said.

- Uruguay is also getting interest. There were no soybeans grown in Uruguay ten years ago. Now it produces 800 metric tons. One Argentine group is growing 190,000 acres of soybeans in Uruguay.

- We discussed the land use issue. Grossmann says that in Brazil the new acres are not coming from the Amazon forest but from the cerrado, the savanna-like central area of the nation. “Deforestation is not an agricultural issue, it’s a security issue,” he said. Having been on the John Carter ranch, we can vouch for that.

- Uruguay is on the upswing in terms of ag production—and it has a huge upside in terms of potential hectares.

- The population of Paraguay is 6.5 million. Uruguay is 3.3 million. Interestingly, the median age in Paraguay is a young 21 years old; in Uruguay it’s 33. The life expectancy is 75 and 76 years respectively. So both countries have a generally younger population.

- Grossman echoed a recurring theme of this trip—that Brazil has a long term strategic plan and vision for agriculture and energy.

The three hours with John Grossman and Gabriel Ramos flew by—with reams of notes taken by our team. This was an extremely valuable meeting which provided an even better insight into the unique aspects of agriculture in a number of South American nations.

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