It is clear the agriculture sector of Brazil is excited as the country prepares for a new president and an end of socialism. Agriculture will have a powerful seat at the table and is ready to begin to exert its influence.  The cotton industry is energized with some beginning focus on preparing the needed infrastructure for the 2019 record crop and the effort it will take to move this crop to export. November cotton export shipments reached 198,400 tons which set a record.  Exporters continue to battle a shortage of containers following a drop-in import. Brazil is the world’s largest exporter of coffee and now moving up the ranks in cotton exports and both products compete for container space. If imports do not pick up during the first of 2019 then shipping cost will rise as shipping companies will have to bring in empty containers, which is expensive. This, plus the increased trucking cost, will impact basis levels or grower’s income. Much of the cotton crop is sold FOB the port with growers responsible for the cost of the truck freight.

Brazil imports have increased the last three months; November imports were up 28.3% at 16.9 Billion USD but remain far below the record set in October 2013 of over 23 Billion USD. Capital goods imports surged in November with China the top import source. Capital goods are goods used to produce other goods.  This data is in line with the increased manufacturing activity. No retail sales data is yet available for the post-election period.

The success Brazil has had in improving cotton quality is evident in later ginnings with some merchants offering 1 5/32 length cotton and even a few bales of even longer staple. This is quite an accomplishment given that as recent as 2015 and 2016 significant issues with short staple was occurring with a high percentage of exports 1 3/32, which are now seeing a reduced role.  This compares to a base grade in most contracts of SLM  1 3/32 with a small premium for better quality. Merchants remain very aggressive basis offers for the 2018 crop with sales of the Middling 1 1/8 noted at 875 on March. Brazil lacks the storage facilities to carry cotton for long periods so shippers, for the most part, hold ginned cotton in yards under tarps which means the need to move inventories is always an issue. Brazil will need to move a record volume to export in 2018/19 and 2019/20; note that the 2018 crop moves in the 2018/19 calendar year and the 2019 crop in 2019/20.

Lots of attention was created last week when the CEO of one of Brazil’s largest agriculture production firms said that Brazil could bring 43 million hectares of new land into production. This would come from the new Frontier states and degraded pastures. This of course got lots of attention for it represents more than 106 million acres, more than the total US soybean acreage in 2018. Several weeks ago we discussed a switch in sourcing of some tractors from China to plants in Brazil and November production of agriculture machinery in Brazil surged 70% indicating a real awaking of the industrial sector and new confidence after the election. The push to improve infrastructure is gaining momentum. China has targeted Brazilian infrastructure as part of the Belt and Road. In 2017 China Merchants Port purchased a lease on the very important Port of Paranagua in the South. In 2018 the China Construction Corp, which is the driver in the Belt and Road, purchased 51% of the project to build a grain terminal at the Port of Sao Louis in Maranhao state in the north. This port will handle about 10 MMT of grain and fertilizer as well as oil products. There have been some discussions of container facilities that would allow cotton export but that appears to have possibly been dropped in the final tender.

Now a landmark railway project, known as Ferrograo, connecting Mato Grosso and other regions to the northern ports appears ready to be tendered in early 2019 after some delays. It will build up to an estimated 1,142 kilometers or nearly 710 miles of railway track when complete. It is estimated to cost 12.7 Billion Real or 3.27 Billion USD. A group of Mato Grosso growers are reported to considering a stake in the project. The tender to operate the railway and build it has drawn the interest of the Shanghai Pengxin Group which owns the grain trader Fiagril which operates in Brazil. Cargill has also been mentioned. This project is badly needed and would dramatically reduce logistics cost for grain. It is extremely important for cotton to be included in the project but we have not heard of any container services being considered. One issue is that the northern ports are heavily focused on bulk grain and iron ore.

Earlier this year we discussed how Argentina’s crisis and sharp fall in domestic consumption was driving the Cotton crop to export and increasing its role as a USD export earner. 2018 exports have lived up to the hype reaching 70,761 tons during the January - October period with shipments of 17,494 tons in October. Indonesia is the top market followed by Pakistan, Vietnam, Turkey and Thailand.  2019 planted acreage is up sharply and the crop should be near 50% higher which means another sharp increase in exports.