If you think Washington, D.C., is crazy, get a load of this…
Last year, Brazil’s Senate impeached former President Dilma Rousseff for corruption.
Last month, prosecutors filed corruption charges against Michel Temer, Rousseff’s successor. If he doesn’t step down, he could be impeached, too.
But it gets even better… Temer’s potential successor is under investigation for abuse of power.
To add fuel to the fire, Brazil is also facing an international scandal involving tainted beef. Several countries, including the U.S., have banned Brazilian meat this year.
Political corruption and the beef industry scandal have delivered a one-two punch to Brazil’s economy.
Here’s why I’m telling you about Brazil’s crisis…
It will boost demand for U.S. grains.
Last week, I told you that U.S. grain stockpiles had peaked, and supply would start tightening this year. That would push prices higher.
Now, we’re going to see demand for U.S. grains pick up, too. That’s the second tailwind that will send prices even higher. Let me show you how…
Finding Opportunity in Chaos
Brazil is the leading exporter of beef in the world (the U.S. is fourth). But its beef industry is suffering. And that will create an opening for U.S. grain exports.
There are two reasons for this. Let me explain…
The first problem is political.
Because of massive political corruption, no one knows who will lead Brazil next year. Foreign importers are wary of doing business in the country due to political uncertainty.
The second problem involves unsafe meat-packing practices.
The U.S. Department of Agriculture (USDA) has rejected 11% of Brazilian beef imports this year due to unsanitary conditions and health concerns.
The problem got so bad that the USDA announced on June 30 that it would temporarily ban beef imports from Brazil.
China—the world’s largest importer of meat—also banned some beef imports from Brazil. Mexico, Chile, Japan, and the European Union have taken measures to avoid importing Brazilian beef, too.
The scandal has rocked the Brazilian beef industry.
Rabobank is a leading financier in the agricultural sector. According to the bank, Brazil’s beef exports had dropped 10% before the scandal broke earlier this year. They’re down even more now.
That drop has created a huge opening in the world’s meat market. And U.S. cattle farmers are making a move to fill it.
Here’s why this is important…
Cows and pigs combined consume more U.S. grains than people do.
To replace the decreasing supply of Brazilian beef on the world market… U.S. cattle farmers will increase their herds. Those bigger herds will need more U.S. grain.
There’s also this: China is lifting a 14-year-old ban on U.S. meat. This ban has been in place since the 2003 mad cow disease outbreak.
Per the latest U.S. Meat Export Federation (USMEF) report, U.S. beef exports are already 12% higher than last year.
As U.S. beef exports rise, so will the need for cattle feed. And that will boost grain prices.
Grains Are Hitting a Double
As I wrote last week, U.S. grain stockpiles have peaked. The trend is reversing, and supply will start shrinking this year.
The last two times grain stockpiles were so large, the Bloomberg Grains Subindex spiked 80% and 118%—just over a year later.
Add to that the increasing demand for feed from U.S. cattle farmers, and you have two tailwinds that will boost grain prices higher.
I like to see multiple reasons before getting into a trade… And now, there are two fundamental reasons for U.S. grain prices to skyrocket this year: tightening supply and increasing demand.
Prices will follow.
Remember, there are many ways to play this trend. You can buy ETFs focused on grains, seed companies, and fertilizer companies.
Nick Rokke, CFA
Analyst, The Palm Beach Daily
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