Tough times continue in Brazil, where many farmers are still negotiating on 2004 carryover debt and trying to arrange financing for the 2005 crop. The following five factors have combined to threaten the soybean crop in Brazil in 2005-2006:

  1. Rust has been found on plants that are just 28 days old in Mato Grosso. By mid-November rust had been reported in almost every major soybean state in Brazil. With rust starting this early, keeping it under control will be difficult and expensive, with some farmers needing to make four to five applications during the growing season.

  2. Interest rates remain high. The prime rate is at 19% with most farm loans priced at prime plus five with a profitable farmer able to lock in the low rate of 2%/month. This sky-high, short-term interest rate is also one of the main reasons the currency is so strong.

  3. Debt carried over from 2004 is a major problem for farmers attempting to secure financing for this year's crop. In some states as many as 70% of last year's loans haven't been paid off and are in default.

  4. Input and energy costs are much higher for farmers throughout the world. Higher energy costs have caused everything from diesel to fertilizers and herbicides to increase by 10-40%. Basis levels in Mato Grosso are as much as $2/bu. below the CBOT price.

  5. Currency strength is the greatest problem of all.

The Brazilian Real rallied to new four-year highs in November with prices topping out at R45.84. The next chart objective for the Real is at R48.50-50.50. This strong currency has had a devastating effect on Brazilian farmers and soybean processors. Brazilian soybean farmers pay more attention to the currency than prices on the CBOT.

Soybeans in Brazil are priced in dollars, but paid in Reals. The chart at left shows the super strong currency, and the table below shows its impact on soybeans priced in Reals.

The prices received today by Brazilian soybean farmers are down 57% from two years ago. Most farmers need at least R18/bu. to break even. The result has been a 5-10% reduction in acreage with input purchases of lime, fertilizer and herbicides down by 10-40%. For many farmers, spraying for rust will be an expense they can't afford.

With the current low CBOT price, strong currency and major rust expenses, soybean acreage is projected to be down 5-10% with input purchases down 20-40%.

Date Real Value CBOT Soybean Futures Real/Bu.
March 2004 34.22 $10.24 29.78
Feb. 2005 33.22 6.20 18.66
Nov. 2005 45.84 6.00 13.08

Brazil's Impact On U.S. Soybean Prices

Unless Brazil has a perfect growing season, odds favor at least one or two major weather scares. If it stays hot and dry, production will be reduced. And if it's too wet, rust will be a major problem. Odds are good we have put in a major long-term low in soybean prices in October 2005.

Plan to use any South American weather scare that takes the CBOT soybean price back to $6.50-6.80 to increase your 2005 cash sales. With the yield most U.S. soybean farmers hauled in this year, the combination of yield and price will create a good profit for your 2005 soybean crop.

Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want information, write:Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: aginvestor@agmotion.com.