Last year wasn't a great time to be a Brazilian farmer. Soybean and corn producers across the country were hit with droughts at planting and near floods at harvest, and earlier and stronger onsets of Asian rust in between. The biggest problem was a worsening of an already unfavorable exchange rate — creating extremely low market prices.
The picture isn't pretty. Although the government initially expected an output of 60 million metric tons (mmt) for the 2005-06 soybean harvest, the Brazilian Association of Vegetable Oil Industries (locally Abiove), now pegs the crop at 52.6 mmt, 12% below the government's initial estimate.
DEEP IN THE RED
The Brazilian grain sector has accumulated losses of more than $10 billion in the past two harvests, 68% of which came at the expense of the soybean industry. Diesel fuel is up 200% since 2004, and the devaluation of the U.S. dollar in relation to the real is down 25% since 2004. Most producers in Brazil depend on export markets, so a weak dollar means fewer reals for their beans.
THE BIGGER THEY ARE…
A recent study by a federal university predicted that in Mato Grosso, Brazil's biggest soy-producing state, acreage will fall by 2.5 million acres for the crop being planted in late 2006. That would amount to a reduction of 17% from the 14.6 million acres planted in the state last year. (As a point of reference, Illinois farmers planted 10.1 million acres of soy in 2006.) Fewer acres planted will ripple throughout the state's economy, and are estimated to cause a loss of 76,000 jobs ($400 million in lost wages) and sales tax losses of $40 million in the state.
The Center-West region will lose the most, down 2.6 million acres. The large percentage acreage reductions in Minas Gerais and São Paulo come from strong competition from expanding sugarcane mills.
Yields have fallen, primarily due to rust and fewer inputs. Fewer inputs per acre will be used due to low prices and lack of credit available for input purchases.
CORN AN ALTERNATE
In Brazil, they say, you can “grow” anything, but selling it can be a little bit harder. Corn is one of Brazil's alternative crops, but farmers like to call it the “poor cousin,” due to the high input costs and currently low and unpredictable market prices.
After reductions in planted area for the past two harvests, experts don't expect corn to move up in the “crop family” pecking order any this year. Many producers in the southern states of Paraná and Rio Grande do Sul are planning to reduce their corn acreage by 20%, and some will only plant corn during the safrinha (winter crop).
Some Paraná producers passed on corn this past winter and opted for wheat instead. Our Londrina, Paraná, producer told us that wheat prices went up 40% this year. This was the second year that he bypassed corn, and he plans to use wheat for this year's winter crop as well.
Brazil's national fertilizer association is expecting an 11% drop in sales this season, the second year in a row of reduced usage. This would be similar to the amount supplied to producers in 2002-03, a crop that included 45.7 million acres planted to soybeans. At the end of August, annual sales totaled less than one-half of the previous year's sales, and the association believes that its industry may not return to higher levels until at least 2010.
CASH AND CARRY
Credit restrictions imposed by input suppliers and banks have already negatively impacted grain production. Historically, farmers have only been required to pay cash for 30% of their inputs, with the balance due after harvest. However, debt carried over from the past two seasons is forcing input suppliers to change the rules, increasing demands for collateral, other guarantees and cash.
Many small and medium producers won't be able to meet the requirements for more cash up front, so expect to see not only a reduction in planted area, but also in the amounts of fertilizers and chemicals used on the acres that are planted.
Total farmer indebtedness to input suppliers alone is estimated at over $2.7 billion, and this doesn't take into account the debt held by state-owned and private banks. Market experts believe that the debt issue will be the single most important factor restricting the size of the 2006-07 crop.
El Niño is expected by some this year, typically delivering more rainfall and less sunshine. Rainfall, especially falling as continuous periods, may hinder spraying for rust and insects. And in Mato Grosso, they shudder at the thought of seeing another rainfall during harvest. El Niño years have historically ended with losses in most Brazilian ag sectors.
SOY ACRES AND PRODUCTION TO DROP
Our interviews lead us to believe that Brazil will plant 10.6% fewer acres to soy this year, primarily due to continuing poor economics and the lack of credit. Using yield estimates based on the previous three crops, we see soy production falling by 5.8% from last year's already reduced levels, dropping to 50.3 mmt.
THE OPTIMIST'S VIEW
What could prove our pessimistic output projections wrong? Brazil's production could exceed our projections…
- If rains fall early and adequately, and there isn't a major drought — anywhere.
- If the majority of farmers plant certified seeds, rather than cheaper pirated seeds, or bin-run seeds, to cut costs.
- If Asian rust doesn't show up as early as it did in the past season.
- If the U.S. dollar exchange rate rises by at least 20% and stays there.
- If insect attacks are not as heavy as they have been in past seasons.
- If producers are able to both plant and harvest at the right time, without deluges of rain.
- If world market prices don't fall even lower than they are today.
- If producers are allowed to import chemicals from alternative, less expensive sources.
- If the government significantly improves the federal highway system.
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