News In A Pod
BRAZILIAN HARVEST LOSSES
The Ministry of Agriculture is closing the books on the 2004-05 soybean harvest. Total output was 51 million metric tons (MMT), against the projected 60 MMT. This represents a 22% drop in income when compared to 2003-04, and 28% less than in 2002-03.
The ag ministry has also issued its first estimates for the total acreage planted with grains in the 2005-06 season. They expect a reduction between 3 and 6%. The total area in the 2004-05 grain harvest reached 120.7 million acres, yielding 113.5 MMT.
EU REJECTS BRAZILIAN PLAN
European Union (EU) Trade Commissioner Peter Mandelson deems the Brazilian requests for changes in the EU's preferential tariff schedule as “unacceptable.” A comprehensive tariff-reduction plan would affect African, Caribbean and Asian nations that depend heavily on preferential treatment. “This is why the current goals of the Americans and Brazilians are unacceptable,” he says.
What's Up With The Real?
Brazilian soybean producers are facing a world of hurt right now. Ironically enough, this is in large part due to the fact that Brazil's economy has been doing well, in fact, too well! How so?
TRADING SOY FOR REAIS
Brazilian farms run on Reais (plural form of the Real), the official currency of Brazil. The vast majority of the soybeans grown in Brazil are for export, and soy is priced on the world market in U.S. dollars. So before a Brazilian farmer can spend his crop revenues, the market has to convert the payments back into Reais, and that's where the Real/dollar exchange rate comes into play.
SUPPLY AND DEMAND FOR MONEY
Exchange rates between countries are driven by a number of factors including interest rates, inflation, balance of trade and stability. In Brazil's case, high interest rates and a strong economy have been drawing in a lot of U.S. dollars, all of which have to be exchanged for Reais. The exchange rate is a numerical display of the balance between this supply and demand between currencies, and for the past several months, the supply of U.S. dollars has been exceeded by demand for Brazilian Reais.
THE INFLATION-INTEREST CONNECTION
Inflation spiked to 7.65% in Brazil in 2004, exceeding its Central Bank's targets, and triggering a get-tough approach with the economy. The primary result of this has been significant increases in interest rates, undertaken to slow a somewhat overheated economy. After boasting the highest inflation adjusted interest rates in the world for several months in 2005 and with some lending rates still more than 18%, Brazil's economy has started to slow down and cool off, with its 2005 rate of inflation hovering at 6.2% at the end of November. Even though the brightening inflationary prospects are good news, the strengthening of the Real was an unintended and, from the perspective of Brazilian businesses, unwelcome side effect of these economic policies.
With planting time soy prices in the low 20s (Reais per sac, or about $4.10-4.50/bu.), it's almost a sure thing that planted acreage will fall in Brazil this year, as break-even for most Brazilian producers with current input prices is R25 per sac or more ($5). Current official and market estimates are for Brazilian farmers to put 5-10% less land into crops for the first time in several years. However, many farmers in Brazil expect a larger decrease, possibly more in the range of 10-20%.
SLOWING EXPANSION/CUTTING COSTS
Very few new/virgin acres will be brought into production this year, as these areas typically have higher costs and lower yields, making profits even harder to achieve. In addition to cutting acres, many farmers are applying less fertilizer and trying to economize on other inputs. Unfortunately, cutting costs without sacrificing yield is hard in Brazil, as the weak soils require fertilizer nearly every year to achieve top yields, and the tropical environment presents challenges that require continuing investments to manage — soybean rust being the perfect example.
SHORT VS. LONG RUN
The fundamentals that have driven the expansion of Brazil's agricultural sector, including low land prices, strong agronomics and an improving infrastructure, remain intact. This indicates that the current downturn will likely turn out to be a short-term correction, rather than a long-run change in trends.
WHAT DOESN'T DEFEAT YOU…
Brazil's economic situation is clearly a challenge for producers there, but just as the tougher times in U.S. agriculture's history during the 1980s created more efficient and financially stronger producers, the current downtrend in the Brazilian ag section may well have the same effect there.
MARKETS FIND A WAY
Consumers, especially the growing population of meat-hungry Chinese, need Brazilian farmers to produce animal feedstocks like soybeans. Regardless of the demand for Reais and dollars, the market always finds a way to encourage sufficient supply to satisfy demand. Predicting how long this downturn will last is difficult, but knowing that it will eventually happen is almost a sure thing.
Brazilian Land Market Update
It's difficult to quantify changes in land prices in the various regions in Brazil. With the poor economic situation, there are very few sales actually being completed. In fact, when we quizzed our contacts in the various regions on the land market in their areas, many of them responded with “What market? There isn't any market right now!” Here is an area-by-area accounting of what producers and professionals have to say about the land market in their area.
Farms sold in many regions of Brazil are often priced in sacs per hectare (ha.), with 1 sac containing 60 kg, or equal to about 2.2 U.S. bushels (1 ha. is equal to 2.471 acres). Sac pricing is a leftover indexing tool from Brazil's history of hyperinflation. In the state of Paraná, which is located in Brazil's southern and older agricultural area, properties in the best production areas normally consider 410-420 sacks/ha. as the starting point for negotiations. However at today's soy prices in the mid-20s/sac, this “base price” would only convert to slightly more than R10,000/ha. ($1,760/acre at 2.30 × rate), and virtually no farmer would consider selling their farm for that price.
RIO GRANDE DO SUL
From his farm near the town of Santa Maria, producer Sergio A. Saueressig indicates that the best price one could expect to receive in his township is around 2,500 Reais/hectare ($440/acre using a 2.30 × rate). Santa Maria is a central and important region in the state with one of the nation's top universities for agronomic studies, and prices there should be some of the highest in the state. Again, his comment is that “there really isn't any land market these days,” at least not for property intended for soybean farming or cattle ranching. Many farmers are selling their properties to cellulose companies, both local and foreign, as the land is excellent for eucalyptus tree production since it seems to grow faster in southern Brazil than either in Europe or the U.S.
Silvio Caiapo, South American Soy's Tocantins farm manager, indicated that prices for farms in his area currently average R6,000 Reais per large alqueire. A large alqueire is equal to 4.84 ha., or 11.95 acres, so this would equate to approximately $218/acre using a 2.30 × rate. This price is down slightly from a few months ago. One area farm recently sold for R8,000/large alqueire ($291/acre), however it was a prime property, well equipped, very fertile and very close to town. Silvio indicates that in general, sales in the area are a rarity as almost no one is trying to buy, and local owners will try to sell only in an emergency or if they are in need of capital.
Comparable to Tocantins in terms of land prices, Piaui is another of the new frontiers for soybeans. Again, there is little volume here to base any value estimates on, but indications are that prices are down slightly, and properties that do sell are typically priced slightly lower than you would see in Tocantins. As a footnote, the state of Piaui is so poor and so frequently plagued by droughts that a few years ago a tourist slogan of “Visit Piaui before it disappears” became known throughout Brazil.
Throughout this state that serves as the northern border to Brazil's older production regions and the stepping-off point into the Cerrado, land prices have dropped by an average of 30%. Several months ago, Type A farms with equipment, buildings, irrigation pivots, etc., might bring more than $2,200/acre. Recently however, a similar Type A farm was put on the market near the town of Conceicao das Alagoas with an asking price of $1.455/acre. Local producer Olavo M. Borges, told us that “it just won't sell.” He believes $1,250/acre is a more realistic level — “but sellers have to be very patient.”
RONDONIA AND MATO GROSSO
Like Paraná, farms are priced in sacs in these two states, creating exactly the same problem as described above; net cash prices that are too low for sellers to accept. The problem is compounded here, however, by much higher freight costs, creating much lower net local prices for soy. In these states, it appears that no one is buying or selling, except in emergency situations.
John Carroll, farming near Sao Desiderio, Bahia, indicates that current land prices range from $400 to $800/acre, depending on whether it's cleared and how long it's been in production (land that has been in production longer tends to produce higher yields, and have lower input costs.) There are farms available for purchase and cash renting as well, with rents ranging from $25 to $40/acre.
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