Each year, every year, the first order of business for a Brazilian corn and soybean grower is to line up financing. (That's just one similarity many U.S. producers share with their South American counterparts.)
In Brazil, however, a vast majority of the financing comes from the Brazilian government. In recent years, the country's fragile economic and political situation made it difficult for corn growers to bank on getting the government loans in time to maximize production potential by maximizing inputs.
That's not the case for the 1998-99 crop.
The reason isn't a sudden change in attitude toward growers or a new push to increase corn production. The reason is much more simple than economic - it's political.
The Brazilian presidential elections will be held in October, and the man currently holding the office has attempted to lock in the farm vote early. It's a tight race between the incumbent and a populist labor leader. Making farm funding available early was the current government's way of convincing the ag sector that it's committed to agricultural improvement.
By early July, the Brazilian government had announced R$11 billion reals (Brazilian currency) will be made available for Brazilian agriculture for the 1998-99 growing season. That's a 35% increase over the R$8 billion made available for the 1997-98 season. An increase in funding was fully expected, but this substantial increase surprised market-watchers.
Most importantly, R$10 billion of the funding is already available. The early availability could change growers' cropping decisions - and change them significantly.
Despite a thriving and growing beef industry in Brazil, corn production has fallen out of favor ever since the Japanese first financed soybean production in the country back in the '70s. The lack of advancement in corn production and expanding domestic consumption turned Brazil into a corn-import-dependent country. But the domestic Brazilian corn market is now providing price incentive to producers to up their corn acreage.
Corn acres in Brazil were expected to increase between 8% and 12% for the 1998-99 growing season. About half those acres were expected to be "stolen" from soybean production. But the early availability of the funds may make the corn acreage increase even bigger.
Here's why: In the past, intergovernmental bickering delayed the funding until September or even October - past the optimum planting time for corn. The delayed funding made it impossible for growers to put the resources into corn production needed to shoot for big yields.
As a result, corn yields have barely reached yields seen in soybean fields and soybeans have taken over the Brazilian countryside over the last few years. For the 1998-99 crop season, Brazilian producers have the ability and the incentive to change the trend.
The availability of operating funds isn't the only factor that may make 1998-99 the year for Brazilian growers to switch to corn. As mentioned earlier, Brazil's domestic corn demand is growing annually - and with increased demand comes higher prices. If growers see an opportunity to make a bigger buck from corn production, they'll switch from soybeans in a heartbeat.
The overriding issue that determines soybean area is the U.S. price of soybeans during August and September. That's when Brazilian producers are making purchases for the October-through-December planting season. If U.S. soybean futures fall to the $5.50 area around September, planted soybean acres in Brazil could be down as much as 10%. If soybean futures hold above $6, Brazilian bean acreage will be steady to down 5% from 1997-98 levels.
And, finally, don't forget about the weather. By July, La Nina was getting a foothold in the Pacific, threatening to bring less-than-ideal growing conditions to South America. With production risk at higher-than-normal levels, many Brazilian growers may look to cut their risk by growing a crop with lower input costs - corn.
Bottom line: Don't believe all the talk you'll hear this fall about expanding soybean acres in Brazil. In fact, odds now favor at least a slight reduction in bean acres, tightening global supplies and potentially lifting the global bean price floor.