August 2009

Slumping Soy Prices To Force Brazilian Farmers To Cut Costs

Brazilian soybean farmers are watching with dismay as soybean prices continue to slide lower on the CBOT. For farmers in central Brazil, these prices are already below the cost of production, when you take into account what it cost to transport the crop to ports in southern Brazil (US 2.50 to 3.50 per bushel depending on where the crop is grown). Brazilians always refer to the May futures and the May ’10 contract would need to be US$ 11-12 in order for them to pencil in a profit given the current cost of production. I do not know where prices are going in the future, but if the current trend continues, the situation could be even worse by the time Brazilian farmers go to the fields to plant their 2009-10 crops.

Last year, Brazilian farmers had to reduce their costs because of a lack of credit, high input costs and slumping prices. This year the credit situation should be better and the input costs (fertilizer) have come down, but soybean prices are once again below the cost of production, so Brazilian farmers may be forced to once again to cut their costs. The easiest way to cut soybean production costs in central Brazil is to reduce fertilizer applications.

The native fertility of the soils in central Brazil is quite low, but with yearly application of phosphorus and potassium and regular applications of limestone (every 3-4 years), the fertility can be maintained high enough to insure very good soybean yields. Problems start developing though if farmers start skipping or reducing those applications of P and K. The heavy tropical rains tend to leach out the nutrients, so if they are not replaced, the soybean yields start to suffer. If they have a good growing season, the farmers can get by one year with reduced P and K applications, but if they continue to reduced P and K applications for two years in a row, then the yields become more questionable.

Certainly under these economic conditions, Brazilian farmers will not be anxious at all to clear more land for soybean production. It can cost between US$ 150-250 an acre to clear land and apply the fertilizers necessary to grow an acceptable crop of soybeans. Additionally, the soybean yields for the first few years after clearing are usually below average until the soil fertility is improved. In the current economic environment, I don’t think Brazilian farmers will be very interested in clearing any new land. In fact, there are farm organizations in Brazil telling their members that this may be a good year to pay off some of their old debts instead of trying to bring new land into production.

With that in mind, I am currently estimating that the Brazilian 2009-10 soybean acreage will probably hold steady. Last year’s soybean yields were adversely affected by dry weather in southern Brazil, so if the weather returns to normal, the nationwide soybean should be better than it was in 2008-09 (2629 kg/ha or 38.1 bu/ac). If the yields would return to 2007-08 levels (2,816 kg/ha or 40.8 bu/ac) then the total Brazilian soybean crop in 2009-10 would total 61 million tons. I would estimate right now that Brazil should produce between 60 and 61 million tons of soybeans in 2009-10.