March 31,2010
Big Crops Not Translating To Big Returns For Brazilian Producers
Even though Brazil will produce a record soybean crop in 2009-10, many soybean and corn producers in Brazil may well end up losing money this year. This is especially true in central Brazil where production and transportation costs are generally the highest in the country. The reasons for the lack of profits are many and varied and they include: low soybean and corn prices, adverse weather, increased disease pressure, poor quality of fertilizers, high transportation costs, lack of infrastructure, a strong currency, lack of marking options, and a lack of government support
Low soybean prices - The prices being paid to Brazilian farmers for their soybeans are some of the lowest in recent years. In some of the hardest hit areas of central Brazil, soybean prices are R$ 23 to R$ 26 per sack whereas last year at this time, prices were R$ 37 to R$ 39 per sack. Brazilian farmers did not forward sell much of their crop and they are still very slow to sell the crop they are currently harvesting. The latest estimates put the total sales at approximately 40% of the anticipated production. The farmers of course, are waiting for some news from the U.S. that will cause soybean prices to strengthen such as either a surprisingly low acreage estimate or adverse spring or summer weather.
Adverse weather - Most farmers in central Brazil started planting their soybeans as soon as they were allowed to do so, which was the second half of September. Many farmers also decided to increase the amount of early maturing soybeans with the intent of planting a second crop of corn after the soybeans were harvested. Unfortunately, there was a short dry period in late October and November in central Brazil, which impacted the early maturing soybeans at the time they were setting and filling pods. Additional, there were very heavy rains during December and January, which impacted the early maturing soybeans just as they were maturing and being harvested. As a result, the yields of the early maturing soybeans were sub-par this year.
Increased disease pressure - Soybean rust moved into the Brazilian soybean fields earlier than normal this growing season and forced farmers to make additional applications of fungicides in order to adequately control the disease. Farmers that applied two or three applications of fungicides during the last several growing seasons, were forced to apply three, four, or up to five applications this growing season. The result was much higher chemical costs than what the growers had budgeted at the start of the growing season.
Inferior quality of fertilizers - Recent studies released in Brazil indicated that the fertilizers that were sold in Brazil for the 2009-10 growing season were far inferior compared to the product's specifications. The amount of active ingredient in some cases was 13% below what was labeled. Brazilian farmers did not know this of course at the time they applied the fertilizers and they now feel that the adulterated fertilizers could be one of the reasons why some of their yields were sub-par. They just didn't apply enough fertilizer to meet their yield objectives. Once the studies were released, the federal government moved in and took control of some of the remaining fertilizer supplies to test if the product met the label requirements, but the damage had already been done.
High transportation costs - The record soybean crop in Brazil has resulted in a shortage of trucks to move the crop to processors and export facilities. Freight costs, which are always high in Brazil, increased another 25% this harvest season. It can now cost more than US$ 3.25 a bushel to ship soybeans from the interior of Mato Grosso to ports in southern Brazil. Farmers point out that in some cases, half of what a farmer is paid for his crops is eaten up by transportation costs. There are many reasons for the high transportation costs, but the main ones are heavy reliance on truck transportation, insufficient highways, poor quality of existing highways, and great distances from the production areas to Brazilian ports.
Lack of infrastructure - The high cost of transportation is a direct result of a lack of rail and barge as options to move grain in Brazil. Trucks transport sixty percent or more of Brazil's grain production over very long distances (its 2,200 kilometers from central Mato Grosso to the Port of Paranagua or a little longer than from Minneapolis to New Orleans). But another missing piece of the infrastructure that drives up costs is the lack of on-farm storage in Brazil. Only about 10-12% of Brazil's grain production can be stored on farm, which greatly limits a farmers options when he has to decide to either store the grain or sell the grain. If he doesn't have his own storage, he has to sell or pay for storage.
Strong currency - The Brazilian currency has been strengthening compared to the U.S. dollar for a number of years. Since the prices of soybeans and corn are set in dollars, as the Brazilian currency strengthens, the price paid to Brazilian farmers for their products goes down. Over the last few years, the Brazilian currency has appreciated more so than nearly every other developing currency. A common occurrence in recent years has been for the currency to strengthen as the growing season progresses. In other words, the farmers got paid less for the crops at the end of the growing season that what was budgeted for at the start of the growing season. Brazilian farmers do not see the same price for their soybeans as do American farmers. They receive a lower price than American farmers due to the strong local currency.
Lack of marketing options - A lack of savvy marketing knowledge has always been the Achilles heel of farmers around the world, and Brazil is no exception. Some large soybean producers in Brazil do use the Chicago Board of Trade and the Bovespa in Sao Paulo to off set their risks and lock in profits, but that is the exception and not the rule. The most common marketing practice in Brazil is to forward sell some of their anticipated production to international grain companies in exchange for production loans. This limits the options for farmers because they are forced to sell a significant portion of their production to one company. The farmers don't like this scenario and the grain companies don't like it, but it's the only way many farmers can get financing for their crop.
Lack of government support - Traditionally, the main government program in Brazil to support its farmers has been to give low interest production loans at the start of the growing season. In the last several years though, they have also instituted minimum prices for the principal crops. The irony of the minimum prices is that they were established when commodity prices were at historic highs and the anticipation was that the government would probably not have to pay those minimum prices. Unfortunately, the world economic downturn triggered a steep drop in commodity prices and now the government can't meet its obligation to pay the minimum prices that it promised.
Take for example corn produced in Mato Grosso. The minimum price set by the government for corn in central Mato Grosso is R$ 13.98 per sack. The current cash price for corn in the state is R$ 8 or R$ 9 per sack. In order to receive the minimum price, the corn must be sold to the government, but the program is so under funded that the government can't purchase all the corn and have it moved out of the state to where it is needed. Last year in Mato Grosso, the government purchased 85% of the state's corn production, but many silos are still full of the corn, which is already causing storage problems. The storage situation is going to get much worse when the safrinha corn harvest begins in the state in June.
Conclusions - Many Brazilian farmers are disappointed that even though they are producing a big crop of soybeans, the profit margins are going to be slim this year, if there is going to be any profits at all. Brazilian farmers are holding onto their soybeans in the hope of improved prices. In recent years, the market has given Brazilian producers opportunities to sell their crops due to adverse weather in the U.S. or a drop in soybean acreage. It remains to be seen if those opportunities will once again appear in 2010.