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April 11, 2013

Declining Prices Could Impact 2013/14 Brazilian Crop Acreage

With commodity prices falling and transportation costs rising, Brazilian farmers are already looking ahead to the 2013/14 growing season and wondering about their profit margins. Transportation costs in central Brazil are extremely high and farmers in the region realize that they have been lucky the last couple of years to have had strong commodity prices at the same time that their transportation costs have surged. If commodity prices fall and transportation costs remain high, farmers in the region will be hard pressed to make any money with their 2013/14 crops.

Over the next few months, Brazilian farmers will start to finalize their planting intensions for the 2013/14 crop. When doing so, the benchmark for their planting decisions will be the May 2014 futures price on the Chicago Board of Trade, which right now stands at about $12.40 a bushel. The variable cost of producing soybeans in Mato Grosso is generally considered in the range of $ 8.00 per bushel and the total cost (variable plus fixed) is approximately $ 10.00 per bushel. This is a broad estimate based on 45 bu/ac yield and an exchange rate of two Brazilian reals per dollar. An individual farmer's costs may vary by at least a dollar per bushel either way depending on his yields and location in the state.

In addition to the cost of production, transportation costs out of Mato Grosso to ports in southern Brazil can be as much as $ 2.50 to $ 3.25 per bushel. Therefore, if prices on the Chicago Board of Trade would fall below $12 per bushel, farmers in Mato Grosso would be hard pressed to show a profit growing soybeans, especially with high transportation costs.

If prices do fall below $12.00 per bushel, several things would probably happen in Mato Grosso and other areas of central Brazil. First of all, farmers would slow the rate of expansion of soybean acreage if they would expand their acreage at all. Bringing new land into production, whether it is virgin land or the conversion of pastureland, requires additional expenditures. These new production areas generally have lower yields for the first few years, which mean the cost of production is even higher. The soybean acreage in Brazil expanded nearly 10% in 2012/13, but that sort of expansion would be out of the question in 2013/14 if soybean prices remain weak.

The second thing Brazilian farmer would do is to reduce their production costs. The primary way they do that is to cut back on fertilizer applications. Fertilizers can account for as much as 35% of the cost of growing soybeans in Mato Grosso. If a farmer has been diligent in maintaining his soil fertility, he can skip a year of fertilizer applications and "mine" the nutrients from the soil. If the weather during the growing season cooperates, he probably would not even notice a decline in soybean yields. If he tries to do that for two years in a row though, his soybean yields would probably start to decline.

Brazilian farmers generally do not have the option of switching back and forth between corn and soybeans like American farmers can do depending on the price ratio between the two crops. Brazilian farmers planted 27.6 million hectares of soybeans in 2012/13 and 7.1 million hectares of full-season corn so their crop acreage was almost 4 to 1 in favor of soybeans. Farmers in southern Brazil could decide to plant more full-season corn and less soybeans if the prices favored soybeans, but for many farmers in Brazil, soybeans are their only option, so it's hard for them to cut back on soybean acreage.

Before Brazilian farmers make their final planting decisions, they will wait to see how summer weather in the U.S. is impacting the crops. If the U.S. weather looks good and commodity prices continue to weaken, then I would expect the 2013/14 Brazilian soybean acreage to remain basically steady. If the U.S. summer weather turns adverse and commodity prices strengthen once again, then Brazilian farmers will continue to aggressively expand their soybean acreage.