August 15, 2011

Currency Swings Impact Cost of Producing Soybeans in Brazil

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Brazilian farmers do not only have to worry about the price of soybeans, they also have to closely monitor the price of inputs and the currency exchange rate because they can have just as much influence on their bottom line as the actual price of the crop.

In central Brazil, fertilizers are the number one cost of growing soybeans and since most of the fertilizers used in Brazil are imported, the price farmers must pay for fertilizers can be greatly influenced by the currency exchange rates. Several weeks ago, the exchange rate between the Brazilian real and the U.S. dollar reached nearly 1.5:1, which was the strongest for the Brazilian currency in almost a decade. Since fertilizers are priced in dollars, the strong Brazilian real lowered the cost of purchasing the fertilizers. With the recent turmoil in the financial markets, the Brazilian currency has weakened compared to the dollar and it is now trading at 1.61:1. Conversely, as the Brazilian currency gets weaker, fertilizers become cheaper to purchase.

This makes determining the cost of production very difficult because it depends on when the farmers purchased their inputs. At least thus far this off-season, it would have been better for farmers to purchase their fertilizers earlier rather than later.

Based on the exchange rate of June, the municipality of Sapezal, which is located in western Mato Grosso, had the highest cost of fertilizers needed to grow the 2011/12 soybean crop. The Mato Grosso Institute of Agricultural Economics (Imea) estimated that the total cost of fertilizers per hectare in 2011/12 is R$ 880 (US$ 220 per acre), which is 10% higher than the R$ 795 in 2010/11 (US$ 198 per acre).

Imea has also determined that the total cost of production for soybeans in the municipality of Sorriso, Mato Grosso including all the inputs, labor, taxes, and depreciation on machinery and land is now estimated at R$ 1,651 per hectare (US$ 412 per acre) compared to R$ 1,503 in 20010/11 (US$ 375 per acre). The municipality of Sorriso is used because it is the largest soybean producing municipality in Brazil with 600,000 hectares under cultivation.

If we assume that the average soybean yield in Sorriso is 43.5 bu/ac (3,000 kg/ha), then the cost of production per bushel in 2011/12 will be US$ 9.47 compared to US$ 8.65 in 2010/11. The average cost year round of transporting soybeans from Mato Grosso to the ports in southern Brazil is approximately US$ 2.75 per bushel although it can be much higher during the peak harvest season. Combining the cost of production and the transportation costs, the break even point last year for soybean producers in the state was approximately US$ 11.40 per bushel and for the 2011/12 growing season, it will be approximately US$ 12.22 per bushel.

Any cost of production calculation in Brazil must be viewed with caution because they are highly dependent on the exchange rate. The above costs were calculated using an exchange rate of 1.6 Brazilian reals to the dollar.