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August 3, 2018

Brazilian Farmers may Plant 3-4% more Soybeans in 2018/19

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

At the present time, it looks like Brazilian farmers will increase their soybean acreage for the 12th consecutive year in a row in 2018/19. I am estimating that the Brazilian soybean acreage will increase by 3-4% to 36 million hectares or more. If the weather cooperates during the growing season, the 2018/19 Brazilian soybean production could be 121-122 million tons.

Brazilian farmers will start to plant their 2018/19 soybean crop in mid-September but there are a lot of uncertainties that could impact the future soybean crop including: freight rates, cost of production, delayed input deliveries, currency exchange rate, trade war between the United States and China, Brazilian presidential elections, and of course - the weather.

The primary factor that would favor soybean expansion in Brazil are favorable domestic soybean prices. The strong Chinese presence in the Brazilian market has resulted in high premiums at Brazilian ports which translate to favorable prices in the Brazilian interior. If the U.S. and China persist in their trade dispute, domestic soybean prices in Brazil should remain favorable.

After a very profitable year in 2017/18, the cost of production in 2018/19 is expected to increase in the range of 10% and the margins are expected to be approximately half of last year. Even with the reduced margins, soybeans still offer a better opportunity for Brazilian farmers, which could result in further reductions of full-season corn acreage in southern Brazil as farmers continue to switch full-season corn production to soybeans. Full-season corn and soybeans compete for the same acreage in southern Brazil and the trend in recent years has been to plant more soybeans and switch the corn to safrinha production, which is planted after the soybeans are harvested.

Therefore, the Brazilian soybean acreage could increase due to less full-season corn acreage, the continued conversion of degraded pastures to row crop production, and the clearing of new land. While it looks favorable at the present time for increased soybean acreage, there are also a lot of uncertainties as well.

Forward Contracting - Brazilian farmers have been very slow to forward contract their anticipated 2018/19 soybean production due to the uncertainty surrounding future freight rates. Currently, farmers in Mato Grosso have forward contracted approximately 20% of their 2018/19 crop, which is much lower than normal for this time of the year. Additionally, they have only sold about half of their current corn production, also due to uncertanities surrounding the freight rates. Many grain companies are not even putting out an offer to purchase grain due to the freight issue.

The hope in the agricultural community is that the higher freight rates (20% to 40% higher than last year and in some cases 100% higher) will be reversed by the Brazilian Supreme Court. Therefore, no one wants to commit to a price based on the current freight rate if the rate might be lower by the time the crop is harvested and sold next January and February.

Cost of Production - Brazilian farmers are bracing themselves for higher costs to produce their 2018/19 crops. The higher costs are associated with higher prices for imported fertilizers and chemicals due to the weaker Brazilian currency and higher costs to transport the inputs from Brazilian ports to the interior.

Delayed Input Deliveries - Only a fraction of the needed fertilizers have been delivered to farmers in the interior of Brazil. The delayed deliveries are also due to the uncertainty surrounding freight rates. Some of the fertilizers that are being delivered to farmers are actually being contracted under the previous lower freight rates, which is not supposed to happen.

It is entirely possible that Brazilian farmers may end up applying less fertilizers to their 2018/19 soybean crop, which could result in lower soybean yields if the weather during the growing season is less than favorable. My estimate of 122-123 million production of soybeans in 2018/19 is based on normal weather and normal fertilizer applications. We will not know how much fertilizers will be used until we get further into the planting season. Therefore, there is a potential that my soybean estimate may decline if Brazilian farmers actually do reduce their fertilizer usage.

Currency Exchange Rates - The currency exchange rate is always an important factor for Brazilian farmers. Currently, the weaker Brazilian currency favors relatively strong domestic grain prices, but the exchange rate can change between now and when the crop is sold next January-February-March. The worst case scenario for Brazilian farmers is to plant when the prices are good due to a weak currency only to have the currency get stronger by the time the crop is harvested and prices are lower.

Trade War - Right now there is an impending trade war between the United States and China, which favors Brazilian farmers, but no one knows if the trade dispute gets worse, gets better, or how long it will last. If this trade issue gets resolved in a relatively short period of time (months), that would be bad news for Brazilian farmers. I am not even going to guess how this trade dispute is going to play out.

Presidential Elections - Brazilian will choose a new president in October. If the pre-election polls indicate that the potential new president favors financial reforms, then the Brazilian currency could strengthen and grain prices could move lower. If the pre-election polls indicate that the potential new president might abandon financial reforms, the Brazilian currency would weaken and grain prices might move higher. The presidential election will occur just as farmers are in the field planting their soybeans.

As you can see, there are a lot of factors that could impact the Brazilian soybean acreage in 2018/19 and the eventual soybean production.