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January 11, 2016

Ag Performed Well in Brazil in 2015, Future less Certain for 2016

Brazilian agriculture continues to be the bright spot in an overall gloomy economic picture in Brazil. The overall GDP in Brazil declined 3.2% in 2015 while the agricultural GDP increased 1.0% to 1.5% in 2015. With the 2015/16 crops encountering weather challenges, the agricultural growth in Brazil in 2016 is expected to be less than in 2015, but it is still expected to outperform the Brazilian economy in general.

According to the Agricultural and Livestock Confederation of Brazil (CAN), it was the devaluation of the Brazilian currency in 2015 that kept Brazilian agricultural exports competitive in the world markets. The top ten Brazilian exports in 2015 were: soybeans, iron ore, petroleum, poultry, sugar, soybean meal, cellulose, coffee, corn, and beef. The biggest increase in exports in 2015 was for corn at over 40%. It is estimated that Brazil could export as much as 35 million tons of corn from the 2014/15 growing season.

Another bright spot in Brazilian agriculture in 2015 was poultry production. According to Revista do Avisite, Brazil is now the second largest poultry producer in the world edging out China for second place after the United States. Avisite and the USDA estimated that Brazil produced 13.1 million tons of poultry in 2015, which represented an increase of 3.5% compared to the 12.6 million produced in 2014. While Chinese poultry production figures are uncertain, it is estimated that the Chinese production was 13.0 million tons in 2015 putting it slightly behind Brazil.

While 2015 had many positive results for Brazilian agriculture, the picture for 2016 is less certain. The weakening of the Brazilian currency in 2015 was very important for the agricultural economy, but it has also increased the cost of imported items such as fertilizers, which are 70% imported, and agricultural chemicals. It is not clear if the Brazilian currency will continue to weaken in 2016, but one thing is certain, the cost of producing grain in Brail in 2016/17 will increase significantly.

Brazil will also have a much stronger competitor next door with the election of Macri as Argentina's new president. Argentina's new president eliminated the export tax on corn (20%) and the export tax on wheat (23%) while lowered the export tax on soybeans from 35% to 30%. He also allowed the Argentine peso to float resulting in a 30% devaluation of the currency. Additionally, the Argentine government will no longer attempt to limit grain or meat exports in an attempt to control domestic inflation. The combination of these actions is going to significantly improve domestic prices for both crops in Argentina.

As a result, it is expected that Argentine farmers will increase their corn acreage in 2016/17 by 30% to 40%. The initial increase in corn acreage will probably come at the expense of soybean acreage, but within several years, both the corn and soybean acreage in Argentina is expected to increase. The big problem for Brazil is that Argentina exports both crops at the same time as Brazil, which means that Brazil will now have a much stronger competitor for both crops.

In addition to the external headwinds, Brazil continues to struggle with inadequate infrastructure resulting in higher transportation costs than its main competitors - the U.S. and Argentina. Brazil has been making some progress in recent years on infrastructure improvements, but the recent severe downturn in the Brazilian economy is slowing that progress.

Predicting the future is always a very difficult thing to do, so Brazilian farmers are hoping for the best, but they realize that 2016 might be a very challenging year.