June 15, 2016
Is Brazil's Soy Situation trending similar to Brazil's Corn Situation?
Buried deep in Conab's 173-page June Crop Report was one paragraph that really caught my attention. It was the paragraph that indicated that Brazil's soybean production would be 95.63 million tons with exports estimated at 54.10 million tons and domestic consumption at 42.50 million tons resulting in a very low (their words) carryover stock of 0.45 million tons.
Let's put that carryover number in perspective. Brazil's domestic consumption of soybeans is about 116,000 tons per day, so the carryover figure represents about 4 days of domestic demand! As we all know, it is impossible to end up with that tight of a supply, the market would never allow it, so what is happening in Brazil?
Soybean exports have been leaving Brazil at a record pace the last few months while at the same time that the soybean crop has been getting smaller. This sounds eerily similar to what happened with corn in Brazil. Months before the soybean harvest started, Brazilian farmers had forward contracted a lot of their soybeans to exporters. When soybean exports started leaving the country at the end of January and in early in February, many analysts were estimating the 2015/16 Brazilian soybean crop at well over 100 million tons. As it turned out, the crop is now at least 5 million tons smaller than what had been anticipated earlier in the year.
With a high level of exports and a dwindling supply of unsold soybeans, domestic soybean prices in Brazil have hit record high levels and they are expected to remain strong given the increase in the international price of soybeans. So what could happen going forward?
Will Brazil run out of soybeans, or will Brazilian soybean export end abruptly? - Something has to give way going forward, either the soybean exports from Brazil end earlier than anticipated, or the domestic demand declines, or Brazil imports soybeans from Paraguay or Argentina to make it to the next harvest. My guess is that it will be a combination of an abrupt end to Brazil's exports and a decline in domestic consumption. Regardless of what may happen, soybean prices are going to be supported in Brazil not only due to the tight supplies, but also due to rising international prices for soybeans.
Favorable soybean prices will support soybean expansion in Brazil - These favorable prices could impact the soybean and corn acreage mix in Brazil for the 2016/17 growing season. A few months ago before soybean prices started to rise, I thought for sure that farmers in southern Brazil would plant more full-season corn to take advantage of the very good domestic corn price. The anticipated increased corn acreage would be at the expense of soybean acreage. Under that scenario, I though the 2016/17 Brazilian soybean acreage would increase maybe 0-2% compared to 2015/16.
The scenario now is very different. Domestic prices for old crop soybeans in Brazil are at record highs and new crop prices are favorable and climbing. I now think it is a "toss-up" between soybeans and corn for acreage in southern Brazil. These improving prices are also going to stimulate a continued expansion of soybean acreage in central Brazil. Under this new scenario, I now expect the 2016/17 Brazilian soybean acreage to increase 2-4% compared to 2015/16.
Soybean farmers in Brazil like the price increases of course, but they could still face obstacles concerning their 2016/17 soybean crop. Credit from the federal government is going to remain tight and their production loans are going to have higher interest rates than last year. The cost of producing their crops continues to increase. The Brazilian economy is very weak and domestic consumer demand has slumped. The political situation in Brazil remains clouded. And lastly, La Nina is developing and should be in place for the South American growing season, which could led to adverse weather for southern Brazil. Therefore, there are a lot of things to consider going into the next growing season.
It is now harder to normalize Brazil's corn situation - This now makes the Brazilian corn situation even more precarious. I thought the corn situation in Brazil would be resolved with increase acreage of the full-season corn and an increase in the 2017 safrinha corn acreage. Brazilian farmers will increase their 2017 safrinha corn acreage, but they may not increase their full-season corn acreage. Therefore, it is now less likely that the tight corn situation in Brazil will be resolved next year. It might take until the 2018 safrinha corn harvest before the situation returns to normal. In the meantime, Brazil's corn exports will be much smaller than what we have seen this past year.
Big picture analysis -
- Brazil's corn exports will decline compared to last year and the corn export tail will be short in late-2016.
- Brazil's soybean exports could end up below current expectations due to the possibility that Brazil could run out of soybeans. The soybean export tail in Brazil will also be short in late-2016.
- Brazilian farmers might expand their 2016/17 soybean acreage by 2-4%.
- Brazil will likely produce more than 100 million tons of soybeans in 2016/17 if the weather cooperates.
- A developing La Nina will be in place for the 2016/17 growing season in South America and a La Nina usually correlates with dryer than normal conditions in southern Brazil and Argentina.
- Argentine will export less soybeans and soybean meal in 2016 due to flood-induced production declines and poorer quality soybeans.
- All of this offers increased export opportunities for the United States.