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May 14, 2012

Strong Soy Prices Stimulate Sales in Brazil

Soybean prices in Brazil have been setting new record highs since it became evident that the soybean crops in Brazil and Argentina would be severely impacted by the drought that afflicted the two countries. After the release of the USDA reports last Thursday in which the U.S. government lowered their estimate for both the Brazilian and Argentine soybean crops (the Brazilian estimate was lowered 1.0 million tons to 65.0 million and the Argentine estimate was lowered 2.5 million tons to 42.5 million), it is now evident that the drought-induced losses in Brazil and Argentina are greater than the entire production of soybeans in Mato Grosso (21.6 million tons).

As a result, soybean supplies in Brazil are now even tighter and prices have again set new record highs. In Rondonopolis, which is located in southeastern Mato Grosso, soybeans were being sold last Thursday for R$ 56.50 per sack of 60 kilograms. In the entire state of Mato Grosso, soybeans are selling for over R$ 50.00 per sack.

For Brazilian farmers, it's not only tight supplies driving up prices but also the weakening of the Brazilian currency compared to the U.S. dollar that is helping to lift prices. As of last Friday, the Brazilian currency was trading at 1.95 to the dollar compared to last July when it was trading 1.53 to the dollar. As the currency weakens, Brazilian farmers are paid more for their soybeans, so it's the combination of tight supplies and a weaker currency that is such good news for Brazilian producers.

In southern Brazil where the drought was most severe, the increased soybean price has nearly compensated for the reduced production caused by the dry weather. Farmers in southern Brazil have also quickly sold their 2011/12 soybeans in order to take advantage of the historical high prices. As a result, old crop supplies in southern Brazil are already very tight and it's only the month of May. Supplies this tight generally do not develop in Brazil until much later in the year, generally in the October to December timeframe.

These record high prices are not only being paid for old crop soybeans, but they have also carried through to the 2012/13 crop as well. As a result, Brazilian farmers have been very aggressively selling their anticipated 2012/13 production.

According to the Mato Grosso Institute of Agricultural Economics (Imea) approximately 45% of the 2012/13 anticipated production has already been sold. Normally this level of sales is not achieved until November after the crop has already been planted. The forward contracting in Mato Grosso is generally in exchange for the inputs needed to plant the crop. Therefore, many farmers have sold enough to cover their costs, guarantee a profit, and reduce their risks. In Mato Grosso alone more than 10 million tons of next year'Ss soybean production has already been sold.