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May 17, 2012

High Fertilizer Costs Result in less Corn and More Soy in Brazil

While Brazilian farmers are very pleased with the record soybean prices they have been receiving, as they plan for the 2012/13 growing season, they are confronting fertilizer prices that have increased 30% over the last two months. The cost of growing soybeans in Parana is expected to increase 15% in 2012/13, but if soybean prices stay above R$ 50 per sack, they still should be able to make a good profit.

The recent price increases have been primarily for urea and potassium chlorate. In February, a ton of urea was selling for R$ 850 and now it is selling for R$ 1,200 per ton in south-central Parana. Three months ago, a ton of potassium chlorate was selling for R$ 980 and now it to is selling for approximately R$ 1,200.

One of the principal reasons for the price increase is the weakening of the Brazilian real compared to the U.S. dollar. In February it was trading at 1.7 to 1 and now it is essentially 2.0 to 1. Since the vast majority of the fertilizers used in Brazil are imported, as the currency weakens, these imports become more expensive. The reverse is true when farmers are selling their soybeans. As the currency weakens, farmers put more money in the pockets for each sack of soybeans they sell.

Another reason for the price increases is the chronic congestion at Brazil's ports. The number one entry point into Brazil for imported fertilizers is the Port of Paranagua in southern Brazil. The wait time for vessels to unload at the port is currently running at 25 to 30 days and that could increase to 40 days as the peak of the fertilizer shipments arrive at the port. As a result, the demurrage costs associated with waiting in the bay for 4-6 weeks to unload is also driving up the cost of the fertilizers.

These increased costs for fertilizers are going to result in fewer corn acres and more soybean acres to be planted in Parana in 2012/13. Corn is always more expensive to plant compared to soybeans due to the increased fertilizer requirements and that difference may be even greater this year with the rising prices for fertilizers.

Additionally, domestic corn prices have been falling in Brazil in recent weeks with the realization that Brazil will produce a record large safrinha corn crop. With record high soybean prices and falling corn prices, it's an easy decision on the part of the farmers. They will reduce their full-season corn acreage in 2012/13 in favor of increased soybean acreage. The total corn production in Brazil may not fall very much though because farmers will plant more safrinha corn and less winter wheat in 2013.