November 26, 2013

Brazilian Farmers continue to be Slow Forward Sellers of Soy/Corn

Farmers in Brazil are in the final stages of planting a potentially record large 2013/14 soybean crop (90.0 million tons is my current estimate), but they have been slow sellers of their anticipated production. Nationwide, less than 40% of the next crop has been sold, which is about 20% less than last year. In the state of Mato Grosso, which is the largest producing state, approximately 45% has been sold compared to 65% last year at this time. Falling soybean prices is the reason for the slow sales.

During the month of October, the average future price for a sack of soybeans delivered in Mato Grosso next February, March, or April was R$ 45.00 (approximately US$ 9.30 a bushel), which was down from the September average of R$ 49.82 per sack (approximately US$ 10.30 a bushel). These prices are now very close to the cost of production given the increased costs this growing season for fertilizers and increased insecticide usage to control the corn earworm.

For those farmers in Mato Grosso still holding onto last year's production, the prices are much better in the range of R$ 60 per sack or approximately US$ 12.40 per bushel. It is estimated that there is only 235,000 tons of last year's soybean crop yet to be sold in the state.

Farmers are in a sales holding pattern waiting to see if weather problems or increased pest pressures in South America will result in lower production and higher prices next year when they are selling their crop. They are also watching the value of the Brazilian real vs. the U.S. dollar. The Brazilian currency is now trading at 2.3 reals per dollar and it is expected to continue weakening. On August 22 of this year, the rate was 2.48 per dollar, but heavy intervention by the Brazilian Central Bank strengthened the currency over the last several months. The central Bank has reduced its support of the currency and as a result, it has resumed weakening.

A weaker currency is good news for Brazilian farmers. Since the price of soybeans is set in dollars, but paid in reals, the weaker the real is verses the U.S. dollar, the more money a Brazilian farmer puts in his pocket every time he sells a sack of soybeans. From the farmer's point of view, they would like to see the currency weaken further because he would make more money and his soybeans would be more competitive on the world market.

Farmers in Mato Grosso continue to also be slow sellers of last season's corn crop as well. According to the Mato Grosso Institute of Agricultural Economics (Imea), farmers in the state are still holding onto 28% of last year's record large corn crop. Domestic prices for corn in the state have improved somewhat over the past month. During the first half of November, the average price of corn in Mato Grosso was R$ 11.78 per sack (approximately US$ 2.45 per bushel), still below the minimum price set by the government at R$ 13.00 per sack (approximately UD$ 2.90 a bushel), but an improvement over last month.

The Brazilian government continues to be heavy buyers of Mato Grosso corn. Of all the corn sold thus far this year in Mato Grosso, the government has purchased nearly 50% of the total through its various programs used to support corn prices in the state. Once purchased, the government then subsidizes the transportation of the corn to northeastern Brazil or southern Brazil. In northeastern Brazil the government auctions off the corn to small livestock producers and in southern Brazil they auction off the corn to poultry and hog producers.

During every step of this process, it's a losing proposition for the government and they have already spent more than half a billion reals on these programs, which is much higher than anyone expected when these programs were initiated.

The Brazilian government will probably continue to purchase last year's corn production, but it remains to be seen if these programs will be perused as aggressively in 2014. If international corn prices weaken further, these programs will become more expensive and it is an open question as to how much resources the government wants to put into subsidizing corn production, especially in Mato Grosso.