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November 7, 2016

Forward Selling of Soy and Corn in Brazil Slower than Last Year

Farmers in Brazil are holding tight to their anticipated 2016/17 soybean and corn crops in the hope of improved prices going forward. In the largest grain producing state of Mato Grosso, the Mato Grosso Institute of Agricultural Economics (Imea) is reporting that farmers in the state have been slow to forward contract both their soybean and corn crops. Imea indicated that they have sold 27.8% of their anticipated soybean crop compared to 47% last year. The forward sales of the anticipated safrinha corn crop are even further behind with only 18.8% sold compared to 64.9% last year.

Reasons for the slow selling include: lower domestic prices, a stronger Brazilian currency, and memory of the last growing season. Lower international soybean prices and a stronger Brazilian currency have resulted in declining domestic soybean prices. The Brazilian currency is currently trading at about 3.2 to the dollar which is approximately 20% stronger than in early 2016. Since soybeans are priced in dollars but paid in the local currency, a stronger local currency means that farmers put less money in their pocket when they sell their crops. Brazilian farmers like to see a devalued currency because that results in higher domestic prices.

Farmer selling in the state of Mato Grosso do Sul is slow as well in part to higher production costs. The cost of producing soybeans in the state increased 35% this growing season. In the municipality of Dourados, which is located in the southern part of the state, the cost of production last growing season was approximately R$ 1,500 per hectare (about $200 per acre) and it has increased to R$ 2,000 per hectare this season (about $250 per acre). The conversion to dollars per acre was made using an exchange rate of 3.2 Brazilian reals per dollar. Inputs cost more this year especially to control resistant weeds, with some farmers needing to make three herbicide applications.

The forward contracting for the safrinha corn is even slower than it is for the soybean crop. During the last growing season in Mato Grosso, some farmers forward contracted as much as 70% of their anticipated safrinha corn production months before the crop was even planted. Unfortunately, that turned out to be a very poor decision. The weather turned hot and dry in April and May and some farmers did not produce enough corn to fulfill their forward contracts or to pay their production loans.

Many of these farmers are currently in the process of renegotiating those contracts and production loans. As a result, they have been much more conservative in their forward contracting this year.