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September 11, 2017

Conab Issues Generalized Look at 2017/18 Growing Season

Conab will issue their first official estimates for the 2017/18 growing season in Brazil when they release their October Crop Report. In the meantime, last week they issued their 2017/18 Agricultural and Livestock Prospective, which is a generalized look at the upcoming growing season.

In their report, they discussed historical trends, prices, profitability, etc., but they did not issue their own estimates for crop production for the upcoming growing season, relying instead on what the USDA is predicting for the 2017/18 growing season in Brazil. I view the report as sort of a half-hearted effort to look at the next crop. Having said that, here are some of the main points for the Brazilian soybean and corn crops.

Soybeans - Brazil came into the 2016/17 growing season with a soybean carryover of 1.4 million tons, farmers produced 113.9 million tons, Brazil consumed 47.2 million tons, and they are expected to export 63.0 million, resulting in a soybean carryover of 5.4 million tons, which is the most in 12 years.

The large soybean carryover from the 2016/17 growing season has resulted in lower soybean prices, but not to the extent that makes soybean production unprofitable. In addition to having large domestic and world stocks of soybeans, part of the reason for low domestic soybean prices is the strength of the Brazilian currency. In May of 2016, it was trading at 3.53 to the dollar and now it is trading at approximately 3.1 to the dollar and expected to strengthen even further. A stronger domestic currency makes exports less competitive and generally results in lower domestic grain prices.

As I mentioned, in their report Conab did not issue their own estimate for the 2017/18 Brazilian soybean crop relying instead on USDA estimates. The USDA has estimated that the Brazilian soybean acreage in 2017/18 will increase 2.35% to 34.7 million hectares, but the yields will be much lower than last year resulting in a total soybean production of 107.0 million tons. If verified, the 2017/18 soybean crop would be approximately 7 million tons less than the 2016/17 production.

Corn - Brazil came into the 2016/17 growing season with a carryover of 7.9 million tons of corn, they produced 97.1 million tons, the domestic consumption will be 56.1 million tons, and they are expecting to export 28.0 million tons, resulting in a carryover of 21.5 million tons of corn. This huge carryover has resulted in very low domestic corn prices with corn prices in many locations below the cost of production.

In many areas of Brazil, there is little hope for improved corn prices and farmers are worried that the corn price in 2017/18 may not cover the cost of production. In contrast, the projected soybean prices for the upcoming season are expected to be good enough to generate profits. As a result, farmers in Brazil are expected to reduce their full-season corn acreage and opt for more soybeans instead. The USDA is estimating that the full-season corn acreage will decline 2%, but Conab indicated that most market observers in Brazil thought the full-season corn acreage would decline 2% to 5%. The USDA is estimating that Brazil will produce 95.0 million tons of corn in 2017/18 compared to 97.1 million tons in 2016/17.

The authors felt that the full-season corn acreage is more sensitive to price because farmers have alternatives to planting full-season corn, namely more soybeans. Conab did not address the potential safrinha corn acreage in 2017/18, but they did indicate the safrinha corn acreage is not as sensitive to prices because there are limited alternatives to producing safrinha corn. The safrinha corn crop in 2017/18 will account for approximately 70% of Brazil's total corn production.

In the state of Mato Grosso, which is the largest safrinha corn producing state in Brazil, the main alternative to safrinha corn is safrinha cotton, but the cotton acreage is very small compared to corn.

Conab's analysis indicated that any meaningful reduction in Brazil's large corn carryover would require a total corn production of less than 90.0 million tons.