September 27, 2013

Weaker Currency Drives up Production Costs in Brazil

The Mato Grosso Institute of Agricultural Economics (Imea) estimates that the cost of producing the three principal crops in the state will increase due to the weaker currency which is driving up input costs. The weaker currency makes imported items such as fertilizers and chemicals more expensive and Brazil imports 70% of the fertilizers used in crop production.

The state's main crop is soybeans and the cost of producing soybeans in 2013/14 is estimated at R$ 2,432 per hectare (approximately US$ 428 per acre), which is 27% higher than last year. Farmers in the state are expected to plant approximately 8.2 million hectares of soybeans in 2013/14 with a total production of 25 million tons.

The cost of producing corn in the state is estimated at R$ 1,738 per hectare (approximately US$ 310 per acre), which would be 5% more than last year. Virtually all the corn grown in the state is planted as a second crop after the first crop of soybeans is harvested. Yield expectations for this second crop of corn are much lower than for full-season corn so as a result, farmers apply less fertilizer.

The third major crop in the state is cotton and the cost of growing cotton is estimated at R$ 5,123 per hectare (approximately US$ 901 per acre), which would be 15% more than last year. Even with the higher cost of producing cotton, it may be more attractive than corn for a second crop following soybeans.

All of these calculations should be viewed with caution because they are highly dependent on the exchange rate and when the inputs were priced. The Brazilian currency has fluctuated widely in recent months starting in May when it was trading at 2 reals per dollar. The currency weakened during the summer until it reached its lowest point on August 21st when it traded at 2.45 reals per dollar. It has since strengthened again and is trading at 2.2 reals per dollar.

The timing of when the inputs were purchased is also very important. If a farmer purchased his fertilizer for example before the end of May, he paid significantly less than a farmer who purchased his fertilizer at the end of August.

The increased cost of imported fertilizers is the major factor driving up costs, but farmers can reduce those costs by cutting back on fertilizer applications. If the soil fertility has been maintained at adequate levels, a farmer can reduce his fertilizer application on soybeans and still expect a relative high yield if the weather during the growing season cooperates. In a sense, he is mining the nutrients in the soil that he has built up over the years.

Normally, soybean farmers in central Brazil apply a maintenance application of potassium and potash every year, but the amount of fertilizers applied can be reduced during years of low commodity prices when farmers need to reduce casts.