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Production
Estimates and Crop Assessment Division |
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Production
Estimates and Crop Assessment Division |
Brazil: 2005/06 Soybean Area Projected to Decline
Summary
As the 2005/06 planting season approaches, it is apparent that a farm credit crisis along with a sharp decline in the profitability of soybeans will likely lead to a net reduction in sown area, ending a remarkable five-year expansion phase. The USDA September estimate for Brazilian soybean area is 22.0 million hectares, down nearly 0.9 million or 4 percent from last year. Soybean production is estimated at a record 60.0 million tons, up 9.0 million or 18 percent from last year.
Historical Perspective
Brazilian soybean producer’s increased cultivated acreage by an unprecedented 9.3 million hectares over the past five years, as strong profits stimulated the opening of new lands. A massive campaign of land acquisition and conversion occurred across the country, as farmers sought to rapidly take advantage of favorable economic conditions and expand their production base. During this remarkable period of growth, total national soybean area grew by 68 percent overall, while the average annual growth rate reached 1.86 million hectares per annum.
The vast majority of the recent soybean expansion has occurred through the conversion of existing pastures that are prevalent throughout Brazil, as well as the opening of virgin grasslands called “Cerrado.” High relative profits from soybeans in recent years and strong international demand for Brazil’s soybean exports fueled the expansion. Brazilian oilseed industry officials and traders report that the sizable profits earned from recent harvests were primarily directed toward the acquisition of new land and equipment, allowing farmers to increase both their scale and efficiency. This also created vulnerability, as farmers became increasingly reliant on credit to keep the process rolling. Should crop yields or soybean profitability fall substantially, farmers would find themselves in very difficult financial bind. The hunt for land was especially acute in relatively affordable but remote regions in the states of Mato Grosso, Goias, Maranhao, Tocantins, Piaui, Para, and Roraima. As a result, the rate of growth in soybean cultivation in these states is some of the highest in the country. Farmers from all over the country have sought new opportunities in the rapidly expanding Center-West and Amazonian states, where land prices are a fraction of those in more established regions (especially the traditional farming states in southern Brazil). But a stark turnaround in soybean profitability during 2004/05 has brought a financial crisis to the farm sector, limiting farmer’s ability to repay production and equipment-related loans as well as their access to new financing. The fuel which spurred rapid recent growth, strong soybean returns and ample farm credit, are now in short supply, thus limiting farmers ability and appetite for expansion.
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It is now expected that a substantial portion of the new land that has been converted to soybeans during the past 6-18 months will not come into production in 2005/06, given the low initial crop yields on these lands and poor prospective profitability. Generally, it takes 3-4 years of soil amendments (lime) and fertilization to improve the fertility of newly cleared land, enabling soybean yields to climb to a sustainable 3.0 tons per hectare level. Given the questionable profitability prospects for soybeans this year, farmers interested in growing the crop are expected to devote their best, most reliably producing land to the crop. This will ensure that they have the best prospect to maximize crop yield and thus their gross margins.
Economic Reversal
The substantial expansion of Brazil’s soybean acreage in recent years was driven by rising global demand and the crops profitability. The availability of vast acreages of relatively undeveloped or under-utilized land suitable to farming enabled Brazilian entrepreneurs to quickly take advantage of highly favorable conditions on the international soybean market by expanding their production capacity. The devaluation of the Brazilian currency in 2001 and 2002 provided a particularly stimulative effect, as it coincided with strong international demand for Brazilian soybean exports. The devaluation substantially increased the profitability of exported soybeans, which were priced in the stronger US dollar, and inflated the net financial returns of Brazilian soybean producers and exporters during the period. The repatriated profits from soybean exports fueled interest and investment in additional land for soybean production.
As the 2005/06 growing season approaches, however, Brazilian farmers are faced
with markedly worse financial prospects than those that resulted in the recent
expansion. The Brazilian currency appreciated about 20 percent versus the U.S.
dollar over the past 12 months while international soybean prices were subdued,
seriously deflating the net returns for the crop harvested last year. Safras &
Mercado agricultural consultants recently reported that average soybean prices
received by farmers over the past year declined 25 percent from the previous
season. Most growers saw healthy net profits from their 2003/04 crops evaporate
entirely in 2004/05, in many cases experiencing a net loss owing to poor yields,
higher production and transport costs, and depressed commodity prices. More
importantly, at current prices being offered in Brazilian markets, producers in
many states are unable to cover soybean production costs. Meanwhile, the
outlook for the Brazilian currency over the coming year is for continued
strength while soybean prices are expected to remain weak, implying that
producers may face the prospect of another year of negative potential returns as
the planting season gets underway in September. Given the substantial financial
losses farmers accrued in 2004/05 and the guarded prospects for commodity prices
in the coming year, it is uncertain whether sufficient production financing from
either public or private sector sources will be made available to sustain
national soybean acreage.
According to a recent report (BR5623 – Soybean Update) from the U.S. Agricultural Attache in Brasilia, Ministry officials have stated that credit for crop production financing in 2005/06 may be tight. The government programmed an 18 percent increase in credit, with much at a subsidized rate of 8.75 percent, but all these funds may not be available due to non-payment or delayed payment on loans from the previous two harvests. In addition, the government has (to date) failed to release any of these funds to private banks (who transact the loans with farmers) despite the fact that planting operations are to begin within a few weeks. Generally, the bulk of the government agricultural loans go to small farmers who lack access to the large pool of private-sector production financing via companies like Cargill, Bunge, Archers Daniel Midland etc. Even so, it is estimated that roughly 50 percent of public-sector farm credit last year was not disbursed owing to problems with farmer’s existing creditworthiness. After sustaining enormous crop losses during the 2004/05 growing season due to drought in the traditional southern growing states, where the bulk of small farmers are located, these producers farm balance sheets are likely in an even more precarious state. In addition, it has been reported that an estimated 25 percent of commercial soybean farmers in the major Center-West producing states have not paid back their production loans for the 2004/05 season that came due in June. Therefore, it is likely that private-sector financing for the 2005/06 growing season also will be somewhat constrained. In fact, private agricultural analysts in Brazil have confirmed that both private trading firms and agrochemical dealers who typically provide advance production financing are indeed restricting credit outlays.
However, as the Agricultural Attache reported, perhaps the greatest obstacle for soybean producers is the current exchange rate. Most producers purchased imported inputs for planting last year’s summer crop at an exchange rate of R$3.0/dollar but sold the crop near the current rate of R$2.30/dollar. At the current rate, dollar returns on soybean are said to be very discouraging to producers. For the second half of the year, expectations are that the Brazilian currency (Real) will continue strong. This is due to a strong trade surplus, which is supporting the currency with a record agricultural surplus of U.S. $20 billion for the first half of the year despite the unfavorable exchange rate for exports. These strong exports continue to inject cash into the country thereby supporting the currency. Also supporting the currency is the Central Bank’s policy of maintaining a high interest rate, which currently is 19.75 percent. However, even if the Central Bank lowers the interest rate, it will likely do so slowly, as has been the Bank’s tradition.
Regional Situation
The recent soybean expansion has been evident all across the country, occurring to some degree in virtually every state. The strongest growth has been registered in the new farming regions of the Center-West and Amazonia, including the states of Mato Grosso, Mato Grosso do Sul, Goias, Minas Gerais, Bahia, Maranhao, Tocantins, Piaui, Para, Rondonia, and Roraima. In this collection of states, categorized as the expansion states, soybean area has risen 101 percent or over 7.0 million hectares since 1999/00. By comparison, in the older and more established farming region of the south, including the states of Rio Grande do Sul, Parana, Santa Catarina, and Sao Paulo, growth has been more constrained. In this collection of states categorized as the traditional states, soybean cultivation has grown by 35 percent or 2.3 million hectares in the same period. The slower overall growth in the southern states is attributed to an array of issues including substantially higher land prices, comparatively small scale of existing family farm operations, lower capitalization, and the nearly complete regional utilization of existing arable land resources.
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On a state-by-state basis the rate of soybean expansion during the past 5 years has been varied, with the most robust increases occurring in the primary producing Center-West states of Mato Grosso (up 3.2 million hectares), Goias (up 1.3 MHa), and Mato Grosso do Sul (up 0.9 MHa). The remaining members of the expansion states that experienced significant growth rates in percentage terms, but who started from much smaller base acreage levels were Minas Gerais (up 0.5 MHa) and Bahia (up 0.2 MHa). In comparison, traditional southern producing states had lower overall growth rates but still witnessed substantial expansion, in particular, Parana (up 1.3 Mha), and Rio Grande do Sul (up 0.7 MHa).
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As for the outlook for 2005/06 soybean planting intentions, the Agricultural Attache reported that the current market situation should affect planting decisions less in the Center-West than in the south since producers in the south were hit hard by drought along with low prices. In discussions with producers in the Center-West region, it appears that they are generally optimistic about prices for soybeans for the next year. Furthermore, prices for competing crops (except for corn) such as cotton and rice are also quite low. It is expected that there will be minimal acreage shifting from cotton towards soybeans in the Center-West even though it is difficult to reduce area for this crop in the short-term due to the high investment costs. The lower costs of production for soybeans compared to cotton and rice is expected to favor soybeans as evidenced by a recent report by the Agricultural Ministry (CONAB) which estimates soybean profitability (as of early August costs) for the coming crop at 24 percent compared to just 4 percent for cotton.
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There is also the probability that there will be a small amount of soy land being returned to pasture or fallow, however this should be minimized as it is believed that producers in the Center-West region are hoping for a good soybean crop this year to help recover from losses from the 2004/05 harvest. In a recent visit to one of the largest soybean farms in Minas Gerais, the Attache was informed that most producers in the region are hopeful about crop prospects this year and plan to reduce crop area and inputs only slightly. The anticipated reduction in soybean area in the Center-West and particularly Mato Grosso, therefore, is expected to occur on marginal croplands.
As far as the major producing states in southern Brazil are concerned, the
Attache expects a five percent reduction in soybean acreage, as producers opt to
plant more summer corn. This switch will be primarily focused in the states of
Parana, Santa Catarina, and Rio Grande do Sul. The soy/corn price spread
strongly favors corn and the Attache believes corn prices will increase in
Brazil over the next several months owing to a
substantial production shortfall,
restricted imports, and a rapid drawdown of available stocks.
Soybean yields in 2005/06 are forecast to increase substantially over last year in all regions primarily on the assumption that adequate rainfall (normal weather) and control of Asian-rust will occur. Abnormal weather and Asian-rust has played a huge role in the sharp reduction in national soybean yields over the past two years. The drought in 2004/05 in southern and central Brazil was particularly harsh, resulting in significant crop abandonment and yield losses. In contrast, heavy late-season rainfall and rust outbreaks have plagued the prime producing states in the Center-West during the past two growing seasons, causing harvest delays, downgraded grain quality, and lowering overall crop yield. The current forecast for 2005/06 shows national crop yields at the long-term trend level of 2.73 tons per hectare. This is above the 5-year average of 2.57 tons per hectare, but below the record of 2.82 tons set in 2002/03.
