June 10, 2005

Brazil:  Total Crop Area Forecast to Increase Slightly in 2005/06

Expansion Expected to Stall

Brazil’s robust recent agricultural expansion is expected to cool somewhat this year as high production costs, depressed commodity prices, and a strengthening domestic currency take a collective toll on farmer’s financial returns. USDA currently estimates Brazil’s 2005/06 total grain, oilseed and cotton area at 44.7 million hectares, up only 2 percent from last year’s record level. 

The main engine of growth since 1997 has been the rapid increase in area devoted to soybeans, as strong international demand coupled with low relative production costs fueled grower profits.  The high relative returns that Brazilian farmers received for the soybean crop led to a dramatic increase in the nation’s cultivated land area, which rose roughly 13.8 million hectares in the past 8 years.  Soybeans represented roughly 70 percent of that area growth with grains and cotton making up the remainder.  As soybean became the dominant field crop in 1997, Brazilian farmers didn’t walk away entirely from other crops.  Instead, they increasingly intensified their cropping system by adding more winter-grown grains. This lead to rising acreages devoted to corn, wheat, and sorghum.  Thus, as soybean gained popularity in the summer season, and summer-planted corn area subsequently declined, winter corn plantings gradually made up for the deficit.

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. 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 and depressed commodity prices. More importantly, at current prices being offered in Brazilian markets, producers in many states are unable to cover production costs for major crops like soybeans, rice, and wheat.  Meanwhile, the outlook for commodity prices in coming months is for continued weakness, 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 the current record area of grains, oilseeds, and cotton – let alone support its continued growth from current levels.

Grains

Total area devoted to grains (corn, rice, wheat, sorghum, oats, barley, and rye) in 2005/06 is estimated at 20.35 million hectares, up 4 percent from last year but well below the record of 24.9 million set in 1986.  Increases in corn and sorghum are expected to offset declines in rice and wheat, leading to a marginal increase in grain area.  Of the four major grain crops grown in Brazil, corn has the brightest prospects for growth in 2005/06.  Profit margins for corn, unlike most other crops in 2004/05, have remained in positive territory.  The 2004/05 corn crop was affected by drought in both the summer and winter growing seasons, with production falling to 35.5 million tons – well below the estimated domestic demand of 40.9 million tons.  Internal corn demand is expected to increase to a record 42.0 million tons in 2005/06 as consumption by the growing poultry and pork industries in southern Brazil rises a projected 5 percent.  The current shortfall in production and strong relative growth in domestic demand should underpin internal prices for the upcoming 2005/06 summer corn season.

Given corn is one of the few bright spots in Brazilian agriculture this year, crop area in both summer and winter seasons is expected to increase.  Total corn area is estimated at 13.0 million hectares, with production at a near-record 44.0 million tons.  With the assumption of normal weather conditions, corn yields are forecast at a near-trend 3.4 tons per hectare.  Rice area, by comparison, is forecast to decline nearly 12 percent this year as farmers struggle with a second consecutive year where production costs are expected to significantly exceed projected returns.  Rice area is forecast at 3.5 million hectares, and production at 8.1 million tons.  Dismal wheat prices lead to a sharp drop in sown area and production in 2005/06.  Wheat area is forecast to decline 13 percent from last year to 2.4 million hectares.  Wheat production in 2005/06 is forecast at 4.8 million tons, 18 percent lower than 2004/05, as producers are expected to limit the use of inputs and reduce their overall production costs.  Though sorghum returns are very low this year, crop area is gradually increasing all across the country owing to rising demand from the poultry industry and from the export sector.  Sorghum area is forecast at 1.0 million hectares and production at 2.5 million tons.

Oilseeds & Cotton

Brazil’s oilseed sector is dominated by a single commodity, soybeans.  The outlook for soybeans in 2005/06 as outlined above is highly questionable, as rising production costs, moderating international prices and a strengthening domestic currency have seriously eroded or eliminated the previous profit margin for the crop.  Many producers are suspected to have suffered outright losses this year despite achieving decent crop yields.  And severe financial losses were certainly incurred by a sizable population of soybean farmers in the severely drought-affected region of southern Brazil this year.  It is apparent that the “fuel for the fire” (huge profits) which drove record annual expansion of cultivated soybeans over the past 5 years has now evaporated.

Soybeans are still the most desirable or competitive crop in much of the country’s vast center-west and northeast regions, but as farmers take stock of their post-harvest finances and look forward, they face the twin prospects of potentially uncertain international soybean prices and a continued strengthening of their currency.  Given slim or negative profit potential for soybeans, it seems logical that there will be a break from the robust expansionary pattern exhibited in recent years.  Newly opened lands, especially those that were in forest, yield poorly for several years as soil amendments slowly improve the fertility.  These lands would be especially risky to cultivate to soybeans in 2005/06 as they would almost guarantee a net loss.  In addition, given the scale of financial losses suffered by soybean farmers in 2004/05, credit availability from both public and private sources may be affected, limiting the scope of new plantings.  And in southern Brazil, where the growing poultry and pork industries are focused, corn is now very competitive with soybeans and is expected to gain ground this year.

In 2005/06 soybean area is forecast at 23.0 million hectares, nearly unchanged from last years sown area of 23.25 million (harvested soybean area fell to 22.8 million hectares owing to drought).  Soybean yields are forecast at a near-trend 2.7 tons per hectare on the assumption of normal growing conditions and adequate control of Asian rust, while production is estimated at a record 62.0 million tons.  Soybean area in southern Brazil is expected to be reduced slightly from last year’s levels as a greater emphasis is given to planting summer corn. Farmers are expected to allocate their most reliable lands to the crop, giving them the best chance to achieve superior yields and a positive net return.  In the center-west and northeast states, which contributed the lion’s share to the soybean expansion in recent years, soybean area is expected to increase only marginally as high production and transport costs take their toll.  Cottonseed output, which represents about 4 percent of the nation’s oilseed production, is expected to increase in 2005/06 as cotton area grows.  Cotton is one of the most important alternative crops available to farmers in the center-west and northeast states, and area is expected to increase marginally.  The state of Bahia, which is favorably placed in respect to its nearness to the northeast textile industry and to ports for export, generally receives better prices for its cotton and producers have been rapidly investing in and expanding their production base.  Cotton area in Bahia grew about 20 percent last year, but is expected to moderate in 2005/06 owing to high costs and a strong domestic currency which limits exports.  Brazilian cotton area in 2005/06 is forecast at 1.2 million hectares, while cottonseed production is forecast at 2.5 million tons.

Table 1:

For more information, contact Michael J. Shean
of the Production Estimates and Crop Assessment Division, FAS at (202) 720-7366.