January 25, 2006

Brazil's soy market slows on dollar weakness, favourable weather

The Brazilian soy market remained slow all week as soy prices remained below US$6 a bushel on the Chicago Board of Trade (CBOT).

The CBOT March contract traded around US$5.71 1/4 per bushel on Tuesday, but the dollar continues to look unattractive to the Brazilian soy market, falling to 2.24 Brazilian real on Tuesday from Monday's close of 2.26 real.

Dollar weakness, soft CBOT March futures and favourable weather throughout Brazil's main producing states--Mato Grosso, Parana and Rio Grande do Sul--have farmers and traders expecting the worst when it comes to soy revenues.

"The market is moving in slow motion. With the dollar where it is now, no one wants to sell," said a trader in Sao Paulo.

The northern half of Mato Grosso started harvesting its soy this month, an expected 6 million tonnes out of a state total of 17 million tonnes expected for the 2005/06 crop.

Traders are seeing a worst-case scenario play out. A good Brazilian harvest means lower world prices. A record trade surplus in Brazil and high interest rates at 17.25 percent keep attracting dollars to the country, pushing the Brazilian real up.

At this time last year the US dollar was worth about 2.80 real, and even with the CBOT at comparable prices from last year, Brazilian producers were getting 28.00 real per 60-kilogramme bag last year, compared with the 22.00 real they are getting today on average, traders say.

Some agronomists are already looking at less production in the 2006/07 crop if the exchange rate remains where it is and international prices remain too far below a comfortable US$6-a-bushel level between now and July, when farmers start to think about next season's planting.

"If prices and the dollar continue to fall, we will have less production next year because we will have even less money to invest in the crop than we did this year," said Sergio Kunrath, an agronomist at Cootricampo, a large cooperative in Rio Grande do Sul state.