June 5, 2006

 

Brazil rethinking soy auction subsidy programme

 

 

Brazil's Agriculture Ministry is considering changes to the new soy auction programme it announced just last week in response to concerns raised by farmers and industrial buyers, a government auction programme coordinator said Friday (Jun 2).

 

"We're thinking of doing away with the current private options contract auction (for soy) and just do direct payments to either farmers or industry," said Savio Perreira, general coordinator for oilseed auctions at the Agriculture Ministry.

 

Direct payments would have Brazil's government paying for the difference between a minimum set price and the market price. Perreira did not say when the government would make the decision, but the auctions are monthly so a decision is likely before the end of June.

 

The government is considering including soy in the price guarantee programme (PEP), which works like the loan deficiency programme in the US. The government fixes a price based on the cost of production, international prices and political decisions to guarantee soy farmers a floor price for soybeans. Perreira did not say whether the programme would be used in place of the current auction programme.

 

Last week, the government included soybeans in its private options contract auction for the first time in history. The programme, known as PROP, has the government auctioning soybeans to industry with an extra price tagged onto the 60-kilogramme bags as a subsidised options contract.

 

The government decides on the value of the option contract, which goes as high as 6 Brazilian reals (US$2.64) per bag in northern Mato Grosso where soy production costs are high and market prices for soybeans are low.

 

Industrial buyers auctioned those options contracts for some 500,000 tonnes of soy they won at auction to farmers on May 31 and Jun 1. The winning bidders are granted the right to sell soy at the options price.

 

"Farmers, on the other hand, are bidding for the right to buy the option contract which gives them an extra price for their soy. That's how PROP works. They auction the premium price they are willing to pay for the options contract. Farmers have to deliver that soy by Jun 9, though, so it's become an option without much of an option," said Perreira, adding that PROP only worked for farmers who still had considerable volumes of soy available. Most farmers, especially in the centre-west, had already traded their soy to agro-chemical and trading companies.

 

"We prefer PEP. It includes farmers who still have soy sitting in warehouses without a price," said Rui Prado, president of the Mato Grosso Soybean Association.

 

"My thinking is we'll have PEP, or something very similar, for soy this year," Prado said.

 

"Any type of mechanism the government can do is good at this point," said Steve Cachia, a soy and grain market analyst at Cerealpar, a brokerage firm.