June 6, 2012

 

 

Having been ravaged by drought in 2012, Brazil's soy farmers are now preparing to bounce back with a bumper harvest, by using revenues from advance sales of next year's crop to buy seeds and fertiliser.

 

Conditions appear almost perfect for the coming crop, with early signs that the soy belt will reclaim territory lost to corn and cotton crops while extending its reach into untapped pasture land.

 

The surge in soy area is no surprise. Soy futures prices remain up 14% this year, despite declines in May. Prices look even better to Brazilian farmers, factoring in the real's 17% decline against the dollar since February. In real terms, soy is up more than 24%. Corn is down 10% and cotton down 18%, in real terms.

 

Even veteran agronomists have been surprised by the confluence of positive factors. Early sales of the 2012/13 crop have been unprecedented, fertiliser sales are up 7%, and the onset of El Niño should bring good rains to parched South American land.

 

Brazil, which grows more than a quarter of the world's soy, should see another record breaking year for soy, putting to rest the view that the booming expansion rates of 2000 to 2005 are a thing of the past.

 

"Conditions are extremely positive for soy. Corn, cotton and even rice will give up area to it," said grains consultant Carlos Cogo based in Rio Grande do Sul.

 

Early numbers from leading soy states indicate a possible expansion of two million hectares, or 8%, in planted area. That would easily double the recent annual expansion rate in Brazil, the world's number two producer of the protein-rich crop used in everything from animal feed to salad dressing.

 

Much of the increase will come from farmers switching away from corn and cotton, which had taken a growing share of crop land over the past two years. Now corn prices have fallen and domestic stockpiles have swollen to record highs, discouraging farmers from sowing more.

 

But some new area will come from expanding into virgin lands in the frontier regions in the centre-west and northeast.

 

"It's a seller's market for grain land now," said Wilson Lucas, president of the realtor company MFRural, who has dozens of large rural properties for sale, many in the centre-west and north-eastern states where soy expansion is occurring.

 

Global climate conditions are also turning in Brazil's favour. One year after La Niña-related drought shaved about 30 million tonnes of soy from the combined crop of Brazil, Argentina and Paraguay, the world is bracing for El Niño, which tends to bring more moisture than average to grain crops in the Americas.

 

"One thing is certain: next season will be wetter," Marco Antonio dos Santos at local meteorologists Somar told Reuters. "La Niña is gone and we are looking at a 70% to 80% chance of a moderate El Niño versus a neutral weather scenario."

 

It is too early to pinpoint next season's output, but private analysts Informa Economics forecast the 2012/13 Brazilian crop at a record 80.5 million tonnes, a record recovery from this year's drought-hit 66 million tonnes.

 

Later in May, the USDA forecast the Brazilian soy crop at 78 million tonnes, with acreage rising by 1.5 million hectares.

 

The upbeat outlook and surge in prices have encouraged farmers to lock in revenues weeks if not months sooner than they normally would, according to analysts Celeres.

 

Forward sales of next harvest reached unprecedented levels of 27% in late May, they said. Sales of the soy crop just harvested reached a record 87%, well over the average 67% for this time of year.

 

"A year ago, there were no significant sales volumes," said Anderson Galvão at Celeres.

 

Thanks to the growing use of crop insurance, this past year's devastation has not put farmers on the financial ropes. Their default rate is actually the lowest in seven years, providing a sounder financial foundation for expansion.

 

"The producer who is better off today as he contracted insurance," said Osmar Dias, the vice president of agribusiness at state-run Banco do Brasil, the main source of agricultural credit in Brazil.

 

Farms more than 90 days in arrears on loans are at the lowest rate since 2005, according to the bank.