June 20, 2006

 

Brazil and Argentina's soy growers experience different fortunes

 

 

Brazil's soy growers are languishing knee-deep in debt even with government aid while Argentina's soy growers are flourishing with new growing methods and lower production costs, according to USDA's Oil Crops outlook released Jun 12.

 

After a series of crop failures, many of Brazil's soy farmers are facing a debt crisis as they face higher costs, and lower prices.

 

Last month, the government of Brazil announced a new financial aid package for soy farmers including a 1-year rescheduling of payments on government loans that are due this year.

 

Although the debt relief covers 9 billion real (US$4 billion), the agricultural debt that needs to be refinanced in Brazil may be twice as high.

 

The government also launched a 1 billion real auction scheme (US$444 million) intended to support the sales price between sellers and buyers of soy.

 

The government conducts a weekly auction for processors and exporters to bid for the right to receive a risk premium when purchasing soy, the report said.

 

With this guarantee, the commercial interests at the first auction can buy an options contract for an equivalent volume of soy at a price that includes the value of the premium.

 

A subsequent auction lets soy growers buy an options contract (the right to sell soy) at the guaranteed price. The government's premium provides a shared subsidy to the auction participants.

 

For 2006/07, the government credit allocated to the entire Brazil agricultural sector amounted to 60 billion real (US$26.6 billion).

 

Lending to commercial farms for production and marketing is 41.4 billion real (US$18.4 billion)  (a 25-percent increase from the previous year).

 

The USDA estimates these government measures are far from adequate to cover all the credit needs of these farms.

 

Obtaining credit would be difficult for farm borrowers not current on their payments.

 

At current prices and expected yields, many soy-producers in the centre-west can barely cover variable costs of production.

 

Against this backdrop, prospects for sowing the 2006/07 soy-crop appear bleak, the USDA said.

 

If US soy-supplies stay as large as predicted, prices may stagnate. Furthermore, appreciation of Brazil's currency, also added further obstacles to soy profitability. 

 

For the second consecutive year, USDA projects that reduced soy area in Brazil, to 21 million hectares in 2006/07 from 22.0 million in 2005/06.

 

Area reductions would likely be the greatest for the center-west region, where soy  prices tend to be lowest due to its long distance from ports, the USDA report said.

 

Output could again peak around 56 million tonnes, according to the report.

 

Over the past 2 years, crushing of soy in Brazil has failed to increase, and next year's growth may improve marginally, at best.

 

 The 2006/07 soy  crush is forecast up 2 percent to 28.3 million tonnes.

 

Ever rising exports of soymeal from Argentina and resurgent trade from the United States is depressing demand from the Brazilian industry, the report said.

 

Domestic consumption of soymeal, which is projected 2.5 percent higher to 9.4 million tonnes, is also being weighed down by a slowing demand for the country's poultry exports.

 

Argentina's soy farmers, by contrast, have had more stable yields, stable prices and lower production costs than Brazil with greater profitability encouraging expansion of planting area, according to the USDA.

 

More producers are also adopting the practice of intercropping soy with wheat, which entails sowing soy directly into the growing wheat crop, the report said.

 

Argentine soy  area is projected up 3 percent to 15.4 million hectares, which combined with a slight upward yield trend could boost output to 41.3 million tonnes from 40.5 million this year.

 

Processing capacity has been growing rapidly, and further expansion is scheduled for completion in 2007, according to the USDA.

 

For full USDA report, click here