July 3, 2006

 

Brazil's soy industry buys 92 percent of soy offered in auction

 

 

Brazil's soy industry purchased 92 percent of the 700,000 tonnes of soy offered Friday in the country's newest soy subsidy auction, the National Commodities Supply Corp (Conab) said.

 

There was more soy sold Friday at auction than was sold all week in the commercial soy market, Conab and soy brokers said.

 

"The market has been slow all week because everyone was waiting for this auction. There is no question that we sold more in one day because of this auction than we sold all week," said Helio Sirimarco, a consultant at brokerage firm Ativa Corretora in Rio de Janeiro.

 

The government created the new 1 billion Brazilian real (US$463 million) soy auction this month to facilitate national soy sales in a climate where farmers are currently facing market prices well below the cost of production throughout the entire centre-west soybelt.

 

There was no demand for soy offered in Para and Rondonia in the north, but competition in the center-west was greater than expected.

 

"There was a lot of interest. More than anyone thought," said Steve Cachia, a market analyst at grain brokerage Cerealpar. Cachia said the company participated in the electronic auction Friday morning.

 

The new auction, known as Pesoja, sets a strike price of as much as 4.89 Brazilian reals (US$2.25) over the spot price for 60-kg bags of soybeans. Strike prices vary per region. The government subsidises the difference between the spot and strike prices set before the auction. Winning bidders are those willing to accept a lower subsidy.

 

Subsidy values fell slightly in Bahia, but declined significantly in Mato Grosso and Mato Grosso do Sul because of industry demand. In Mato Grosso, the government offered a premium of BRL4.89 over the spot price of soy in the northern part of the state, but competing bidders drove the premium down to BRL3.45, which ultimately lowers the government's subsidy pay-out, but still guarantees industry direct payments for paying above market rate for soy. In Mato Grosso do Sul, the premium fell to BRL2.83 in heavy bidding compared to a strike price premium of BRL3.45 at the opening.

 

Winning bidders are now required to purchase soybeans from local farmers and cooperatives at the prices settled at auction.

 

The new government trading mechanism gives soy farmers more money for their soybeans and pays industry for the difference.

 

A similar auction will take place on Jul 4 with soy farmers and cooperatives. In that auction, soy farmers will compete for the right to sell soy at the subsidised strike price. Farmers, in that case, receive the direct subsidy payment instead of industry.

 

Another 700,000 bags will be offered in the July 4 auction.

 

In a similar auction this week, cotton farmers agreed not to bid the premium down so all participants received the full subsidy for cotton. Most cotton farmers in the centre-west also farm soybeans.

 

Brazil is the world's second biggest soy producer and exporter behind the US.