October 20, 2004

Brazil's Soy Growers Hopeful Despite Bleak Future

Brazil's soy profits may be coming to an end as a huge US crop weighs on prices and local costs soar.
 
Soybean prices at ports have slumped from all-time highs of 60 Brazilian reals ($1=BRL2.86) per 60-kilogram bag at Paranagua port in March to BRL34 on Friday, forced lower last week by a US Department of Agriculture crop production report estimating a record 3.1 billion-bushel US crop.
 
Historically, this remains a decent price. But operating costs have risen 25% to 30% this year, according to the local FNP agricultural consultancy. The leading culprit is an increase in petroleum-linked fertilizer prices, while producers are also forced to invest more to fight the perilous Asian rust fungus.
 
As a result, planting margins are currently negative in many parts of the top-producing center-west region for the first time in five years.
 
Despite the bleak outlook, Brazilian farmers will hope for the best, and very likely plant more soybeans this year. Production is pegged to rise 20% to 60 million metric tons or more.
 
"Many of the smaller guys don't have many options. They need to plant to create turnover to finance their debts," said Seneri Paludo, soy analyst at the local AgRural agricultural consultants.
 
Local producers have great faith in soybeans after making enormous profits since 2000. But much of that capital was channeled back into production. Unfortunately, if there are heavy crop losses or prices remain low next year, a large number of small producers will go to the wall, analysts agree.
 
Even if they get through 2004-05, producers are going to be forced to make some tough decisions next year.
 
With South America set to produce over 100 million tons of soybeans this year, low prices are expected for the rest of 2005 and possibly 2006.
 
Blairo Maggi, Brazil's self-proclaimed soy king and governor of the top-producing state of Mato Grosso, recently said that his Maggi group would not be expanding soybean production next season. The group currently produces over 1 million tons of soy.
 
And many other major producers will make the same decision, concentrating on more lucrative crops, such as cotton or sugar.
 
The smaller producers, though, can't afford the high cost of switching to cotton while prices for corn aren't any better than soybeans.
 
"Many farmers will plant because there is no other prospect of making the money needed to run their farms," said Vladimir Denuzi from his 740-hectare farm in Parana.
 
Low prices will probably squeeze out the speculators, who tried to buy into the soy boom late, and producers in marginal areas or new expansion areas, such as Maranhao and Piaui states, with lower yields or higher costs.
 
"We will probably see a repeat of what happened in the US during the '90s when dropping prices caused output to slump in the southeast of the country, where soy wasn't the main crop," said David Brew, soy trader at the southern-based Brasoja brokerage.
 
More than ever, scale will be vital to making money on soybeans, analysts said.