March 26, 2007

 

US dollar taking bite out of Brazil soy farmers' margins

 

 

The US dollar has taken a bite out of local soy farmers' profit margins these past two weeks, with expectations that the foreign exchange markets are not going to improve the situation anytime soon.

 

Higher soybean prices on the Chicago Board of Trade have helped the dollar's decline. During the last two weeks, the dollar has dropped even further, along with soybean prices and soybean premiums, now making Brazilian soy prices cheaper than Chicago price quotes.

 

So far, though, farmers are not showing signs of concern.

 

"They're a bit ambiguous at the moment," said Anderson Galvao Gomes, a market analyst at agribusiness consultancy, Celeres.

 

"Their margins are getting squeezed over the past two weeks, but overall the dollar volatility of the past is gone."

 

In the 2005/06 harvest, farmers planted with a dollar worth around 2.30 Brazilian reals and sold with it around BRL2.08. This season, farmers planted with the dollar around BRL2.15 and have been selling with it around BRL2.12 this year. Over half of the estimated 57 million-tonne soy crop has already been priced and sold, according to consulting group AgRural in Mato Grosso.

 

In Mato Grosso, the nation's top producer, some 75 percent has been sold already, said Maria Amelia Tielone, an analyst for AgRural in Mato Grosso.

 

"Farmers aren't rushing to fix prices out of fear the dollar will collapse further," Tielone said.

 

Since Feb 13, the dollar has dipped below BRL2.10, rising briefly in March to BRL2.13 again. This week, the dollar's been below BRL2.06 and hit BRL2.05 on Thursday, levels not seen since May 2006 when soy farmers took to the streets in protest for government aid and debt relief.

 

The declining dollar has the government back to offering its soy auctions, a subsidy programme for farmers in the north of Mato Grosso and other states where prices tend to be cheaper than in the southern states.

 

"The situation is still good for Brazilian soy farmers, but I have gotten calls from farmers asking what I think about the dollar," said Jose Carlos Hausnecht, an agribusiness consultant at MB Associados.

 

"I tell them to call their brokers and hedge, or at least fix soy futures," Hausnecht said.

 

Still, fixing prices is mostly an alien operation in Brazil. Most soy producers sell in the spot market after harvest, right when prices start to fall as Brazil's soy supply starts to rise.

 

"We don't fix prices. No one is selling here yet. We do worry about the dollar, but farmers already expect the dollar to weaken again," said Airtonne Zalemena, a sales manager for Cootricampo cooperative in Rio Grande do Sul, Brazil's no. 3 soy producer.

 

Farther north, in no. 2 producer Parana state, farmers were getting 35 Brazilian reals (US$16.99) per 60-kilogramme bag of soybeans. Considering yields upwards of 50 bags per hectare, according to early crop estimates by Agroconsult, a farmer with 400 hectares could expect BRL700,000 from soybeans. On March 5, the dollar closed at BLR2.135, making that property's soy fields worth US$372,868.

 

On Friday, soybean prices at the Paranagua port in Parana were BRL33.30. That same 400-hectare farm yielding 50 bags now has fields worth BRL666,000. Given Friday's dollar close at BRL2.06, that means that same farm's soybeans are now worth US$323,300.

 

"Most farmers have already sold at good prices," said Tielone. "We don't see the dollar impacting the market at this time," she said.

 

Gomes said if the dollar continues at this level, farmers at cooperatives like Cootricampo, that have yet to sell soy, have already lost out on better margins.