August 20, 2008


Brazil's 2008-09 soy a hard sell as farmers watch prices fall



It's becoming harder and harder these days to close deals on new 2008-09 soy in Brazil as farmers remember getting prices $2 per bushel higher just a few weeks ago, brokers and traders said.


"The problem isn't that prices are falling necessarily, but that farmers still remember Chicago soy futures around $14 to $15 a bushel," said Flavio Franca, a soy market analyst at commodities consultancy Safras & Mercado.


"If prices continue where they are, or fall gradually, farmers will start selling again because the price reality will sink in, but that's not going to happen right now. The good times are still too fresh in their minds," Franca said.


Soy futures fell to $12.76 per bushel for the November contract on the Chicago Board of Trade Tuesday. Even though futures for March and May soy, which is the time frame when Brazil harvests soy, are still slightly over $13 a bushel, brokers who know the main soy regions well say that's becoming break even for some, and therefore an unattractive sales price. That's largely the case in Mato Grosso, Brazil's No. 1 soy producing state.


"If you don't have prices equal to $14 a bushel with the premiums on top you don't buy soy these days in Mato Grosso," said broker Paulo Gilioli of grain brokerage firm Cerealpar. Premiums are the price difference paid over the closing price of soy for any particular soy contract on the CBOT. Soy futures for March delivery in Brazil are currently being offered by sellers at discounts of 30 points under the CBOT, which means even with Chicago at $13.084 per bushel, Brazil farmers are going to get less.


Moreover, according to brokerage firm Soma Corretora, buyers are willing to pay 60 points under the March soy CBOT contract, keeping them light years apart from sellers so far this week.


"The major players are not willing to offer more because the importers (of soy) are well covered and not willing to pay anything extra," said Gilioli.


Franca said that just 18 percent of Mato Grosso's 2008-09 soy crop, to be planted in October, has been sold as of Aug. 15 compared to 39 percent last year. On a national level, 8 percent of the crop has been sold as of that date compared to 22 percent last year.


The 2007-08 crop was a bit of an anomaly, though. Soy prices were rising fast and farmers were willing to fix prices as soon as they could to lock in profits following two break even, or worse, years.


In addition, soy buyers were concerned that a smaller US soy crop in 2007-08 would make for tight supply - so they were aggressively buying. That's not the case at this point in time, with the US expecting around 10 million metric tonnes more soy this year for a total of around 81 million tonnes, said Franca, citing USDA numbers.


Even though last year was unusual, the 2008-09 soy crop in Brazil is promising to be a bit of a bore. Brazilians normally sell 11 percent of their crop by now; in Mato Grosso, 21 percent. And the planted area, expected to rise by 5 percent early in the year, is now expected to top off at around 2 percent to 21.8 million hectares.


A large US multinational in Sao Paulo said it also expects that Brazilian soy planted area will rise by no more than 3 percent, and that could shrink further if soy prices fall in Chicago.


Falling prices have slowed business.


"Our clients are all well covered and do not need to buy soy," said the Sao Paulo trader. "China soy crushers are finding it easier for them to import soymeal and soyoil rather than crush soy themselves, due to a reduction in profit margin for them, so that has taken them out of the market for us," he said.


Brazil is the No. 2 soy exporter behind the US. Most of the soymeal and soyoil that is made from crushing the soy stays local.


"Europe is also well covered at least until September," the Sao Paulo trader added.


Soymeal discounts are going for 18 points under the CBOT September soymeal contract and soyoil discounts are 260 points under the CBOT September soyoil contract, the trader from the US exporter said.


"Our expectation is that exports will start to shrink," said an export broker in Paranagua, Brazil's No. 2 soy export hub.


"We are seeing some business with swaps, with Bunge selling futures contracts to (Louis) Dreyfus (Commodities), but very little physical," the Paranagua broker said.


Bunge sold May soy contracts at 75 points under the May soy CBOT to Dreyfus this week for April and May shipments, but aside from that business remains relatively uneventful, the Paranagua broker said.

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