November 04, 2003
Outlook of Brazil's Soy Market in 2003
Executive Summary
Much has been made about the dramatic expansion in Brazilian soybean production and the possibility of it overtaking the United States as the leading producer in the next few years. The attention that Brazil has garnered is warranted. ATO Sao Paulo has revised output to 52.5 MMT for Brazil's 2003 soybean crop, at least twenty percent larger than 2002's output level though area increased no more than thirteen percent.
Yields improved as there were no major weather concerns and experienced southern producers migrating to the states of the Center-West and northeasterly to Maranhao and northward to parts of Para, for example, explain much of the production boom. In tandem with the farmers opening up new land, the whole agricultural input/output system comprised of multinationals and Brazilian companies is widening its presence across the state of Mato Grosso but also in outposts like Tocantins and Piaui, often in previously underdeveloped regions, making seed, fertilizer, herbicides available on the one hand and credit, purchasing, transport and export to complete the cycle.
Especially in view of very favorable international market prices for soybeans and derivatives due to the markedly reduced 2003 U.S. crop, there is every reason to expect yet another strong leap in production in 2004. And in view of the growth in output achieved with the 2003 harvest, another jump on the order of twelve percent could push Brazilian production to the 59 million metric ton level.
There is no indication that even with a much larger crop that Brazilian processors and exporters will have difficulty in marketing the soybeans, meal and oil produced. In this regard, additional crushing capacity and export terminals are being planned by the leading soybean merchandisers/ processors/ exporters and over time, as more production comes out of the center-west and more northerly states, so to will more exports and products.
Production
Area
ATO Sao Paulo has marginally reduced 2002 crop size in recognition of a small change in yields but has slightly revised soybean acreage upward for the 2003 crop due to modified national estimates and has increased projected area for 2004's output in consideration of producers' objectives of growing as much as soy as possible because of favorable pricing. As stated in various USDA and other reports, though Brazil is currently using about 45 million hectares for all agricultural production purposes, it could bring into production at least twice the current area. Obviously, this will take years and extensive investment to become reality, but the point is that former pasture lands and newly prepared acreage has been brought into production and this expansion will continue to occur and occur rapidly.
The strongest relative rates of expansion in soybean area will continue to be in the states of the north and northeast which are still new to the planting of this commodity. On the other hand, the largest absolute increase in land used for soybeans will continue to be in the center-west states and those of the south and southeast.
Again, given extremely attractive Chicago soybean prices and despite attractive cotton prices as well, in view of the production cost of competing crops like cotton, farmers will prefer to plant soybeans as a first crop and follow with second-crop corn or, in some cases, cotton, in cases where there has been no change in overall farm size. Nationally speaking, because area is not a constraint to production, much of the two million hectare increase foreseen for the 2004 soybean crop will be attributable to new land beginning to be cultivated as opposed to one-for-one reduction, say, in corn acreage.
Yields
2003 crop yields of better than 2.8 MT/hectare were a noticeable increase over 2002 as weather was less of a deciding factor and resulted in a marked increase in 2003 production which has been revised upward by close to three percent. Production practices including more no-till planting, suitable seed variety usage including upwards of seventy percent of Rio Grande do Sul's (RGdS) producers use of biotech seed varieties and improved crop management explain the growth in productivity.
Recent reports on the part of the 2004 soybean crop being planted in October 2003, suggest that the use of Roundup Ready seed varieties is spreading more openly across Brazil. In view of the September 2003 signing of a Presidential Provisional Measure sanctioning the use of biotech seed varieties in the 2004 crop, a range of producers nationwide are sourcing this seed from producers in the southern states of RGdS and Parana and from Argentina and Paraguay. So, estimates are that the biotech content of the 2004 crop may be as high as 25%, and this will have a positive effect on yields.
Production Costs
It should be noted that rising costs for fertilizers, most of which is imported, for herbicides, seeds and even labor have led various market watchers to estimate that overall production costs for the 2004 crop will be about 50% higher than in 2003. At the same time, because the Brazilian Real has strengthened versus the US$ in the course of 2003 and because, of course, soybeans are US$-denominated, the payoff for Brazilian producers is lower than was the case, say, in October 2002. These factors would normally be expected to dampen what will already be considerable expansion in area planted. But again, countering the higher cost of inputs and weaker US$ is the fact Chicago soybean prices in October 2003 are 30-35% stronger than was true twelve months back.
Brazil's land and labor costs will continue to make it a relatively lower cost producer, but the more costly dependence on roads for most transport of its soy mountain from the interior to processing and port facilities and will prevail.
For now, soybean exporters moving the crop and meal and oil processed in state will continue to ship most southward to Santos and Paranagua ports via road and rail. Also, the use by two of the largest players in the soy industry, Maggi and Cargill, of highways 364 and 174 in Mato Grosso to move product to Porto Velho in Rondonopolis from which barges carry the soybeans to their respective Amazon port facilities can be expected to grow further.
Trade
USDA's projection that Brazil's exports of soybeans and derivatives in the course of 2003/04 production cycle will, for the first time ever, exceed those of the United States, has gained considerable press. Overall Brazil's agricultural trade surplus surpassed $20 billion in 2002 and looks like it will be approach the $25 billion mark for the 2003 calendar year. It is no surprise that the soy complex is the leading export sales generator for the agricultural sector, and the export value derived from soybeans and products top $8 billion in 2003.
In terms of markets for its soybeans and derivatives, China and the EU continue to be the most important Brazilian customers. Overall, China is the largest buyer of soybeans, the Netherlands the biggest buyer of meal and Iran purchases the most vegetable oil.
Policy
Biotechnology
When it comes to biotechnology policy, a cloud of confusion continues to hover over the Brazilian soybean landscape. Though the 2003 crop was close to 15-20% biotech content and prevailing law did not allow for it to be planted last year, Brazilian President Lula signed a Provisional Measure in March 2003 allowing for the transport, processing and marketing of the commodity. Many held out hope that the Lula Administration would finalize a definitive biotech law working with the Brazilian Congress prior to the beginning of planting of the 2004 soybean crop.
In the interim, the Brazilian press reports daily on the ongoing dispute between Agriculture Minister Rodrigues and Minister Silva over how government should regulate biotechnology. With the goal of putting in place a finalized policy on agricultural biotechnology, the Lula Administration has apparently decided to fashion decision making along the lines of the process adopted by Australia whereby a subset of the cabinet would render judgment on the approval of new biotech seed varieties and biotech policy in general. Of course, this draft legislation will be debated in congress and a final version, once passed, would move to the President for signature and implementation. But in view of the years and energies that have gone into the public debate on this subject, it would be a considerable achievement if the executive and legislate branches are ultimately able to craft a permanent policy very soon.
Two interesting developments to report concerning the 2004 crop that is now being planted are:
- A new Provisional Measure (PM) signed in September 2003 allowing planting and harvesting of biotech seed varieties. Among other conditions, this PM requires farmers to sign documentation acknowledging using biotech seed and that they accept responsibility for any environmental damages or public health effects were they to be discovered at an ulterior point in time. Moreover, the MP disallows the commercial sale of biotech seed varieties across state lines. Based on late October 2003 news reports however, interstate seed sales are indeed taking place pushing estimates that as much as 25% of the upcoming crop will be biotech.
- The Government of the State of Parana has declared itself to be a biotech-free zone starting October 2003. The Governor of the state in conjunction with a majority of state legislators have decided to implement this legislation in the Brazilian state which produces the second-largest output of soybeans. And at 25 percent, it is also the state with the largest share of Brazil's oilseed crushing capacity.
In addition, it is also a state where possibly as much as 10% of the 2003 harvest was produced from biotech seed varieties. Within the first week of the adoption of this measure, hundreds of trucks transiting Parana from Mato Grosso do Sul and Sao Paulo states with soybean or product cargoes headed for the port of Paranagua or for processing in Parana itself have been stopped to be tested for biotech content. Given the difficulties of enforcement, the disruption in the transport and the flow of soybeans into Parana for processing and the subsequent loss in revenue to that state, it would seem likely that some compromise is reached or that the state law is abrogated or superceded by a federal law or injunction that would restore the marketing, handling, processing and exporting of soybeans and products in that state to the prevailing norm.
Source: USDA
