South America Calling

Brazil's Crisis and Soy

Brazil is in a state.

The economy probably contracted last year, will likely do so again in 2015 and the recession may extend through 2016.

And there is little anyone can do about it.

The government can't stimulate the economy as inflation is soaring and it needs to cut spending to bring public accounts under control. If it ignores these issues, it risks an economic meltdown.

Politics is also a mess. President Dilma Rousseff was just re-elected in October but her approval rating is way down (only 11% approved of her government in March) amid a corruption scandal at state oil company Petrobras. Members of her party and coalition allies stand accused of syphoning billions from the oil giant in what may be the world's biggest corruption case.

If that weren't enough, below-average rains over the last couple of years mean levels at hydroelectric reservoirs are perilously low and there is a real chance of energy rationing in 2015.

This situation has sparked large street protests in major cities and talk that the newly elected president may be forced to step down -- impeachment seems unlikely.

"OK, but what will be the impact of Brazilian grains?" I hear you ask.

The first reflex is already being felt.

The local crisis has amplified the dollar's recent resurgence and the Brazilian real has devalued 30% against the greenback since September.

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This has transformed margin calculations on soybean production.

Before the devaluation, planting soybeans in Mato Grosso 2014-15 was expected to offer a wafer-thin profit margin and would lose money when rents are included in calculations.

The devaluation changed that outlook. Agroconsult, a local farm analytics firm, currently pegs the margin in northern Mato Grosso at R$798 per hectare ($101 per acre), before rents.

The slide of the real also considerably brightens the outlook for the 2015-16 season. For while costs will rise, the devaluation will more than offset the impact.

Based on an exchange rate near current levels, costs of production in northern Mato Grosso will rise 13% next season to R$2,187 per hectare ($278 per acre) on the back of a 22% increase in chemical prices and a 29% increase in fertilizer prices in local currency.

But even with soybeans projected at $9 per bushel next year, Agroconsult projects farmers in north Mato Grosso will enjoy a margin, before rents, of R$337 per hectare ($43 per acre) in 2015-16, all things remaining equal.

Bearing in mind that Brazil increased area in 2014-15 when margin prospects were even tighter, this can be read as bearish for soybeans.

However, there are other effects of the crisis that will offset the boost to farmers offered by the devaluation.

The principle factor is credit.

Official credit accounts for approximately half of all soybean crop funding and the government banks are radically cutting back the availability of credit following government austerity measures.

"The situation is absolutely clear in the Cerrado," said Mauro Alberton, marketing strategy director at Bayer, a major chemicals supplier.

This week, Agriculture Minister Katia Abreu declared that there will be no shortage of official credit for the 2015-16 season.

Those in the industry aren't so sure.

According to Agroconsult, while total funds available for soybean, corn, cotton and wheat planting may remain roughly the same in 2015-16, an increase in costs may lead to a R$10.7 billion ($3.4 billion) shortfall in credit, around 11% of total credit.

Meanwhile, the great uncertainty over Brazil's economic situation will prompt farmers to be more conservative in their planting plans, scaling back expansion, for example, in light of credit limitations.

It will also delay decisions on planting, considerably logistics for input suppliers and raising costs.

As a consequence, Agroconsult estimates that soybean area will fall 740,000 acres from the 77.8 million acres planted this season, which would represent the first decline in area in nine years.

However, the situation is so uncertain that it is difficult to predict anything about the next season with certainty.

If the government's austerity plan works over the next six months, stability will return with a positive impact on credit but a strengthening of the real. On the other hand, if the plan falters, the inverse will occur. It's a question of degrees.

Normally, analysts have a pretty good idea what Brazilian soybean area will be by the end of April. This year, any degree of certainty will only come later.

(CZ)

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