South America Outlook

By Alastair Stewart
DTN South America Correspondent

SAO PAULO, Brazil(DTN) -- South America pressured soybean and corn markets in 2015 and there are indications that they may do the same in 2016.

With no clear end to the political and economic turmoil in Brazil, the balance of probabilities indicates no reversal of the devaluation of the real that made local farmers so competitive last year.

Meanwhile, the end of many grain export controls and the floating of the peso may lead Argentina to dump much of its massive soybean stocks during the course of the year.

MATO GROSSO DRYNESS ONE BULLISH NOTE

The one bullish South American story offering some support to soybean prices is the dry weather in Mato Grosso, the top Brazilian grain producing, and in the frontier region of Matopiba.

Rain has been inconsistent across Mato Grosso since October, first stymying soybean planting and then starving plants of moisture in November and December across parts of the north and east of the state.

The USDA Friday lowered its Brazilian crop view from 100 million metric tons to 98 mmt in large part due to the situation.

But the situation is perhaps not as grim as some growers would make out, for while some crops have suffered, they only represent about a quarter of the state's crop and crops benefitted from dousing over the Christmas and New Year period.

It is too early to talk about massive losses, warns IMEA, a farm-funded consultancy, which has so far cut its forecast by 4% on the dry weather.

"As farmers in the U.S. know, soybean crops can recover quickly with rain at the right time," said Steve Cachia, grain analyst at Cerealpar, a local brokerage.

He pointed out that losses in Mato Grosso will not likely be of an order large enough to significantly move international markets.

BRAZIL'S CRISIS

The slide of the Brazilian real during 2015 -- it fell 32% against the dollar -- bailed out local grain farmers. It allowed them to register small positive margins on 2014-15 soybean and corn crops and on forward-sold 2015-16 crops and meant Brazil was aggressive in export markets, particularly for corn.

A key question is whether this dynamic will continue in 2016?

The 2015 devaluation was a consequence of a dramatic downturn in the Brazilian economy and a political crisis that meant Brazil did little to remedy the deep-seated economic issues.

As we move into 2016, little has changed. Economists forecasting the Brazilian economy will contract another 3% in 2016 and political gridlock continues amid a massive corruption scandal that threatens to bring down many major figures and an impeachment process against President Dilma Rousseff.

With no easy fix in sight -- recently The Economist wrote of the possibility that Brazil could be in the middle of a lost decade -- the balance of probabilities indicates that the real will not recover next year and could cede more ground.

A further devaluation would allow Brazil to continue to be aggressive in selling soybeans and corn, of which it exported a massive 29 million metric tons in 2015.

"All eyes will be on the exchange situation over the next year," said Carlo Lovatelli, president of Abiove, the Brazil soy industry association.

ARGENTINA TO SELL STOCKS

And then there is the question of how quickly Argentina will sell soybean stocks?

For nearly a decade, Argentine farmers have been at war with its government, which saddled them with heavy export taxes, tight export controls and latterly foreign exchange controls.

So they are currently walking on air following the victory of Mauricio Macri in December's presidential elections. Since taking power Dec. 10, the new president has summarily swept away export quotas and tariffs on corn and wheat, cut the export tax of soy by 5 percentage points and devalued the official peso.

In response, trading firms have already started exporting more heavily, shipping nearly $2 billion in grain since tariffs were lowered, according to the Argentine Grain Exporters Center (CIARA-CEC).

But farmers still have much larger stocks -- before the election, soybean stocks were pegged at between 10 mmt and 20 mmt -- and the question is, when will they unload these?

The spot market has been fairly slow during the first month under the new conditions amid low international prices, but selling will likely increase as new crop bills start arriving from May onwards, or if international prices rise.

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Editor's Note:

Each year, DTN presents an outlook series on what is expected for the year ahead in various areas of agriculture. This is the fifth story in a series DTN is running that looks at what farmers can expect as the hot topics for 2016 in areas such as farm finance, land prices, ag and the environment, agricultural policy, crop inputs, livestock, transportation and others. We welcome your feedback on what you think the year will be like at talk@dtn.com.

Alastair Stewart can be reached at alastair.stewart@dtn.com

(ES/SK)

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