South America Calling

With the soybean harvest now 20% complete, futures staging a small recovery and the dollar strong against the real, you might expect Brazilian grain trading desks to be busy.

But business has been very slack over the last couple of weeks.

"It has been the slowest start to the year in my 30 years in the business," said David Brew of the Brasoja brokerage in the southern city of Porto Alegre.

And it isn't as if the farmers forward sold a lot of soybeans in the second half of 2014.

Up to Feb. 13, farmers had committed to sell 38% of their crop compared with 58% at the same point last year, said Safras e Mercado, a local farm consultancy.

So why are Brazilian soybean farmers holding on to their soybeans?

The first reason appears to be because they can.

After five years of good returns, producers are well capitalized and don't have to sell.

"Farmers aren't financing crops half as much and are freer to choose when to sell," said Richardt Tegnher, commercial manager at Braganca Agronegocios in Mato Grosso.

"With prices lower than last year, there is no pressing reason to sell," said Tegnher, whose company planted 31,000 acres of soybeans around Lucas do Rio Verde, Mato Grosso, this season.

Meanwhile, many farmers are better able to stock after investing in on-farm storage over the last couple of years.

The second reason is that soybeans have become a means of hedging against, or speculating on, a deterioration of the local currency.

The Brazilian real has declined vertiginously against a dollar in recent months, losing 22% of its value since Sept. 1.

This has bolstered local soybean prices. On Friday, beans were quoted at 51.50 Brazilian reals per 60-kilogram bag ($8.13 per bushel) in Sorriso, Mato Grosso, only a little down from 54 reals a year ago.

The real's decline in large part is due to the parlous state of the Brazilian economy, which probably contracted last year and will likely also do so in 2015, combined with the threat to governability caused by a massive graft scandal at state oil giant Petrobras.

There is scope for the situation to worsen, for example if President Dilma Rousseff gets embroiled in the Petrobras scandal or the water crisis in Sao Paulo becomes critical. Farmers have noted this, and some are holding soybeans in the hope of a further forex boost later in the season.

"With some talk of the real hitting 4 (to the dollar from the current level of 2.88), farmers are holding the soybeans as a hedge," explains Brasoja's Brew.

As the harvest accelerates over the next month and crop credit starts coming due, soybean sales will rise, but it's not a given that trading desks will be going crazy any time soon.

(AG)

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