The Beginner's Guide to Brazil's Crop Crunch

At the beginning of this year, there was a lot to be excited about regarding agriculture in Brazil. Despite the challenges facing the country in other areas it seemed like Brazilians could look forward to an agricultural year that would include a historically large soybean crop, near record corn production, and prosperity for a number of other agricultural products. The expectation was that these crops would be large enough to satisfy domestic demand while simultaneously enabling exports that would attract badly needed revenue to the ailing economy. But as the saying goes, the best laid plans of mice and men often go awry.

Row Crop Production in Brazil

Before we dig into how this year’s situation has developed, let’s take a look at Brazil’s role in the global production of traditional row crops. According to FAO data, Brazil was the third largest producer of corn in 2014, producing 79.9 million metric tons or nearly 8% of global supplies. They are an even more prominent producer of soybeans, accounting for 28.1% of global production in 2014 when the country produced 86.8 million metric tons. It is important to note that the 2014 data, which is the most recent year available from FAO, does not include the rapid production expansion that occurred the following year. Nevertheless, Brazil stayed in second place, trailing the United States.

Given that they are located in the Southern Hemisphere, Brazil’s production cycles are opposite and complementary to those seen in the US. Though there are of course variations depending on the geographic specifics of a certain region, the majority of corn is planted in October with soybeans going in the ground shortly thereafter. The main harvest occurs in February and March.

Brazil does have one very unique cropping characteristic. Because of the region’s tropical climate, it is possible in some areas to plant two crops in a given season. This second crop, called safrinha, allows farmers to take full advantage of the long production season. The most common rotation is to plant soybeans early, followed by a safrinha corn crop. Because neither crop is planted during the ideal production season, yields of both tend to be lower. Therefore, an individual farmer must decide if it makes sense to plant the second crop. It is clear that many do believe it is beneficial – according to farmfutures.com the safrinha corn crop accounts for 65% of Brazil’s corn production.

What’s Been Happening This Year… 

To understand what’s been happening this year, let’s begin by looking at soybeans. In January of this year, just prior to the beginning of the soybean harvest, the Brazilian crop agency Conab predicted record production of 102.1 million tons, an increase of 5.9 million tons compared to the prior year. The increases were driven by expectations of an increase both in acres planted and yield improvements.

But what started as a potentially record breaking year soon became complicated. A harvest season that began so wet it prevented farmers from getting early soybeans out of the ground turned hot and dry as the days passed. Soybeans in the flowering and pod-filling stages during the dry weather were particularly affected, resulting in falling yield and declining crop quality. Adding insult to injury, by the time harvest arrived for some later season soybeans wet weather had returned to some parts of the country, once again delaying farmers from harvesting their crops on time.

As the season progressed Conab gradually stepped down their production expectations, mostly due to yield concerns from the inconsistent climate. By the time the June estimates were released, the agency was forecasting a final production of 95.6 million tons – an amount smaller than the prior year and a far cry from record expectations that existed only a few months ago.

The situation has perhaps been even more serious when we look at how corn production has developed. At the beginning of 2016, Conab projected that corn production during the year would be 83.3 million tons. However, the corn crop suffered from many of the same weather related impacts as soybeans. The dry weather in particular had a detrimental affect on the safrinha crop. As a result, in June Conab downgraded their production estimates to 76.2 million tons, nearly 10% less than last year’s production.

There has also been another important factor at work over the last few months that has undermined domestic crop availability. As Brazil’s economic situation worsened and political instability gripped the country, the Brazilian real began to weaken in the second half of 2015. Between June and December, the real lost 20% of its value. The relatively cheap currency made Brazilian exports very attractive to foreign buyers. Additionally, other regional producers, namely Argentina, battled their own weather complications forcing buyers with unfulfilled needs onto the global market to look for product. Combined, these factors moved grains, especially corn, offshore at accelerated rates. According to the USDA, Brazil corn exports are up 138% over 2015. 

…And Why It Matters 

We began this article with a Brazil that was hopeful for the revenue generated by grain exports. So what is the problem if exports have increased? At the same time that grain was moving offshore more quickly than in the past, it was being replaced at slower than expected rates due to the issues with the harvest. As a result, grain stocks became depleted and the cost of grains for local buyers, such as livestock producers, shot upwards.

At one point in mid-May, before the harvest of the safrinha corn crop, Brazilian crop experts at Soybean and Corn Advisor reported that Conab only had enough corn on hand to satisfy six days’ worth of the country’s average use. This impossibly low figure helps explain how local corn prices crept up to nearly $55 reais per 60 kg bag.

Feed is one of the most important costs facing livestock producers and in some cases it may account for up to three quarters of a farmer’s expenses. Therefore, higher feed prices will crunch farmers’ margins in a significant way and lead these producers to make management decisions limiting their exposure where possible. In the case of dairy, for example, despite milk prices that are higher than the rest of the region, milk production in Brazil during the first quarter contracted by 4.5% year over year. The pork and poultry industries have also been seriously affected although both these export-oriented industries have also received some benefit at the hand of the weak real.

To help alleviate the stress Brazil has been trying to increase their imports of corn from other countries. However, practical limits on volume availability or import restrictions exist that will prevent imports from being the structural solution that is needed to restore market equilibrium.

Preparing for the Future

Although a bit of pressure has been taken off the market with the beginning of the safrinha harvest, it is clear that limited grain availability, especially of corn, will be a factor that will persist throughout the year. Using what we’ve learned about Brazil’s crop situation, we can extrapolate a few conclusions that will help us prepare for the upcoming months.

Firstly, except for cases where grain was previously contracted to be exported, Brazilian crops are more likely to go to local uses rather than to exports. This will open up export opportunities for other countries, namely the United States. All eyes will be on the weather in the US over the summer and the development of the corn and soybean crops in an attempt to estimate how much will be available for global markets.

Of course this will also impact the price as the more limited the supply, the higher the price. Both cash and futures markets had been marching steadily upwards since early spring through mid-June when they softened once again, probably driven by the safrinha harvest and strong US crop condition reports.

Secondly, animal protein farmers in Brazil are likely to cut back on production in an attempt to salvage their margins. This action will put upward price pressure on these markets. Keep an eye out especially for bumps in the poultry and pork markets, which rely heavily on corn and of which Brazil is a major producer.

Finally, watch for attempted government intervention. Rising grain and animal protein prices will mean higher costs for consumers in an already turbulent economy. Furthermore, many state governments are having trouble balancing their budgets and may try to take advantage of the grains that are moving outside the country to help make ends meet.

Just this week in Goias, a major agricultural state, legislators attempted to eliminate an exemption that grain producers have on export taxes for grain. The move is reminiscent of the ‘retenciones’ that were recently removed in Argentina. Though the farming industry is staunchly opposed to the tax and has so far successfully defeated the proposals, pressure is likely to mount, especially if the country’s economic situation continues to slide.

Summary

While the current grain situation in Brazil was largely unexpected and most certainly unenviable, it can provide learnings and cautions that will help us be better prepared for the future. It will be key to monitor the relationship between stocks, exports, and the development of the current years’ crop – all of which can give important clues about the directionality of markets. While things are difficult now, as with all things in agriculture, the dynamics will continue to shift and in a few months’ time we may find ourselves in any number of different supply scenarios. Stay tuned!