Brazil: Annual Soybean Report 2008

Report Highlights

Thanks to high international prices and good overall climatic conditions, Brazil’s Oilseed sector is experiencing a moment of relative prosperity. Farmers produced a record soybean crop of an estimated 60.1 MMT on 21.7 million hectares, 1 million tons more of soybeans on 4% more area than last year. Brazil’s overall soybean yield, nearly identical to last year’s, is expected to reach 2.8 tons per hectare. Less occurrences of Soybean Rust contributed to this year’s positive outcome. Production and area are in 2008/09 projected to increase by 7%, increasing production to 64.3 MMT.

Executive Summary

Brazil ranks as the world’s second-largest producer and exporter of soybeans behind the United States. The status of being a “new agricultural frontier” gives Brazil an edge in the soybean business, since other world soybean producers such as the US and Argentina face limitations, lacking available land for expansion, especially with corn area expansion taking place due to growing ethanol production.

In 2007/08, soybeans will make up nearly 50 percent of Brazil’s total grains. Post projects that farmers produced a record 60.1 MMT of soybeans on an area equivalent to the 2003/04 season, with yields of nearly 2.8 tons per hectare. The Brazilian government’s projections are for 59.5 MMT with a yield of 2.8. However, several factors contribute to the continued lukewarm financial state of farmers. Although CBOT prices were at historic highs during the growing season, timing was everything for producers this year. Up to 70% of Mato Grosso farmers sold their crop before the CBOT price rally when prices hit $16 per bushel; and sold at or below $12. Only 20% of farmers sold their crop with $16 per bushel prices.

The other major negative factor for farmers in Brazil and elsewhere is the rising cost of inputs. As the price of soybeans rises, input costs concurrently rise. Fertilizers and herbicides have increased about 75% over the course of the season. So, in spite of the season’s high international soybean prices, earnings were not what they could have been, and farmers continue to carry debt.

High international prices and a good 2007/08 harvest are expected to stimulate a considerable area increase next year. Although farmers are still carrying debts, the extension and rollover of debt, which was announced by the Brazilian government in April, will be an important factor in the 7% Post projected increase in area to 23,200 hectares. This would equal a complete recuperation in area lost during the 2006/07 season (surpassing the area in 2004/05 by 400,000 hectares). The North and Center-west should experience the majority of the area growth, and our estimate is that Mato Grosso, Maranhão, Piaui, Tocantins, and Western Bahia will experience highest growth relative to this year’s area. Corn prices will also affect soybean area, and summer corn planting in Brazil should continue to rise modestly. A return to more soy and less corn planting in the US this year is expected to impact what are already historically high Brazilian corn prices. In addition, some shifting from soy to sugarcane should continue to occur.

Brazil has the technological conditions and area available to become the largest oilseed producer in the world. According to local agricultural groups, there are still 90 million hectares available in Brazil without causing deforestation. Nevertheless, farmer groups in Brazil complain that agricultural policy must change in order for Brazil to take the lead in soybean production.

Economic Overview

President Lula and his economic team have implemented orthodox fiscal and monetary policies and pursued many necessary reforms. Brazil's external accounts have improved substantially over the last four years. GDP growth was strong in 2007 at 5.4 percent, its strongest since 2004. Market expectations are for 4.7% growth in 2008. Brazil has experienced booming exports, healthy external accounts, low inflation, decreasing unemployment and reductions in the debt-to-GDP ratio. Buoyed by exports and investment inflows, the Real has remained at relatively appreciated levels, allowing the government and businesses to pay down external debt, although many in agriculture and in industry complain the exchange rate is making Brazilian exports less competitive. The government pre-paid its IMF obligations, its last remaining rescheduled Paris Club obligations, and retired the last of its Brady bonds. This removes from the books all restructured debt associated with Brazil's late-1980's default. Based upon the improving external debt dynamics, Fitch IBCA upgraded its credit rating on Brazil's sovereign debt in February 2006, to BB (two notches below investment grade).

The public sector net-debt-to-GDP ratio is on a downward trend but remains high, at about 42%. Real interest rates also are declining, but remain high. Analysts believe that reducing interest rates will require reductions in the government's borrowing requirement, reform of the financial sector and of the judiciary. Income and land distribution remain skewed. Investment and domestic savings are low, although growing. The informal sector constitutes between 35 to 40 percent of the economy, in part because the tax burden (nearly 36 percent of GDP) is high by comparison with other emerging markets. Sustaining high growth rates in the longer term depends on reforms to improve productivity and increase investment, including fiscal reform, tax reform and labor code reform.

Further Reading

- You can view the full report by clicking here.

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