South America Calling

Rising Costs, Freight Spawns Caution Over 2013-14 Brazil Soy Crop

Brazilian farmers expanded acreage aggressively this season but seem unlikely to repeat the dose in 2013-14 amid rising costs and precarious logistics.

"Next season promises to be much more problematic," said Fernando Muraro, grains analyst at AgRural, a local farm consultancy.

Soybean production costs for the 2013-14 season will average at R$2,294.67 per hectare ($467 per acre) in Mato Grosso, over 20% higher than forecast for the 2012-13 crop a year before, according to the Mato Grosso Agricultural Economy Institute (IMEA).*

Assuming average yields, it would cost $10.50 to produce a bushel next season in Mato Grosso, which is more than the $9.20 currently offered for a bushel equivalent in Sorriso, the biggest soy-producing municipality in the state.

All things being equal, farmers would need May futures to remain above $12 to $12.50 to create any enthusiasm for soy next year, analysts predict.

The main culprit for the rise in Mato Grosso's operating costs is seed. A terrible drought in Bahia, its main seed supplier, and rain and Asian rust damage in Petrovina, the main Mato Grosso seed region, will dramatically reduce availability for next year. This will result in a 50% jump in seed prices, said Muraro.

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Crop protection costs will also surge due to the general rise in the caterpillar population, and the appearance of a dangerous new strain of the Helicoverpa caterpillar.

The only plus is that fertilizer costs remain stable.

The other motive for caution over 2013-14 soybeans is poor logistics. The chaos that the arrival of Brazil's grain crop caused this season will likely be repeated next year as no significant improvements in infrastructure are planned.

The cost of transporting a metric ton of soy from Sorriso to Paranagua jumped 50% this year, currently costing R$280. That is equivalent to 42% of the elevator price offered in Sorriso.

The situation could be even worse next year. Nobody knows. And that is precisely the problem.

With this unknown in the equation, it becomes hard to project farmgate prices for next year. That is bad for farm planning and worse for the trading houses that buy the grain. ADM, Bunge and the rest lost money on the jump in freight this year and will be less keen to offer forward sales for Mato Grosso delivery next year.

Forward sales not only allow farmers to raise working capital, they also serve to lock in prices.

Deprived of visibility on transport costs and the ability to close forward sales, some farmers will be less willing to plant soy.

In conclusion, it already seems unlikely that Brazil will repeat the 11% expansion in acreage seen last year.

However, soybeans remain the bread-and-butter crop for most farmers and acreage may still grow as they switch from cotton to soy and forge ahead with plans to bring pasture into production, says Muraro.

Of course, much still depends on what happens with the U.S. crop.

* The 2013-14 figure takes the rise in costs of production to 49% over the last four harvests, according to IMEA.

(AG)

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