South America Calling

Following a busy February and March, the Brazilian soybean market has slowed dramatically over the past two months, despite local prices remaining firm.

As a result, sales of the 2014-15 crop remain well behind last year.

Brazilian farmers had sold just 60% of their beans as of May 4, down 12 percentage points on the five-year average, according to Safras e Mercado, a local grain consultancy. Sales in Mato Grosso totaled 71% down from an average of 83%.

There are a couple of reasons for the slowdown.

Farmers simply don't have to sell so many soybeans after harvesting a record crop and seeing margins swing positive on a devaluation of the Brazilian real between September and March.

Meanwhile, they are hopeful that we will see price peaks during the U.S. weather market or a further weakening of the real, which will bolster local prices.

However, the second-crop corn will start arriving at elevators in June. Further soybean sales will have to be made to make room for what looks like a bumper crop.

Over the two months, Chicago soybean futures have declined and the Brazilian real has staged a mini-rally, gaining 8% against the dollar since Mar. 20 after falling 30% in the preceding six months.

But local soybean prices have remained virtually stable.

In Sorriso, Mato Grosso, beans were quoted at 55.00 Brazilian reals per 60-kilogram bag ($8.33 per bushel) Monday, compared with R$54.75 on March 20.

Prices have been sustained by a number of factors.

Firstly, high premiums at port. At Paranagua, soybeans are currently quoted 65 cents per bushel over Chicago futures for June delivery. This reflects firm Chinese demand and farmer reticence in selling lots.

Secondly, freight costs are down. It currently costs R$240 per ton ($2.18 per bushel) to truck beans from Sorriso to Paranagua, down 13% on the month, according to the Mato Grosso Agricultural Economy Institute (IMEA).

So, are Brazilian farmers right to hold?

It's a gamble. It is just as hard to predict where Chicago soybean futures will go as it is to say where the Brazilian real will stand come August.

Certainly, the Brazilian Finance Ministry appears to be signaling that the current exchange rate, at around R$3 to $1 should be a ceiling for the currency. That would imply a weakening, especially with the economy so sluggish. But Brazil's high interest rates -- government bonds offer 13.5% for Jan. 2017 -- is very attractive to outside investors, who may pour money in.

(AG)

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