South America Calling

Farmers across Brazil's Cerrado savannah region have been steadily adding soybean acres for the last decade, but many are considering a reduction in area due to low prices and limited access to credit in the 2015-16 season.

The extent to which growers in Mato Grosso and surrounding states retire marginal acres from production come September will determine whether soybean area drops for the first time in nine year or the upward march continues.

Certainly, farmers are not enthusiastic about the prospects for the 2015-16 season.

"After years of good returns, farmers are facing tighter margins this year," said Fernando Muraro, analyst at AgRural, a local grains consultancy, speaking at the annual BM&FBovespa agribusiness seminar in Sao Paulo.

In the south of Brazil, where logistics are simple, farmers will still likely make some money with soybeans next year.

In Cascavel, western Parana, soybeans offer a margin of R$563 per hectare ($73.77 per acre) on rented land, based on current prices and exchange rates, according to AgRural. That is better than corn and will be enough to prompt farmers to switch summer corn acres to soybeans in the south and southeast of the country, all analysts estimate.

However, moving north, the outlook is grimmer.

In Sorriso, northern Mato Grosso, the margin is negative R$35 per hectare ($4.59 per acre), says AgRural.

With few planting choices, most Cerrado farmers will plant soybeans anyway, and many will continue with long-standing plans to convert pasture into soy land.

"Soybean farming in Mato Grosso is like a locomotive, it takes time to stop its momentum," said Ricardo Tomczyk, president of the Mato Grosso Soybean and Corn Growers Association (APROSOJA).

As a result, there are a number of analysts who expect area to grow next season. AgRural's Muraro predicts 2.3% expansion, while analysts at Safras e Mercado consultancy see a 2% rise.

However, in 2015, there is a new factor that has come into play: a lack of credit.

Brazil's economy is in a parlous state. GDP is expected to decline by more than 1% and inflation is roaring at over 8%. The government has been forced into austerity measures. The net result is that banks aren't lending.

The government provided some cheer this month by announcing a 20% increase in official credit for the 2015-16 season. But farm leaders note that the credit plan isn't quite as positive as it appears. That's because only about 60% to 65% of these funds have subsidized interest rates and the rest is at market rates that run as high as 17% per annum.

Meanwhile, it remains to be seen if banks will really lend all this money with many reticent about loaning in such a high-risk segment.

"Access to credit will be reduced and more expensive," said Andre Pessoa of Agroconsult, a local consultancy, during the BM&FBovespa seminar.

Agroconsult estimates more expensive credit will add as much as R$100 per hectare to soybean costs this season

In the south, where farms are small, restricted credit will prompt farmers to switch from corn to soybeans, which are cheaper to cultivate, in order to get by on official credit. But in the Cerrado, where farms are much larger, official credit won't be enough and the lack of commercial funding for farming will be felt.

"Medium-sized banks aren't going to take a risk on financing a restricted number of big farmers as before. Availability of commercial credit will fall," said Pessoa.

The credit crunch has already led to slow input sales, with only 40% of fertilizers bought for the 2015-16 crop compared with 60% at the same point over the last five years. Fertilizer and chemical companies have been much more conservative in offering barter contracts than in recent years.

Many Cerrado farmers are heavily leveraged after splurging on land and machinery in recent years. Those will certainly reduce planting on marginal areas, especially those areas that were rented.

According to Pessoa, the lack of credit will mean that Brazilian planted area will probably fall in 2015-16.

In 2014-15, farmers were saved by a 30% devaluation of the Brazilian real during the season. Farmers are praying for similar help, either via forex or Chicago, this year.

"We will only really get a clear picture of what is going to happen at the end of July," said Fernando Pimental, analyst at Agrosecurity, a local consultancy, who is currently predicting soybean area that is stable or slightly lower in 2015-16.

Brazil planted 79 million acres in 2014-15, marking the eighth consecutive year of expansion during which area jumped 54%.

(AG)

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