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August 27, 2013

Market to Brazil - Plant More Soy, Acreage up 4-6%, Maybe More

As Brazilian farmers prepare for their 2013/14 planting season, they have been receiving some good news from both the commodity markets and the currency markets. Soybean prices are rising and the Brazilian currency is weakening, which are both good news for Brazilian soybean farmers. I think this will encourage an even greater expansion of the soybean acreage in Brazil in 2013/14. Therefore, instead of the 3-5% expansion in soybean acreage which had been expected, I am going to increase that to a 4-6% expansion and it could go higher. As a result, the total 2013/14 Brazilian soybean crop is now estimated at 85 to 87 million tons.

The larger soybean acreage will come from: additional switching from full-season corn in southern Brazil to soybeans, the conversion of degraded pastures to soybean production in central Brazil, and additional land clearing for new soybean production in northeastern Brazil.

Soybean/Corn price ratio in Brazil at 3:1 to 4:1 - For farmers in southern Brazil that can plant either full-season corn or soybeans, the soybean/corn price ratio continues to indicate that they should plant more soybeans and less corn. We need to also remember that the price reference for full-season corn planted in southern Brazil is the March contract and for the safrinha corn, it is the July contract. For soybeans in Brazil, the price reference is the May contract.

While the November/December soybean/corn price ratio at the Chicago Board of Trade is approximately 2.8 to 1 as of last Friday, it is even more favorable in Brazil at 3 to 1 in Parana and up to 4 to 1 in Mato Grosso. The record large safrinha corn crop in Brazil has pushed down prices so much that not even a weaker currency or government purchases of corn at the guaranteed minimum price of R$ 13.00 per sack has been able to pull up prices. In Mato Grosso there is still corn being sold for R$ 10.00 per sack (which is a little less than US$ 2.00 per bushel depending on the currency exchange rate).

The preferred crop of Brazilian farmers is soybeans and they only increase their corn acreage when corn prices are favorable, which is not the case right now. Therefore, the full-season corn acreage in southern Brazil might decline more than the 10% that is currently estimated.

Brazilian currency weakens - The Brazilian real has lost about 9% of its value compared to the U.S. dollar just during the month of August (it has lost 17% since early May). Since soybeans are priced in dollars but paid in the local currency, this decline in the value of the Brazilian currency is the same as a 9% price increase for Brazilian soybean farmers.

The Brazilian Central Bank intervened last Friday in support of the currency, but efforts such as this are a stop-gap measure at best. Most market observers feel the currency will continue to weaken going forward. The exchange rate is already at 2.4 reals per dollar and most people had anticipated that it wouldn't be that low until sometime next year.

The weaker currency is not all good news though because it makes imports more expensive such as fertilizers and Brazil imports 70% of its fertilizer needs. But as soon as the currency started to weaken in May, many Brazilian farmers quickly priced their fertilizer needs for fear of rising fertilizer prices. For those farmers who have already purchased their fertilizers, the weaker currency is basically all good news.

Slow early corn planting - In southern Brazil, soybeans and full-season corn compete for the same acreage, so if farmers plant less corn, they will then plant more soybeans. Corn is the first crop planted in southern Brazil, but the early corn planting in southern Brazil has been delayed by cold weather. If the soil temperatures are warm enough, farmers in southern Brazil would like to start planting their corn by the end of August or early September. Up until this point, it's been too cold to plant corn, so the longer it stays cold, the greater the likelihood that farmers will switch some of their intended corn acreage to additional soybean production.

Another mass of polar air is sweeping into southern Brazil this week bringing with it yet another chance of freezing temperatures in Parana and Rio Grande do Sul and even maybe some light snow in the higher elevations of Santa Catarina. So it looks like it will be another week with very little full-season corn being planted in southern Brazil.

We must also remember that the full-season corn crop in Brazil now accounts for less than half of Brazil's total corn crop, while the safrinha corn crop accounted for approximately 56% of Brazil's 2012/13 corn crop. The safrinha corn crop in Mato Grosso, which is the largest producer in Brazil, basically competes on price and not with other crops - is it profitable to grow corn or not. In Mato Grosso there is a little competition from cotton for the same acres, but the safrinha corn acreage is many times larger than the cotton acreage in the state (3.3 million hectares of safrinha corn vs. 0.475 million hectares of cotton).

In the state of Parana, which is the second largest producer in Brazil, safrinha corn competes with winter wheat, but still safrinha corn has a much larger acreage (2.17 million hectares of safrinha corn vs. 0.914 million hectares of wheat).

Therefore, a switching from corn to soybeans in Brazil will mainly occur with the full-season corn in southern Brazil. The safrinha corn acreage in Brazil will be determined by the profitability of growing corn and not by the soybean/corn price ratio because they are not competing for the same acreage.