Mar 31, 2020

Brazilian Soybean Producers Recording Record High Profit Margins

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

There is a tremendous amount of uncertainties surrounding the world's economies due to the Covid-19 crisis, but one thing is clear, Brazilian farmers are having a very good year financially.

Record high domestic prices for soybeans and corn, which are due mainly to the devaluation of the Brazilian currency, are also resulting in record high profit margins for Brazilian producers. The Brazilian real has devalued approximately 18% over the last six weeks and it is currently trading in the range of 5.1 reals per dollar.

We have written many time in the past that the currency exchange rate is often times more important to Brazilian farmers than the actual price of the commodity on the Chicago Board of Trade for example. Since the grain is priced in dollars, but paid in the local currency, a devalued currency results in higher domestic prices for Brazilian farmers. The downside of a weak currency is that it makes imports such as fertilizers and chemicals more expensive.

The trick is to purchase inputs when the currency is strong and sell the grain when the currency is weak and that is exactly what happened during the 2019/20 growing season. When Brazilian farmers were purchasing their inputs for the 2019/20 growing season, the Brazilian real was trading in the range of 3.9 reals to the dollar. Now that they are selling their grain, the Brazilian real is trading in the range of 5.0 reals to the dollar. This is the Brazilian version of "buy low and sell high."

According to the director of the consulting firm Consultoria Cogo Inteligencia, for farmers in southern Brazil, excluding the state of Rio Grande do Sul which has suffered from drought, the profit margin for soybean producers is in the range of 50%. In the cerrado regions of central Brazil, the profit margins are in the range of 27%. These margins are based on a soybean yield of 60 sacks per hectare or 53.2 bu/ac.

The margins are lower in central Brazil because that region has a higher cost of production and higher transportation costs due to its great distance from export facilities.

Things are good right now, but they could change very quickly in Brazil if there is a disruption in the movement or export of grain, but farmers have already locked in these margins on at least 75% of this year's soybean production and 20-25% of next year's soybean production.

Farmer selling in Brazil has slowed in recent days since they have already booked good profits and purchased a significant percentage of the inputs needed for their 2020/21 crop. Some farmers may still need to sell some of their soybeans to create cash flow, but 75% of the crop has already been sold, which is record fast for this time of the year.