It may come as a surprise to read of protesting Brazilian farmers blocking roads, complaining of the worst farm crisis in 40 years.
Weren’t they the guys with booming soybean and livestock production, overtaking traditional exporters such as Canada and the United States?
They were, but now are suffering from overheated expansion and a soaring currency.
The result is that they might significantly reduce acreage of the 2006-07 soybean crop and that could buoy oilseed prices in about six months.
The main problem for Brazilian farmers is that their currency, the real, has climbed 16 percent against the American dollar since December and 38 percent since the start of 2004. By comparison, the Canadian dollar has appreciated five percent since the start of the year and 16.5 percent since the start of 2004.
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While most currencies have gained against the weak American dollar, the real in particular has soared because of a strong economy and booming exports of commodities and manufactured goods. This has led Brazil to a record current
accounts surplus and high interest rates, 11 percentage points higher than the United States Federal
Reserve’s 4.75 percent benchmark rate.
Soybeans account for an important part of the commodities export boom, but ironically their success is now creating problems.
Brazilian farmers get paid for their soybeans on the basis of a 60 kilogram bag. They now get about 18 reals per bag whereas a year ago they got 40 reals.
Last fall, Brazilian farmers were already nervous as they battled Asian soybean rust and soaring input and transport costs. Also, producers struggled with an inadequate farm financing system and transportation infrastructure.
The situation has now come to a head with some farmers blockading roads and elevators, demanding government assistance.
Last week, Brazil’s agriculture minister and the country’s largest soybean farmer both predicted sharp acreage reductions if this situation continues.
Minister Roberto Rodrigues predicted farmers would cut seeded area by about 25 percent, a sharp reversal from a trend of rapidly rising acreages beginning in the late 1990s.
Blairo Maggi agreed, stating that seeding in his state could drop by one-third. Besides being the governor of Matto Grosso, Brazil’s largest soy growing state, Maggi also owns a company that seeds almost 750,000 acres of soy a year, making him the largest soybean farmer in the world.
Those estimates are probably excessive because not seeding is probably as unpopular among Brazilian farmers as it is among Canadian producers. The U.S. agricultural attache in Brazil forecasts a two percent drop in acreage.
But any significant pullback in Brazilian production or even a halt in its growth will have a big impact. The South American giant accounts for about 25 percent of the world’s soybeans and one-third of exports.
Since 2000, world soybean crush has climbed an average of about four percent a year with booming Chinese demand largely accommodated by rising Brazilian production. If that equilibrium is thrown off, it likely means falling global stocks and strong support for the price of soybeans and other oilseeds, including canola.
This should give canola growers more confidence in their decision about growing the crop this year.
Already, Winnipeg November canola futures have rallied about $20 a tonne from the start of March, leading many to believe the large seeded acreage drop stated in the Statistics Canada March seeding intentions report will not materialize. The recent rally was connected to the overall commodities rally, soy oil’s strength due to expected biodiesel demand, steady domestic and export demand and lingering uncertainty about the size of the canola crop.
But a continued rally will depend on switching the market’s psychology from a comfortable perception of large oilseed stocks to one of nervousness about South American production cuts. That will become clearer as we move closer to Brazil’s soy seeding season, which begins in October.
