Reuters | 7 March 2011
Sao Paulo - When soy futures hit record highs in 2008, Brazilian farmers were in no position to capitalize on the boom. Crippling debts, wild currency swings and high fertilizer and fuel costs rendered them unwilling or unable to sow more acres.
Today, although prices are almost 20 percent lower, conditions have rarely been better. Farmers, now flush with cash, are preparing the first sustained expansion of the country's soy crop after a half decade of stagnation. With more untilled arable land than any other country on earth, Brazil may be the world's best hope for boosting global supplies to contain rising food prices, which hit a record in February for the second month in a row.
Obstacles lie ahead, including tougher environmental laws and competition from other high-returning crops like cotton and corn. And planting won't get underway until September, although preparation has already begun. Farmers who have raced to sell the current crop at a record pace are clear in their intentions.
"Guys around here are gunning their engines," said Alcindo Uggeri, president of the farm association in Novo Mutum -- a leading soy growing county. "Looking at the rate farmers are selling soy crop for fertilizer and seeds, you'd think they were going to plant next month."
Brazil is the world's second-largest grower and the crop that recently started harvesting looks bigger than the record 69 million tonnes last season. Soy futures are around a lofty $14-a-bushel mark and analysts say producers' profit margins have nearly doubled from last year to 50 percent.
EXPANSION CYCLE
One good season won't satisfy huge Chinese-led demand, tame prices and ease the political unrest that they have wrought in some countries. But several years of expansion might. "With such positive signs, we are looking at an increase in the area of 3 to 5 percent," head analyst Flavio Roberto Franca at Safras e Mercado said of next season. "This doesn't look isolated either. We appear to be entering a cycle of expansion. Producers finally recovered from some tough years."
Soy has become indispensable for feed supplies in the global meat industry. It is arguably the most important source of protein today, producing many times more than any other major crop or grazing animals can on equal acreage. The United States is the world top soy producer but high demand for corn to produce ethanol is limiting soy acreage -- it will only grow 1.5 percent to 77.8 million acres this year, according to the USDA's preliminary outlook.
Optimism among Brazil's soy farmers hit a record 125 points in January on the Producer Confidence Index by consultants Uni.Businesse Estrategia, 50 points above a year ago.
By early March, a record 54 percent of the new crop has been sold under advance contracts as farmers lock in profits and start buying seeds and fertilizer for the next season. In the town of Querencia on the cusp of soy expansion in Brazil's No. 1 growing state Mato Grosso, the area for this year's crop jumped 11 percent to 239,000 hectares.
"Fundamentals will produce an even bigger wave of planting in new areas this coming September," said Daltro Barbosa, the town's agriculture secretary.
POLICY RISKS
The previous boom for local soy farmers came in the late 1980s after the introduction of tropical soy strains in the center-west helped double acreage in just over a decade. Area grew by an annual 11 percent in the five years to 2004. But it peaked that year, then shrank for two years before slowly recouping that lost ground; production has risen thanks to better weather conditions, but planted area stagnated.
This season's 2.5 percent rise to 24 million hectares (59 million acres) finally pulled away from the 2004 peak that was retraced last year. While there is no doubt acreage will rise, tougher environmental restrictions, tighter credit and competition from other crops for area could curb farmers' ability to continue bringing additional soy areas into production in coming years.
In a move to bring spending under control and contain rising inflation, the government has announced about $30 billion in budget cuts and some in the sector fear the move will affect the amount of subsidized loans for agriculture. And soy is not the only attractive crop investment. Cotton is at its highest price in over a decade and corn is appealing as well. Both compete for the fields on which soy is planted.
Greater rigor in enforcing environmental laws has already crimped expansion in the No. 1 producer state of Mato Grosso -- the main source of new acreage since the mid-1980s.
Much of the state is classified as a buffer zone to the Amazon and thus has come under greater scrutiny from agents at the environmental regulator Ibama.
NEW AREAS OF EXPANSION
More farmers are bypassing expansion opportunities in Mato Grosso though for smaller, fast growing areas in the northeast far from the Amazon, an area know as Matopiba, because it covers the states of Maranha, Tocantins, Piaui and Bahia.
"Good land in the traditional grain state of Parana will cost you 25,000 reais ($15,000) a hectare but you can still find land for 5,000 in Piaui or Bahia," said Pereira. A study by Informa Economics-FNP showed prices of farm land had risen 9 percent over the past year to record levels, another sign of the push to bring more area into production.
FOREIGN INVESTMENT
The government threw international investors for a spin in 2010 when it said foreign capital was not welcome in land unless control of farming projects stayed in Brazilian hands. Billions of dollars in investments were suspended, but not all foreign investment in land has been deterred.
"It's not really a problem as long as you follow the local laws," said Daniel Ward, who manages the Virginia Tech endowment that invests billions of dollars for the university. "We don't invest in commodities; the trend is for them to fall. The value is in owning the land ... And we are not investing in land anywhere else in the world, except Brazil." ($1=1.65 reais).
