Brazilian agriculture overview
Dry climatic conditions prevailing in the South at the end of 2011 do not bode well for the various harvests starting January 2012. Soy and corn harvests are at particular risk in Santa Catarina, Parana and in some regions of Rio Grande do Sul which have seen little or no rain for over 45 days. Some analysts are now predicting sizeable grain losses and Conab, the Government agency will publish the first estimates of expected losses in the first week of January 2012. Large areas of Argentina and Uruguay are also at risk, hence the supply of key raw materials across the region is likely to be a concern and possibly lead to higher price scenario in 2012, depending on the size of 11/12 US corn harvest, non-food demand, livestock developments and stock-to-use ratio.
Higher prices have conditioned producers’ planting intentions over the course of 2011: cotton, corn, soy, mandioca (tapioca), coffee have all advanced while citrus fruits (oranges), sugar cane in particular have suffered from a lack of perspectives for farmers (low guaranteed prices for oranges, and supply shortage and demand destruction for cane ethanol - although sugar prices have remained high). Another point has been a fast rise in fertiliser consumption (up 28% yoy increase in the first 7 months of 2011 against the same period of 2010), which has been interpreted by Bradesco as high consumption and unusually high anticipated purchases.
Specific risks facing Brazilian agriculture:
· The country may have become over-reliant on China as an end user of soybeans. Indeed any decline in China’s economy could translate into large potential losses for the soy sector as a whole. Large areas are devoted to soy production and the investment model is highly dependent on capital expenditures, in particular for equipment, machinery and storage
· Chronic under-investment in both cane plantations (regular re-planting of older cane is critical to sustain yields) and plant capacity has weakened the industry and made any significant rebound implausible over the next two or three seasons. Indeed the ethanol:sugar ratio at plants has changed in favour of high priced sugar and as a result of robust world demand. Brazil has increased US corn ethanol imports to maintain the flex market going and this has further destabilised the industry and led to sizeable job losses (40,000 job losses in 2011 at cane processing plants in the State of Sao Paulo alone). A number of large EU ethanol importers have switched to US as a supplier as Brazilian ethanol has become uncompetitive
· Minimally-guaranteed prices can destabilise entire sectors when market prices move up too fast. This has been the case in 2011 for oranges (a key economic sector in Sao Paulo state) and the policy is reported by the Brazilian citrus grower association as having negatively impacted orange growers’ profits and led to some producers planting less and switching to other crops such as mandioca (tapioca)
· The country remains highly dependent on imports of fertilisers: approximately 2/3 of consumption relies on imports from countries including China, Russia, Canada or Tunisia. Domestic production has increased at a good pace and is led by large companies such as Vale and Petrobras, but self-sufficiency remains a distant prospect, especially for Potassium Chloride and Ammonium Sulfate/Urea (in spite of Brazil being an oil producer)
· Under-investment in infrastructure has made some products less competitive with time. The transport matrix has not changed significantly over the years and is still dominated by a slow moving fleet of trucks on often poorly maintained roads and highways
· Possibly unsustainable increase in land prices, which appear to have risen by +10% in 2011 against 2010 as a result of rising commodity prices. Relaxation of land acquisition purchase conditions as well as climatic uncertainties threatening two key harvests, namely corn and soy may lead to further rise in land prices in 2012, although a weak expansion of cane planting may somewhat offset the possible rise in prices
· A largely unpredictable legal environment remains a barrier for investors and well established corporate players. 2011 has seen the continuation of a heated debate on forest law (so-called “Codigo Forestal”), which is set to continue in 2012, but also the implementation of laws and directives on deforestation, drastic legal restrictions on land purchases by foreigners (followed a few months later by new, less restrictive provisions based on a December 9th, 2011 directive), new farm online registration procedures (compulsory cadastral registration for farmers), and finally, a new, voluntary cattle traceability program (to be run by two unrelated entities)
December 29, 2011
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