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Commodity Intelligence Report
March 10, 2006

Brazil: 2005/06 Crop Situation Update

Harvest operations for major summer grain and oilseed crops are underway across Brazil, and will pick up pace substantially in March and early April. By all accounts the 2005/06 crop year has been a difficult one in which low commodity prices, increased production costs, and low potential profitability led to widespread reductions in crop area devoted to soybeans, rice, and cotton. Variable rainfall during the growing season also negatively affected soybean and corn crops in several southern states. However, as most summer crops enter their final maturation growth stages, crop yield outlook on the whole is generally positive, though returns for major crops like soybeans and rice are below the costs incurred by producers in many areas. Foreign Agricultural Service (FAS) analysts traveled through important agricultural regions in Brazil during January and February, encompassing the states of Rio Grande do Sul, Santa Catarina, Parana, Mato Grosso, Para, Maranhao, and Piuai. These states collectively account for 66 percent of national soybean production, 54 percent summer corn, 85 percent rice, and 50 percent of the cotton crop.

Soybean Area Graph USDA’s March 2005/06 soybean production estimate is unchanged at 58.5 million tons, though crop area is estimated higher from 21.5 million hectares in February to 21.9 million this month. Brazilian government crop surveys have recently indicated that though soybean area is down from last year, sown area in the Center-West, North, and Northeast states is higher than previously expected. Soybean area in Brazil is currently estimated by USDA to have declined roughly 4 percent from last year’s record level, the first such decline since 1998/99. Soybean yield is forecast at 2.67 tons per hectare, slightly above the 5-year average of 2.60 and above the drought- and disease-affected crops of 2003/04 and 2004/05 where yields were 2.37 and 2.31 respectively.

Overall, growing conditions for the 2005/06 soybean season have turned out to be better than the last couple of years, with beneficial rainfall helping keep most regions on track for average to above average yields. Many areas have experienced periods of below-normal rainfall and crop stress this year, but showers have arrived when needed in most areas to provide relief to crops and stabilize production prospects. The major producing states of Mato Grosso and Goias in the Center-West region have experienced more sunshine and markedly fewer outbreaks of Asian rust than in recent years, helping crops grow with less pressure from late-season foliar diseases. Soybeans grown in southern Brazil have also experienced a good year, with adequate and timely moisture. Deficient rainfall in Santa Catarina and Parana during January did reduce soybean yield in early season varieties and led to lower production prospects, but greater losses were avoided when widespread showers returned to support mid and late maturing soybean varieties which make up the majority of the harvest. Crop production in each of the southern states of Rio Grande do Sul, Santa Catarina, and Parana is expected to exceed last year’s drought-affected levels, with the greatest improvement in Rio Grande do Sul (+224 percent). Soybean crops were observed to be in good condition in each state, ranging in development from flowering to harvest stage. During the recent analyst trip the bulk of the crop nationwide was in pod-set to pod filling growth stages, with harvest operations rapidly progressing on fields of early maturing varieties. Evidence of crop yield declines were evident in southern Parana, western Santa Catarina, and isolated areas in Rio Grande do Sul where healthy looking crops were filling only 2 beans per pod on average. This implied about a 30 percent yield reduction from normal levels in those areas affected.

Harvesting early season soy in Mato Grosso; Soy yields looking good; Flowering soybean field in Rio Grande do Sul.

Harvesting early season soy in Mato Grosso; Soy yields looking good; Flowering soybean field in Rio Grande do Sul.

Soybean producers throughout Brazil commented that credit was tight this year and more difficult to obtain in general. Multinational grain trading companies, on which an estimated 70 percent of commercial soybean farmers depend for annual crop production financing, reportedly reduced their overall lending levels and more carefully scrutinized farmer’s business operations. Producers who defaulted on loans in 2004/05 reportedly found it difficult if not impossible to obtain credit this year from these companies. Farmers who could not obtain adequate production financing reportedly reduced soybean area, diverted land to other crops, or rented their land to growers who could obtain credit. The net result of the widely publicized credit squeeze, however, was only a marginal reduction in actual soybean plantings. The vast majority of producers found a way to plant this year, with or without credit. In doing so, many risked compounding their existing indebtedness in the hope that improved profitability later this year would help them recover some of the financial losses incurred in the past 2 years. Their strategy during a year of tight to negligible profit margins required them to achieve high crop yields while also reducing their production costs. They also needed the national currency to stabilize or weaken against the US dollar, to support domestic soybean prices. Unfortunately, the Brazilian currency (Real) did the opposite and strengthened during the growing season, causing internal soybean prices to fall below the cost of production in many areas. At current market prices a significant number of producers across the country will see potential profits disappear entirely this year. In the major Center-West producing states of Mato Grosso and Goias, growers experienced a substantial increase in their production costs owing to higher fuel, fertilizer, fungicide, and transportation prices. Despite their success in achieving high crop yields, producers watched a strengthening currency erode regional soybean prices to the point that it fell below their production costs. Soybean growers in Rio Grande do Sul, Santa Catarina, and Parana by comparison had healthy potential gross margins at planting, largely owing to their close vicinity to major port’s and their comparatively low transport costs. But farmers in these regions also saw their profits dissipate or disappear when the currency strengthened and crop yields were reduced by drought. If prices don't improve soon, farmers all across the country are facing the prospect of a second year of poor to negative soybean profitability, with the likelihood that the debt and credit problem will only intensify in 2006.

Given the difficult financial position of soybean producers and their penchant for reducing operational costs, it is no wonder that genetically-modified (GMO) soybean acreage expanded this year and is set to increase substantially next season. Retail seed suppliers, multinational grain trading companies, and seed research agencies alike indicated that farmers across the country snapped up as much GMO soybean seed as was commercially available this year. Farmers are experimenting with the new varieties, growing them alongside conventional beans to compare growth and yield characteristics. Research agencies indicate that there are locally-adapted high-yielding GMO varieties available for every region in Brazil, and that on average they obtain similar to better crop yields than conventional varieties. Brazil’s Agriculture Ministry reported that an estimated 9.4 million hectares or 43 percent of the 2005/06 crop were sown with GMO soybeans, up from about 5.0 million or 21 percent last year. Certified soybean seed producers are reportedly bulking up the supply this season, and will devote an increasing amount of irrigated area to GMO seed production this winter as they prepare to meet demand for the 2006/07 growing season.

USDA’s March 2005/06 corn production estimate was reduced to 41.0 million tons, from 42.5 million in Total Corn AreaFebruary, owing to drought-related crop losses in southern Brazil during the main summer growing season. Area was unchanged at 12.8 million hectares, and is up 11 percent from last year. Brazilian government crop surveys have recently indicated that summer corn area was forecast to have increased by 8-13 percent, as southern farmers opted to reduce soybean area in favor of alternative crops. Government agencies estimated in February that summer corn area increased by nearly 20 percent this year in the major southern producing states of Parana and Rio Grande do Sul, while also increasing roughly 6-10 percent in Sao Paulo, Mato Grosso do Sul, and Goias. Initial government forecasts for the upcoming winter corn growing season also indicate that corn area is expected to increase about 8 percent over last year. Total corn yield is estimated by USDA at 3.20 tons per hectare, which is at the 5-year average level, and above the 3.05 yield level achieved in last year’s drought-affected crop.

Drought-affected early corn in Rio Grande do Sul; Corn yields mixed to poor; Vegetative summer corn in Piaui.

Drought-affected early corn in Rio Grande do Sul; Corn yields mixed to poor; Vegetative summer corn in Piaui.

Overall, the summer corn growing season is shaping up to be an improvement over last year, with timely rains benefiting crops in most regions of the country. The major exception were crops in parts of Parana and Santa Catarina which had more serious yield losses this year than during last year's southern drought. Corn crops in Bahia are also reportedly suffering from prolonged dryness, and will yield well below average. However, Rio Grande do Sul suffered only minor losses in yield and has had a strong recovery from last year's devastating drought. Based on field travel, FAS analysts learned that the early corn crop in Rio Grande do Sul, Santa Catarina, and Parana was hit hard by the dry weather in January and yields fell considerably. Fields of stunted corn were commonly observed in the 3 major-producing southern states, with crops averaging 4-5 feet in height and with severe reduction in kernel development. Yield estimates from state authorities in Parana and Santa Catarina estimate summer corn yields 5-7 percent below last year’s drought-affected levels and 10-12 percent below average. However, the mid-to-late maturing portion of the corn crop (which makes up the majority of the summer crop) was observed to be doing very well with above average yield potential. Substantial rainfall arrived in southern Brazil during late January and early February to bolster later maturing crops in the region. The health of this crop will help stabilize national production and prevent the scale of losses experienced last year. The early corn harvest was well underway in all 3 southern states, while mid-to-late season crops were maturing - the main harvest was set to begin in early March. Farmers in Mato Grosso (number-2 winter corn producer) and Parana (number-1 winter corn producer) were observed planting winter corn following the harvest of early-maturing soybeans, and commented that the prospect for area would be far more favorable in the south than in the Center-West. Production costs (including transportation to southern markets) in Mato Grosso were outstripping returns by a factor of about 30 percent, and growers indicated that a substantial decrease in winter corn acreage would occur this year. By contrast, in Parana corn prices were rising and farmers were hoping to plant increased acres to winter corn after having two consecutive crops affected by drought. Winter corn is normally more profitable to grow than wheat in areas of Parana which are less prone to frost, and in the last 2 years farmers have been prevented from fulfilling their corn planting intentions due to dry weather at planting.

USDA’s March 2005/06 milled rice productionRice Area estimate is unchanged at 7.8 million tons (11.471 million tons rough basis), though crop area was estimated lower at 3.15 million hectares, down from 3.4 million in February. Brazilian government crop surveys have recently indicated that rice acreage declined to a significantly larger extent than previously anticipated. USDA currently estimates 2005/06 rice area in Brazil down 20 percent from last year, the first such decline in the past 5 years, largely owing to a huge shift away from the crop in the Center-West and Northeast regions. Rice yield is forecast at a record 3.64 tons per hectare, as the proportion of rice area under irrigation increased from 30 percent of total area in 2004/05 to 38 percent this year after major rainfed areas were abandoned in the previous soybean expansion zone in Mato Grosso, Goias, and Tocantins.

During travel through Mato Grosso, the 2nd largest rice producing state last year behind Rio Grande do Sul, producers indicated that crop area had plummeted this year as a bumper 2004/05 harvest and large unsold rice stocks hurt producer returns, with rice prices in the local market 60 percent below those in 2004/05. They also reported that rice was primarily grown in the state on newly opened lands destined for future soybean production, and with soy profitability eroded, most truly marginal land had been taken out of production this year. The government is forecasting rice area down 64 percent in Mato Grosso, but producers and grain industry officials reported they thought the reduction was even greater. Rice crops being grown on recently converted Cerrado savannah lands and in degraded forest areas abandoned by subsistence farmers was observed in Mato Grosso, Para, Maranhao, and Piaui. When traveling in the main southern producing states FAS analysts learned that the 2005/06 rice crop was doing very well owing to assured irrigation, with early harvest operations in Santa Catarina just beginning. The proportion of national output from irrigated areas rose to 63 percent this year, up from 54 percent last year. Crop area was estimated about 1.5-2.7 percent higher this year in Rio Grande do Sul and Santa Catarina despite low prices and poor profitability. Officials from both regional cooperatives and rice research centers reported that farmers who grow irrigated rice really had no viable alternative crop available to them, and that the best farmers produced reasonable profits by achieving very high crop yields. FAS personnel visited the highest yielding rice production region in the country, in Rio do Sul Santa Catarina, where average yields normally reach 8.5 tons per hectare, but where good farmers were achieve 13 ton yields.


Irrigated high-yielding rice in Santa Catarina; Rain-fed rice on new farmland in Santarem region

Irrigated high-yielding rice in Santa Catarina; Rain-fed rice on new farmland in Santarem region of Para.

USDA’s March 2005/06 cotton area andCotton Area production estimates are unchanged at 0.85 million hectares and 4.5 million bales (979,770 tons). Brazilian government crop surveys have recently indicated that cotton acreage declined by 24 to 30 percent this year, with significant reductions occurring in every producing region. The major Center-West region, encompassing the states of Mato Grosso, Goias, and Mato Grosso do Sul, was estimated by government officials to have experienced a 33 to 35 percent decline in cotton area. This region typically produces nearly 65 percent of the national cotton crop. USDA currently estimates 2005/06 cotton area in Brazil down 28 percent from last year. Cotton yield is forecast at a near-record 1.15 tons per hectare, as the proportion of the national cotton crop grown in high-yielding regions (which average 1.27 tons per hectare) increased to 81 percent, from 77 percent last year.

Cotton is produced as one of several crops on large mixed-farm enterprises in southern Mato Grosso where FAS personnel traveled. Producers are able to alternate crops at will, and this year many reportedly rotated land out of cotton and into soybeans owing to considerable financial losses suffered last year (on soybeans, rice, and cotton) and because of severely constrained credit availability. Cotton farming has a very high capital requirement, with management costs incurred over a long 210-day growing season. Farmers had been borrowing heavily over the past few years to fuel rapid expansion of their soybean and cotton operations, and reported that they were seriously cash-strapped at planting time this year. As with soybeans, cotton producers pointed out that their number one priority now was to reduce operating and production costs, and that the advent of large-scale plantings of GMO cotton varieties was the key to enhanced profitability. Producers expect to benefit from cost savings of approximately 15 to 30 percent, owing to substantial reductions in the sizable amount of manual labor and herbicides currently needed to control weeds. Farmers reported that Bt cottonseed supplies were being increased by commercial seed producers in Brazil, and would be legally available next year for planting. They also commented that Roundup-ready cotton varieties would be legally available for planting in 2008.

The crops observed in southern Mato Grosso had been sown from late November to mid-December and were in uniformly good condition. The more mature crops were in early bloom stage with harvest not expected until June. Farmers who did plant cotton this year are looking to reap healthier profits than they expected at planting, as prices internationally and domestically have firmed in the past few months. The current cotton price being quoted during the FAS trip through Mato Grosso was reported to be 40 percent higher than at the same time last year, and producers were actively forward contracting their crops. Cotton growers indicated that with international cotton prices improving and the legalization of Bt cotton plantings next year, cotton acreage was expected to rebound from the depressed levels this year. Throughout the country, and especially in the state of Mato Grosso, farmers are looking at alternative crop options to soybeans. High-value crops like cotton and sugarcane are expected to gain favor, as long as soybean profitability remains in the doldrums.

Cotton ginning on farm in Mato Grosso; Cotton planted in mid-Dec in Novo Mutum; Cotton in early bloom stage

Cotton ginning on farm in Mato Grosso; Cotton planted in mid-Dec in Novo Mutum; Cotton in early bloom stage.

For more information contact Michael Shean | | (202) 720-7366

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