Phase-one deal is on the table; what now, Brazil?

The preliminary agreement announced last week by the United States and China was the most important step towards softening tensions between the world’s two largest economies since the beginning of the trade war in 2018. But it is still surrounded by uncertainty. For the agricultural sector, the main question is how much soybeans, meat, wheat, corn, cotton, etc. is China going to purchase from the United States in 2020. For Brazil, that is a key question, since its agricultural exports have been immensely benefited by the trade war.

In 2018, Brazil exported 83.3 million metric tons of soybeans, 22 percent up from the previous year and a massive fresh-new record. China was the destination of 68.2 million metric tons, compared to 53.8 million in 2017 (28 percent up). Since Chinese importers made all efforts to buy as much as possible from Brazil (to make things worse for China, Argentina had had a crop failure that year), they inflated Brazilian export premiums. As a result, FOB Brazilian prices averaged $396 per metric ton in 2018, compared to $377 in 2017.

Now in 2019, Brazil is likely to export 57 million metric tons of soybeans to China, reaching something around 73.5 million to all destinations combined. Still impressive numbers, despite the annual drop caused by increasing Chinese purchases in the United States and the impact of the African Swine Fever on China’s soymeal consumption.

And what about 2020? How will the agreement between the United States and China impact Brazil’s soybean exports? It is still early to tell, since it is not clear yet whether China will import specific amounts of American soybeans. The first five months of the year, when about half of Brazil’s annual soybean exports are shipped, do not seem to be much of a problem. According to AgRural, by the end of November Brazilian farmers had already sold 43 percent of their 2019/20 soybean potential production, compared to 33 percent a year before and also 33 percent on the five-year average. But the second semester is likely to be weaker than in 2018 and 2019, in terms of volumes and export premiums, especially if the United States has a good 2020/21 crop.

The phase one deal is likely to negatively impact Brazil’s soybean exports, since the Chinese will certainly buy more from the United States in 2020. But a better trade environment, with the world’s two biggest economies getting closer to a more balanced relationship, is good for everybody in the long term.

Good crop in Brazil so far

Brazilian farmers had planted 96% of their intended area by Dec 12, compared to 93% a week earlier and 98% in the same period a year ago, according to AgRural. With the 2019/20 crop planting complete in most states, all eyes now turn to the North/Northeast region known as “Matopiba” (Maranhão, Tocantins, Piauí and Bahia), which represents about 12% of Brazil’s total production and remains behind schedule due to irregular rains.

At the other end of the country, number-two producer Rio Grande do Sul had hot, dry conditions last week, but they were more harmful to the first corn crop, which is pollinating, than to the soybean crop, which is still in the vegetative stage. Good amounts of rain, combined to somewhat milder temperatures, are likely to hit the state over the next two weeks, giving both crops more favorable conditions.

Most Brazilian producing states are in the path of several storm fronts that will bring beneficial rainfall to both corn and soybean crops. The only state that is likely to receive below-than-normal rains is Bahia, and that might lead to poor germination in some areas.

Production forecast

On Dec 10, AgRural revised its 2019/20 soybean production up, to 122.2 million metric tons, a fresh new record. Despite the lack of moisture in a few areas, the crop develops well across the country and is in very good shape in top producer Mato Grosso, where the first areas will start to be harvested in late December. 

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