Driving forces and challenges as the growing season takes off in the Southern Hemisphere

By Guil Signorini, assistant professor, Department of Horticulture and Crop Science, The Ohio State University

It is that time of the year again when our fellow farmers from Brazil dedicate time and energy to plant their crops. And as they do, challenges and opportunities in their operations signal factors and trends that may drive our decisions next Spring when the weather permits us to plant our crops again.

By Guil Signorini, assistant professor, Department of Horticulture and Crop Science, The Ohio State University

Brazilian farmers are fast-paced sowing soybeans due to favorable weather and soil conditions. On Nov. 1, IMEA (Mato Grosso Ag Economics Institute) informed that 83% of the soybean crop has been sowed in the state. The state of Mato Grosso alone grows more soybeans than Ohio, Michigan, Indiana, and Illinois combined. It also grows approximately 60% of the corn area in these four Midwestern states. Although other states of Brazil lag behind in sowing, research agencies estimate that 55% of the total soybean area has been sowed in the country, the highest mark in the last 5 years. Sowing of the first corn crop, considering that tropical conditions allow double cropping, also progresses fast. Analysts estimate that 65% of the first corn crop is on the ground and ready to grow.

At this point in sowing, one can assume that soybean and corn farmers in Brazil have had access to ag inputs such as seed, fertilizer, plant protection products, and beneficial micro-organisms. (It is difficult to believe that the sowing pace would be that fast otherwise). Leading production and agribusiness management agencies in Brazil recognize that, at this point, most operational costs have been realized by farmers, allowing the agencies to release the first projections of sales, costs, and net value.

A recent study prepared by CEPEA/ESALQ (Center for Advanced Studies on Applied Economics of the “Luiz de Queiroz” College — the most prestigious school of agronomy and related disciplines in the country) shows that the 2021/2022 season is not free of challenges for Brazilian farmers. In that report, CEPEA researchers indicate that grain crop growers’ expenditures with fertilizer are up 50.1% approximately across key production regions against last year. In certain regions, growers face prices for N-P-K fertilizers 59% more expensive this season when compared to the 2020/2021 season.

Researchers attribute the steep price increase to international factors that may affect the next season in the U.S. as well. The price for urea in Ukraine and China ports is the highest since July 2012. Prices are 75.5% and 67.2% more expensive in the respective ports. The increase is primarily associated with China’s government intervention in fertilizer companies to favor its domestic supply over exports. The second reason for the steep increase in urea prices relates to sharp increases in natural gas prices, a key input to produce the ag fertilizer.

The CEPEA report proceeds and suggests that monoammonium phosphate (MAP) prices are up 96.3% in Morocco and 94.6% in Russia, the highest increase since 2008. Similar underlying reasons for the spike in urea prices apply here. The prices of two key inputs to manufacturing phosphate fertilizers — sulfur and ammonia — soar due to refinery curtailments associated with the COVID-19 pandemic.

Prices for muriate of potash (MOP) are 9.1% higher in the Vancouver port when compared to last November according to a World Bank report. Analysts consider that high demand for potash fertilizer, pushed primarily by high commodity prices, combined with the broadly spoken sea transportation crisis are the reasons for the moderate price increases of MOP.

Concerning news comes from chemical prices also. A recent study from CNA (National Confederation of Agriculture and Livestock), a farmers-centered research and policy agency, indicates that prices for key chemical products are two times more expensive this season when compared to 2020/2021 season prices. That is the case for glyphosate that soars to a 128% price increase in important production regions. In addition, CNA is currently working on a strategic coalition plan to minimize the probability of chemical shortages this season and in the future. 

We conducted an in-depth analysis to understand the origin of such price increases and we found two major reasons. The first relates to a recent merger that took place in China in April 2021. The Chinese government approved the merger of Sinochem and ChemChina to create an international chemicals giant responsible for $152 billion in annual sales. Since April this year, the merged company has struggled to equalize two very different business models under a single umbrella. Manufacturing plants were shut down, operations were adapted, and assets reallocated to maximize economies of scale. However, Chinese analysts evaluate that the reorganization plan is a complex one and it may take 4 to 5 years until the new company starts to enjoy scale gains. In other words, the fusion has triggered a large intra-company reorganization project and disrupted established partnerships. The collateral effect in prices of chemicals and industrial inputs was unavoidable and it may last several years.

The second reason affecting international prices of chemicals refers to regulatory and institutional changes occurring in China. The country is the most import supplier of raw material for the manufacture of ag chemicals. The Chinese government has signalized interest in tightening its national policies to reduce air pollution and save energy. Analysts believe that new or updated environmental programs that were introduced in 2008 will include periodic inspections of chemical manufacturing facilities, which may affect production, distort supply, and affect prices. Considering the impact that these two reasons have on the international supply of chemicals and their prices, distorted trade flows and high sea freight costs resulting from the COVID-19 pandemic are less of a concern.

The take-home message for Midwestern growers is the following. Brazilian grain crop growers are facing increased prices of fertilizers and chemicals. The underlying reasons for high prices are mostly rooted overseas and likely to last a couple of months or years. We consider that fertilizer prices may return to stable levels as soon as regular operations in mining, refinery, energy, and transportation sectors resume around the globe in the post-pandemic era. High prices of chemicals seem to be rooted in reasons other than the COVID-19 pandemic. Post-pandemic operations may pull back chemical prices, but there are deeper roots in factors difficult to assess. American growers should watch the next wave of developments and consider feasible tactics to reduce eventual impacts on availability and prices for ag inputs. Anticipating demand and connecting with reliable trading partners ahead of time is a recommended tactic to better plan for the season in times of uncertainty. 

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