Bumper soybean crop starts pressuring prices in Brazil

By Daniele Siqueira, AgRural Commodities Agrícolas

January has come to an end with Brazil’s 2022/23 soybean harvest behind schedule. According to AgRural, 5.2% of the area had been harvested by Jan. 26, compared with 10.4% a year ago and 6.6% in the five-year average. That means that approximately 8 million metric tons had left the fields by the date, below the 14 million metric tons harvested in the same period last year, when production was smaller due to drought, but the harvest was progressing more quickly.

The delay is caused by constant rains in top producer Mato Grosso and slower-than-normal crop development due to overcast skies in late 2022 in other states, especially in Paraná, Brazil’s number two producer. Although Brazilian farmers can catch up as soon as the weather conditions allow them to do so, the harvest delay impacted the export pace in January and will probably cause logistical bottlenecks in February and March.

But despite the harvest delay and the stronger quotes in Chicago, Brazilian soybean prices have fallen in the local currency, pressured by lower export premiums, a stronger Real against the US dollar and the expectation for a bumper crop, which subsists despite the drought-related problems in Rio Grande do Sul, Brazil’s southernmost state.

Daily spot prices monitored by AgRural in 34 locations across the country have fallen between 6% and 10% since the beginning of the year, suggesting that the farmers’ strategy of postponing sales until the harvest window wasn’t exactly the best. The price decline seen so far, however, hasn’t been enough to make them keener to sell before further falls.

Lowest since 2008/09

Just 23% of the 2022/23 estimated production had been sold by farmers until Dec 31, the lowest rate for a new crop since 2008/09. AgRural hasn’t finished its monthly report for January just yet, but its weekly assessments suggest that the progress seen during the month was enough to take sales to around 26%, a way too little figure for this time of the year.

Argentina

Well capitalized by strong gains in 2022 even in states where the last crop failed, farmers are still reluctant to sell because there are four factors at play that can still support prices down the road. The first one is Argentina’s crop. Although the neighboring country has received some very welcome rains in the second half of January, its soybean crop fills pods mostly in February. For that reason, and considering that the soil moisture has been depleted for several months of below-normal rains, Argentina will need regular rainfall throughout February to avoid a big crop failure.

U.S. tight supplies

If Argentina’s crop fails, soybean meal and oil (but especially meal) demand will switch to Brazil and the United States, supporting prices in Chicago — especially because the U.S. supply is tight. And this tightness is the second factor that Brazilian farmers consider in their strategy of selling later. Importers will need Brazilian soybeans until at least October, when the new U.S. crop starts entering the market. With Brazil being virtually the only supplier, importers will have to pay more.

Drought in the South

The third factor is Brazil’s Rio Grande do Sul. The country’s southernmost state has a weather pattern similar to that seen in Argentina, and its soybean crop also fills pods mostly in February. The state, which is Brazil’s number-three soybean producer, has faced irregular rains since the beginning of the season.
In mid-January, AgRural cut its soybean production estimate for the state by 1.1 million metric tons. Adjustments in other states, however, offset part of that decrease, leaving Brazil’s total production estimate at 152.9 million metric tons, 0.7 million down from the previous forecast.

AgRural will revise its numbers again in mid-February and Rio Grande do Sul’s production will suffer a further cut, which might result in some price support. Brazil’s total production, however, is not likely to fall much below 150 million metric tons, still a record for the country.

Exchange rate

A fourth factor making farmers wait a little longer to sell their 2022/23 soybean crop is the Brazilian Real. Contrary to what almost everybody was expecting, the currency has been strengthening since leftist Luiz Inácio Lula da Silva won the presidential election on Oct. 30.

A stronger Real makes soybean prices lower in the local currency, making farmers more reluctant to sell. They believe, however, that it will not take too long for the Real to weaken again, pressured by unorthodox economic policies that the new president is likely to conduct.

Either way, the fact is that Brazil has a record soybean crop and most of it is still unpriced. Although the bullish factors cited above can’t be ignored, it seems to me that 150 million metric tons entering the market until May is a strong reason to believe in lower prices ahead.