Likely leading producer in 2019/20
February, 2020 in Issue 1 - 2020, Markets
A US Department of Agriculture (USDA) analysis [attributed to ‘Post’] has forecast that Brazil could become the world’s leading soybean producer for the 2019/20 season. The country’s planted area is 36.8 million ha for this period, in line with local market expectations. The Brazilian Real has weakened against the US Dollar from about R$4.09 in October 2019 to R$4.17 to the Dollar for the first two weeks of December. These price developments are believed to have pushed some producers to sow a slightly larger area than they otherwise would have.
Notably, the area expansion could have been larger if the local market believed that global soybean consumption would be higher. There is still a lot of consternation over dampened Chinese demand due to the widespread prevalence of African Swine Fever (ASF), which has decimated swine herds and curbed feed needs. Additionally, producers are keenly following the emerging trade truce between the US and China. Producers are cognizant that a trade accord between Washington and Beijing is almost certain to reduce Brazilian exports and exert downward pressure on its soybean prices.
A record crop is projected for the 2019/20 year at 123.5 million tonnes (Figure 1). Brazil’s previous record crop was 122 million tonnes, recorded in the 2017/18 season. The 2019/20 production forecast is based on a return to trendline yields after the current season was adversely affected by inclement weather. Yield is predicted at close to 3.4 million tonnes/ha.
Notably, according to the forecast by the World Agricultural Supply and USDA, the US soybean harvest will be less than 100 million tonnes in 2019/20, a drop of almost 2% compared to the previous season. So, as long as local weather across the key producing states does not deteriorate significantly, Brazil is expected to overtake the US as the leading soybean producer this season.
Early in the season, producers grappled with much-drier-than-average conditions in key growing states. Due to the resulting lack of soil moisture, farmers in Mato Grosso, the largest soybean producing state in Brazil, did not begin planting their fields until the end of September.
Typically, producers like to sow right at the end of the mandatory sanitary period, the so-called vazio sanitário, which in Mato Grosso ended on Sept 16. This regulation prohibits crop planting for several months in between harvests in order to mitigate incidence of fungal diseases in the absence of cold weather. In the state of Paraná, Brazil’s second-largest producer, the vazio sanitário ended on Sept 12, but a lack of rain did not permit farmers to plant until November.
The same variable weather has also affected the north and north-east states of Bahia, Piauí, Tocantins and Maranhao, collectively known as Matopiba. This is a key growth region for soybean production. Analysts indicate that due to irregular rainfall in October and November, some producers in that area will have to replant their soybean, while others may miss the soybean planting window altogether and instead move on to planting corn, which allows for a longer planting window. As a consequence, Post believes that productivity in the Matopiba region may be below average in 2019/20. More broadly, however, Post forecasts yields across most of the soybean growing states will improve over last season.
According to Brazilian agricultural consultant AgRural, as at the first week of December, producers nationwide had planted 93% of their total projected area, compared to 96% a year ago and in a line with the five-year average. In fact, although the pace of soybean planting has been significantly below what was recorded in the 2018/19 season, 2019/20 sowing progress is on par with the historical average. As a result, the delayed pace of planting should not significantly impact the harvest timeline, with the first soybean harvested ready to ship in January.
Post maintains its estimate of 36.2 million ha planted area for the 2018/19 season, with production estimated at 116 million tonnes, based on lower-than-trend yield. Despite the promising early start to planting in the 2018/19 season, adverse weather affected yields across most soybean-producing states.
Export forecast
Post forecasts soybean exports for market year (MY) 2019/20 (February 2020 to January 2021) to reach 75 million tonnes. This is based on recovery in available supplies, but also anticipates subdued demand from China for several reasons. Firstly, China will continue to grapple with the adverse effects of ASF and the resulting drop in feed demand. Secondly, Post anticipates Brazil will lose some portion of its China export share to the US in the wake of a trade deal between Washington and Beijing that was announced in mid-December 2019.
The initial reaction of the Brazilian market to the US-China trade accord has been muted, despite reports that the deal includes a pledge from China to buy $40-50 billion of US agricultural products within two years, compared with $24 billion in purchases before the trade dispute erupted. At this point, Post contacts have not revised their soybean export estimates for 2019/20. Instead, most have adopted a wait-and-see approach, in anticipation of next season’s harvest coming online in January 2020.
Local analysts also point to the fact the forecast shift in global supply may benefit Brazilian exports. For example, the US soybean crop is forecast 20% less than last season due to inclement weather negatively affecting both planted area and yields. Meanwhile, higher export taxes in Argentina may also make Brazilian soybean exports more attractive.
Post revised Brazil’s soybean exports upwards for MY 2018/19 (February 2019 to January 2020) to 73 million tonnes. Although yields have been disappointing this season, Brazil still produced ample supplies to satisfy both domestic and external demand. This calendar year, soybean exports followed in line with the five-year average month-to-month, until the final quarter of the year, when exports surged. Thus, Post’s upward revision is based on this record volume of exports in October and November 2019.
Typically, soybean volumes from Brazil trail off in the last quarter of the calendar year (Figure 3), with the harvest having wrapped up months earlier and most of the crop intended for export having been shipped. This timeframe also coincides with peak exports from the US. This scenario did not materialise in the 2017/18 season, as US-China trade tensions prevented Chinese buyers from sourcing American soybean. At the time, supplies from Argentina, the world’s third-largest exporter, were also constrained due to an extremely poor harvest. As a result, Brazil dominated global soybean sales in the fourth quarter of 2018.
Notably, this calendar year saw a repeat of the 2018 scenario, despite the fact that vessels destined for China loaded soybean both from the US and Argentina. Post believes that October-November 2019 soybean sales from Brazil were driven to a large degree by extremely favourable local soybean price dynamics. Post estimates that December exports will benefit from this same dynamic and will likely reach well over 2 million tonnes as producers had contracted whatever volumes they had left in the previous months.
Farmgate soybean prices have been rising steadily since the start of the year, with only a slight dip during peak harvest in March and April (Table 1). The surge in farmgate prices, denominated in the local currency, is partially attributed to devaluation of the Brazilian Real, which started the year at around R$3.75 to the US Dollar, but has since depreciated to over R$4.20/Dollar at the end of November.
The other dynamic driving this phenomenon is the persistently high export prices of Brazilian soybean, artificially boosted for most of the year by US-China trade tensions that prevented Chinese buyers from sourcing beans in the US. The Brazilian FOB premium (for soybean loaded at Paranagua vs US soybean shipped from Gulf) has remained stubbornly in the $11-18/tonne range over the last month (Figure 4).
Consumption and processing
Post maintains the 2019/20 forecast of 44 million tonnes of soybean destined for processing next season. The forecast is based on trend expansion of about 2% per year. Post forecasts 2019/20 production to reach 34.1 million tonnes of meal and 8.6 million tonnes of oil.
Post forecasts domestic meal consumption to increase by 4%, as livestock and poultry industries continue to expand production to meet rising global demand. As a result, Post forecasts that meal exports will remain nearly flat season-on-season. There is potential for positive upside if the Real remains weak vis-à-vis the Dollar, making meal exports more competitive. There is rising potential that Brazil and China will conclude an export agreement for soybean meal. However, in order for Brazil to be able to export soybean meal to China, it would also need to conclude a separate sanitary and phytosanitary agreement, meaning that Chinese market access is unlikely to come in the near future.
Post forecasts soybean oil exports to level off in 2019/20 to half a million tonnes from 1 million tonnes in the current season. The forecast is based on the expected surge in demand from the domestic biodiesel industry. The next increase in biodiesel blend mandate is scheduled for March 2020, less than a year after the last increase that went into effect in September 2019. The biodiesel blending rate is slated to rise by 1% every year, reaching 15% in 2023.
Post lowered slightly the 2018/19 soybean processing estimate to 42.6 million tonnes, contracting on last season’s crush of 43.5 million tonnes. The estimated season-on-season decline is based on several factors, including a smaller overall supply due to the dip in soybean production this season, and higher than initially expected export volume of raw soybean. In addition, persistently high soybean export prices further dampen domestic processing demand.
The Brazilian crush industry is particularly sensitive to competition with traders. The government incentivises soybean exports via the so-called Kandir Law, which waves the export duty for raw commodities but not processed products. As such, the processing industry faces much tighter margins than producers.
Post estimates Brazil’s soybean oil production at just under 8.2 million tonnes, with the majority of the product consumed domestically. Food use for soybean oil is estimated to remain unchanged on last season due to the very sluggish domestic economy. However, industrial oil use is projected to increase to 3.7 million tonnes, from Post’s estimate of 3.4 million tonnes in 2017/18, to accommodate the higher biodiesel mandate. Domestic demand for oil surged from August 2019, when the government gave final approval to increase the biodiesel blend mandate from 10% to 11% on Sept 1. The biodiesel industry in Brazil relies primarily on soybean oil (about 70%) for blending.
Together with domestic demand, the local price of soybean oil (with 12% ICMS tax) has registered a significant increase, reaching R$3,646.97/tonne in the city of Sao Paulo as of the end of November, the highest nominal level of the Cepea data series, which began in July 1998. In November, soybean oil prices averaged R$3,454.57/tonne, the highest in nominal terms in the Cepea historical series, 4.9% higher than in October and the highest since December 2016, in real terms. According to Cepea researchers, the surging oil prices are linked to the low availability of the derivative, at a time when domestic demand is peaking.
Post estimates Brazil’s soybean meal production will surpass 33 million tonnes for MY 2018/19. Domestic soybean meal consumption is estimated at 17.8 million tonnes, up from last season’s 17.6 million tonnes. The increase in domestic meal consumption is based on higher projected demand from the domestic livestock and poultry industries, which have benefited from increased export demand out of China. Meal exports are projected to decrease to 16.1 million tonnes, from almost 17 million tonnes last season, in connection with tighter supplies.
US Department of Agriculture
Dec 27, 2019
