Concerns about weather in Brazil helped prop up prices earlier this week. Dryness is already plaguing parts Brazil at the height of the planting season, especially in Mato Grosso, while the southern part of Brazil has faced too much rain.
Current crop forecasts point to another big crop in Brazil, as well as a recovery in Argentina after last year’s drought severely ate into crop production there. But with little rain in some of the forecasts for key growing areas, production concerns are starting to pop up. And with global soybean stocks so tight, any hiccup with planting in Brazil, could impact crop prices.
There’s no denying Brazil has become a powerhouse in crop production. They are the top soybean exporter in the world, and recently became number 1 in corn. How has the country been able to grow so aggressively? Kansas State agricultural economist Nelson Villoria recently spent six months in Brazil. He says a combination of factors has aided their growth.
“It’s a very large country with a lot of competitive advantage on agriculture,” Villoria explains. “The cost of land and capital are lower than in other parts of the world, and there are also policy decisions being made to help Brazil become an agribusiness powerhouse. 25% of Brazil’s GDP comes from agribusiness, so it’s a pretty important sector for the economy. Compare that with 5% in the U.S.”
Villoria says with ag being such a large portion of Brazil’s GDP, a lot of investment has also poured into Brazil. It’s not just with crops, but also on the meat side and meatpacking companies.
“The foreign investment is huge. And perhaps the most important, Brazil made decisions about investing in research on development in agriculture. And they converted very extensive parts of that country that were marginal land into some of the most fertile farmland of the planet. That started 50 years ago, and it’s paying off,” says Villoria.
During Villoria’s recent six-month stay in Brazil, he says the most eye-opening thing he saw was just how vast agriculture’s production is. But he says the biggest headwind for Brazil is still on the input side.
“One of the biggest issues is the price of fertilizer,” says Villoria. “They depend on imported fertilizer that comes from Russia and Belarus. With the conflict in that region of the world, prices have gone up dramatically, and that’s squeezing the profits and may or drawback of Brazilian agriculture. Also, the transportation costs are huge. It’s a large country, it’s not easy to get crops from where you produce the soybeans and corn, and get them to the ports.”
He says the other headwind is the macroeconomic picture.
“They have the similar macroeconomic problems that we see here, which are high interest rates, trying to tame inflation, and high levels of debt at the farm level. So, there are those are the issues that they are dealing with at this point.”
