Aug 28 / Pedro Schicchi

Grains, Oilseeds and Livestock Weekly Report - 2023 08 28

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"Brazilian farmers face decisions on what and how much to plant, with tighter margins for winter corn soybeans when compared to the last few years. The influence of El Niño on crop yields varies by region, with potentially positive effects on Southern states and slightly negative impacts on Central and Northern states.
With mild acreage growth and a positive yield outlook, we project soybean production at around 163 million tons. Corn production prospects are less favorable due to economic factors and less optimism regarding yield, with total production estimated at 133M ton, similar to our current estimate for 22/23 despite some acreage growth."

New crop estimates for Brazil (23/24)

Brazilian farmers have been deciding on what and, more importantly, how much to plant. The “what” is usually an easier question to answer, since in most of Brazil it is possible to plant corn as the second crop, and soybeans are preferred for the summer. “How much” is the real question.

This year we have lower costs, but also lower prices. However, grain prices have fallen more than inputs and, as such, margins are tighter than they were in the last three years. While this is true for both, expected margins for winter corn are tighter than those of beans.

Two points stem from this fact. One is that tighter margins require more attention to risk management, as market movements can erode profits more easily. Two is that we should expect less area growth from what we have been seeing in the last few years.
Image 1: Brazil Soybean – Gross Return Expected in July (BRL/ha)

Source: Conab, hEDGEpoint. Includes only operational costs

Image 2: Brazil Winter Corn – Gross Return Expected in July (BRL/ha)

Source: Conab, hEDGEpoint. Includes only operational costs

Margins affect the area, but what can we say about yields?

Since yields are hard to predict even as the crop is developing, you can imagine how accurate pre-crop estimates are. Still, we have an El Niño year ahead of us.

We had a whole report discussing the effects of the phenomenon on crops. The gist of it is that in the Brazilian summer, El Niño tends to be positive to Southern states as it brings good rainfall levels – the opposite of what has been going on in these last couple of La Niña years.

Conversely, it tends to be slightly negative to Center-Northern states as it brings slightly above-average temperatures, which, if combined with low precipitation, can lead to losses.

However, that’s not always the case, as El Niño is not really correlated to precipitation in the North. Still. Rio Grande do Sul and Paraná combined usually produce about 40M ton of soybeans in regular years, and MATOPIBA amounted to ~20M ton in 22/23. As such, the good prospects for the South have more impact on Brazil’s final number.

As for winter corn, the scenario is not exactly the same. The general trends remain: positive to the South and negative to the North. However, corn is more sensitive to high temperatures than beans, and, additionally, Rio Grande do Sul does not produce winter corn.

Thus, the losses in the Center and Northern states could be bigger, while the state that’s the biggest beneficiary of the phenomenon is not in the equation to offset this effect.
Image 3a: Temp. Anomaly on El Niño Years – Dec (std devs from normal)

Source: NOAA, hEDGEpoint

Image 3b: Precip. Anomaly on El Niño Years – Dec (std devs from normal)

Source: NOAA, hEDGEpoint

Image 4: Correlation between State Yields and the Strength of El Niño

Source: hEDGEpoint

Finally, the production estimates

Piecing it all together. On soybeans, we have acreage growth, though not as high as in previous years, and a mild to positive outlook for yields. In turn, this gives us the projection presented in Figure 5.

We estimate production at around 163M ton, but that could easily be increased if we have good yields in Center-West and MATOPIBA, as Rio Grande do Sul alone is likely to recover from this year’s 15M ton to more than 20M ton on good rainfall.

Switching to corn, this year has already been economically bad for producers of the grain. Coupling this with what is supposed to be a good crop out of the US, the incentive to plant corn in Brazil is smaller than to plant beans, though this is debatable. In turn, the acreage growth we expect is also smaller.

Additionally, we don’t have as good of an outlook for yields and 22/23 yields were spectacular against all odds. As such, we estimate production at around the same levels as in 22/23, even with area growth, as this year’s results might not repeat themselves.

Image 5: Brazil Soybeans – Area, Yield and Production (M ha, ton/ha, M ton)

Source: USDA, Hedgepoint

Image 6: Brazil Corn – Area, Yield and Production (M ha, ton/ha, M ton)

Source: USDA, Hedgepoint

Weekly Report — Grains and Oilseeds

Written by Pedro Schicchi
[email protected]
Reviewed by Natália Gandolphi
[email protected]
www.hedgepointglobal.com

Disclaimer

This document has been prepared by hEDGEpoint Global Markets LLC and its affiliates ("HPGM") exclusively for informational and instructional purposes, without the purpose of creating obligations or commitments with third parties, and is not intended to promote an offer, or solicitation of an offer, to sell or buy any securities or investment products. HPGM and its associates expressly disclaim any use of the information contained herein that may result in direct or indirect damage of any kind. If you have any questions that are not resolved in the first instance of contact with the client ([email protected]), please contact our internal ombudsman channel ([email protected]) or 0800-878-8408 (for clients in Brazil only).

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