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Soy, corn and cotton crops may be bigger: what to expect for prices?

The new grains season, which will be harvested in 2019, starts in Brazil with optimism due to the good results of at least the last two crops, regarding both production and profitability. In 2018, there were regional problems with some crops, such as the second corn crop and wheat and, still, Brazil has harvested the second biggest production in history – the largest was in 2016/17.

 

Soybean, corn and cotton, which are competitors in terms of area, account for 89.5% of the area with grains in Brazil (or 85.8% considering summer and winter seasons), generating roughly 92% of the national production of grains (or 89.1% considering summer and winter crops).

 

For the upcoming season, the first estimate from Conab indicates a sharp increase of the area planted with cotton, relative stability for corn (depending on the second crop, planted in the first months of 2019) and a new increase for the soybean area. As for production, the higher use of technologies in the field may continue to boost productivity, but the weather plays an important role. Anyway, supply are expected to be higher than in 2017/18, especially for corn.  

 

The profitability – or at least the expectation that it will be higher compared to other competitor crops – and the possibility to make productive systems (such as soybean + second cotton crop and soybean + second corn crop) are the main reasons for the frequent area increases for these crops.

 

Taking the decision-making periods in different regions in Brazil, mainly between the end of the second quarter and all the third quarter each year, in 2018, prices have been higher compared to those registered in 2017. This fact, alone, creates a favorable environment for area increases.

 

However, prices that may be obtained during harvesting need to be considered in the decision-making process. As for soybean, values at CME Group indicate increases in the next two years, after significant drops in 2018. In Brazil, considering FOB values at the Paranaguá port, contracts for March, April and May 2019 indicate decreases of 13%, in USD, comparing to values in October and November. For the Brazilian seller, the revenue will also depend on dollar quotes.

 

As a result, while the trade war between the United States and China led soybean prices in the US to decrease sharply, but to move up in South America, the good crop this semester in the United States and a new record in South America may increase world inventories and press down quotes. Moreover, importing countries, except China, may purchase higher volumes from the US, due to unfavorable price gaps for South America. Moreover, crushing margins are low and may continue low in the upcoming months in Brazil and in the world. The demand from China may be low because of the weak domestic demand, mainly from swine producers.

 

 

Considering corn, prices in the United States also indicate increases, which may attract producers from that country again for the crop in 2019. In Brazil, prices are much higher than those registered in 2017 and, for the time being, the futures market does not indicate significant decreases for the next year. However, as exports are at a low pace, ending inventories may be higher compared to what is expected so far, first crop supply may be higher than in 2018 and the second crop supply may be good. As a result, quotes may decrease compared to what has been expected up until now. Among corn, soybean and cotton, it is for corn that prices may vary more intensively and in a short period, increasing the need to observe the scenario more closely, in order not to lose the ideal moment of making a decision.

 

For cotton, the relation revenue/costs indicates better attractiveness among temporary crops currently. Moreover, average prices up to October were at the highest levels since mid-2011, in real terms (IGP-DI). This fact justifies the encouragement of producers who are aiming to increase planting in this season. Conab forecasts that the 2018/19 area may be 205 higher in relation to that in the season before, which had already increased 25.1% compared to the previous.

 

Although future quotes of cotton indicate a slight downward trend for the next two months, prices in dollar, in late 2020, would still be higher than those observed in the last crops. However, in Brazil, quotes in the next season will depend on the export parity, which have, in turn, direct influence from the exchange rate. As a result, it is important that sellers close price levels as soon as possible, because there will be intense pressure in supply peak periods.

 

However, new entrants in the market have biggest challenges, such as credit, due to high costs of the crop, and technical aspects, which involve the adequate use of varieties, fertilizers and phitosanitary control, aiming good productivity and quality of cotton, at competitive costs. Trading is another challenge for new entrants.

 

For all crops, inputs were purchased with a relatively high exchange rate. In case the Brazilian currency increases, the export parity may move down, leading to a non-expected gap between revenue and costs. Therefore, the 2018/19 season, despite the optimism, may be challenging in terms of management in all the chains of the Brazilian agribusiness.

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