Daniele Siqueira, Fernando Muraro

Despite some recovery and lots of volatility seen since mid-May, the Brazilian real is still the weakest-performing currency against the US dollar, with a 25% devaluation since the beginning of the year.

This has resulted from a combination of risk aversion and eight consecutive national interest rate cuts that started last year before the current Covid-19 crisis, in an attempt to reignite the economy.

But this weaker real has made soybean exports more competitive, contributing to a new export record in the first semester. It has also sent nominal prices received by farmers to new all-time highs, surpassing the BRL100 per 60 kg bag mark – a sort of magical number that, for many years, existed only in farmers’ dreams.

At the same time, the currency devaluation also raises questions about the production costs for the 2020/21 crop, which will be planted from September to December. Those questions are more than justified, especially when it comes to fertilizers, since 80% of all fertilizers consumed in Brazil are imported.

The good news is that farmers will plant the new crop with a production cost practically unchanged from 2019.

Fertilizer prices have fallen in dollars, making up for most of the currency devaluation. Relatively firm soybean prices in dollars – a result of strong export premiums – have also helped.

Considering the average spot prices in dollars seen in May 2020, a metric ton of granular MAP (monamonium phosphate) at the port of Paranagua cost about 15.8 bags of soybeans. A year ago, the ratio was 19.7 bags per metric ton of MAP.

In top soybean producer Mato Grosso, where fertilizers have a significant weight on the production cost due to soil deficiencies and the long distance from the ports, fertilizers delivered in the state in May 2020 were about 5% more expensive, in reals, than a year ago.

However, since Mato Grosso farmers typically buy most of their fertilizers for the next crop in the first quarter, they were able to avoid the sharpest dive of the Brazilian real which occurred between April and May.

Now that more than 85% of the fertilizers that will be used in the 2020/21 crop have already been bought, it is safe to expect that farmers in Mato Grosso will pay about 2% less for fertilizers than in 2019/20, and that the operating costs of production will be virtually the same as last year.

Also, soybean producers in Mato Grosso have been selling their 2020/21 crop at a record pace. According to AgRural data, 42% of the potential 2020/21 production had been sold by the end of May, compared to 23% in May 2019. Furthermore, this production had been sold for an average price 22% higher than a year ago.

With nearly unchanged production costs, a record-fast selling pace and higher prices, the state will definitely expand its soybean area. But some farmers who have debts in US dollars are in trouble because of the weaker real, and that is likely to limit the increase.

For now, the quick selling pace deserves further explanation. The 2019/20 crop production cost was assessed with an exchange rate averaging around BRL 3.80 to the dollar.

Back then, farmers believed that the Brazilian real would get stronger, reaching something like 3.30, because there was optimism surrounding President Bolsonaro’s economic policies. So, when the real started diving and prices skyrocketed, farmers were in no doubt: they sold not only huge amounts of their 2019/20 crop, but also part of the next crop.

In short, they planted the 2019/20 crop with the exchange rate at BRL 3.80 and sold it at BRL 4.50. For 2020/21, they have concluded most of their production costs at BRL 4.50 and are selling the crop at BRL 5.50.

And they have been selling “safrinha” corn for delivery in 2021 too, which makes the projected income for the new season look even better than what has been achieved so far in 2019/20.

In the second-largest producing state of Parana, 31% of the 2020/21 soybean potential production had been sold by the end of May, compared to 4% a year ago.

But farmers here tend to be slower when it comes to purchasing fertilizer because of the near proximity to the port of Paranagua and better soil conditions.

With about half of the fertilizers yet to be bought, farmers in Paraná will probably face some bumps down the road, especially if the Brazilian real continues its depreciation and if international fertilizer prices rebound. Nevertheless, the projected operating cost for the 2020/21 crop in Paraná is only three percent higher than in 2019/20.

Daniele Siqueira and Fernando Muraro are analysts for leading Curitiba-based consultancy AgRural