Brazil Agribusiness Report

Brazil's agricultural sector suffered from a combination of poor weather, a strong real and restricted credit through mid-2009. The drought in the south of the country will see production of grain and soybeans fall in 2009. We forecast soybean production to drop 5.6% year-on-year to 57.57mn tonnes while corn and wheat output will fall 14.1% and 3.8% to 50.36mn tonnes and 5.77mn tonnes, respectively.

While soybean prices have been supported by tight supplies owing to the devastation of the crop in neighbouring Argentina, the low world corn price combined with poor yields and the strong real has put pressure on farmers' profits. The government has stepped in by raising minimum prices for the crop.

Despite this, we expect to see the area planted to corn decline in 2010 as farmers switch to soybeans. We still forecast corn production to increase next year, however, owing to an expected increase in the average yield.

While drought has caused crop losses for grain crops, the sugar cane and coffee harvests were hurt by unseasonally heavy rains through the southern winter months of 2009. The rains have delayed harvesting of both crops and could see average yields decline. It is quality that is likely to suffer more, however.

Sucrose recovery levels are down and the quality of Brazil's coffee crop will also fall. Demand for Brazil's coffee is being supported by the disastrous harvest in neighbouring Colombia where production has been hit by rains and replanting of coffee production.

Tight world supplies have also boosted demand for Brazilian sugar. Millers have been maximising sugar production at the expense of ethanol to take advantage of the surge in the price for sugar this year. This will see the trend for the declining proportion of cane used for sugar reversed; with investment in recent years focused on increasing ethanol production, mills are now working at full capacity for sugar production. The high level of indebtedness in the sector is making funds for investing in capacity improvements hard to come by despite the high sugar price.

The government is working to open up credit to farmers. In July the agriculture minister said the government would increase the amount of government-backed credit available to farmers by 38% to BRL108bn, according to Bloomberg. This should go some way to making up for the fall in financing from agricultural trading companies and private banks. Difficulty in accessing credit has slowed expansion of agricultural production in Brazil over the years. As Brazil's economy grows and labour costs rise, the pressure to invest in mechanisation will increase. Already producers of key export crops such as coffee are struggling to find labour at affordable levels. Good access to credit will be essential for the continuing development of the sector.