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Commodity Futures - Pre-session commentary
10-Aug-2018     08:25

Commodities Buzz: Brazil Soyabean Production To Touch Record Levels In 2018/19

As per latest data compiled by United States Department of Agriculture (USDA), Brazil's 2018/19 soybean planted area is likely to increase by two percent, to 36.5 million hectares (ha). The increase in area for the 2018/19 crop is due to expectation of higher prices and higher expected demand by Chinese buyers. However, the lower area compared to USDA's official Production, Supply, and Distribution data (PSD) is due to the lingering effects of the truckers strike in Brazil. Most analysts in Brazil think the strike, which resulted in higher freight costs, reduced such a high potential increase. Currently, fertilizer costs are 20% to 30% more expensive and chemicals are 15% to 20% compared to last year (freight costs and weaker Real). Even with better soybean prices, the higher production costs to open new areas will be an issue. In addition, delivery of inputs have experienced delays. The Mato Grosso Institute of Agricultural Economics (Imea) increased their estimate of producing soybeans in the state from last month's report. Imea is estimating the variable cost of producing soybeans in Mato Grosso in 2018/19 is in the range of R$ 2,829 to R$ 3,124 per hectare.

USDA forecasts 2018/19 soybean production at 117 million metric tons (mmt), the second largest crop on record. The lower yield compared to the previous season is due to post's yield calculation based on trend.

Soybean exports for MY 2018/19 (February 2019 to January 2020) are forecast at 69.5 mmt. The export forecast is lower compared to the previous year due to lower exportable supplies as a result of the lower crop and higher domestic consumption. Despite opportunities to continue to take market share from the United States in China as a result of the current trade environment between the two countries, producers and exporters are cautious about next year.

The uncertainties on the freight costs as a result of the truckers strike last May is slowing down the pace of future contracts. According to contacts in Mato Grosso, forward contracts only went up half of a percentage between June and July of 2018. Contacts within trading companies have also expressed their frustrations about the market uncertainties, which have not allowed them to accelerate contracts for next year. At the same time, expectations of a weaker Brazilian Real later in 2018 can also be a lifeline for producers next year. A weaker Brazilian Real due to the open race for the presidency unfolding over the next few months, could translate to higher domestic prices.

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