Trend And Ephemera
11 December 2008 Brazil, always an agricultural heavyweight, is reaching a level of prominence today that has crop protection companies’ mouths watering. As commodity prices climbed, Brazil’s farmers have invested in their crops in a big way, creating an input market that seems on the brink of eclipsing the US and becoming the world’s largest — in fact, in Flavio Hirata’s analysis in our Country Report beginning on p. 8, he concludes that trends in the market show Brazil doing exactly that in the coming seasons.
But can we trust the trends to continue? Remember, it was not long ago that Brazil’s farmers struggled under mounting debt, without access to much-needed credit. At the time, some of those problems might have seemed endemic; the country’s farmers were buried in a hole that did not appear to be a simple matter of a poor season, but something that could stretch out for a while.
However, those farmers did get out. Now, growth in Brazil seems unstoppable. It would appear that momentum has turned around for the country and that there is no limit for its future expansion.
If the country’s fortunes can swing so quickly from one extreme to the other, how much can agribusinesses rely on the market to keep growing, rather than eating the costs of missed payments as farmers fall back into the spirals of debt they found themselves in just a few years ago?
At the heart of the question is the matter of commodity prices, which became strong enough to pull many of Brazil’s farmers back on to their feet and into the black.
There are varying opinions on whether prices can be maintained at their current levels. On the one hand, the impact of biofuels on the market appears not to be the illusion that many thought it would turn into. True, it is not yet set in stone; if petroleum prices drop from their historically high levels and the prices of food rise, there could be a consumer backlash.
However, the privileged position of biofuels as a clean, green alternative to fossil fuels gives the biofuel industry an environmental appeal, and since it will help countries escape the yoke of petroleum producers, there are political and security issues that make biofuels that much more attractive. These factors make it difficult to imagine that government support will dry up for the biofuels industry.
That is not a guarantee of maintained high grain prices over the long term. In the medium term, it is safe to assume that biofuels will continue providing added demand for corn and sugarcane, and that this will ripple to soybean prices as well. As long as this is the case, Brazil should continue to see tremendous growth potential. While this is the most likely scenario, it is not the end of the story. Already, research is well underway to examine other means of clean energy, and other sources of biofuels, such as cellulosic ethanol, which could bring in a new wave of changes.
Changes to the biofuel industry could be scary in that the high commodity prices have gone a long way towards hiding soaring input prices. Fertilizer costs keep rising, and not entirely because of petroleum; the more significant contributor is demand. Pair these costs with rising pesticide prices, and high crop prices become more of a necessity than a bonus. If ethanol does suffer a setback or loses ground to other alternatives, the crop prices may no longer be able to support the high cost of production. In this doomsday scenario, yes: it is possible that massive debt can re-emerge as the Brazilian grower’s most devastating pest.
More likely, however, is that if such changes were in store, the Brazilian agroindustry would adapt with them.
The future is never perfectly clear. But at least as far as the upcoming few years, Brazil looks like a pretty safe bet.
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