Forward Contracting of Brazil Soybeans Should Slow

Author: Michael Cordonnier

By the start of the second semester of 2020, Brazilian farmers will have probably sold 90% of their 2019/20 soybean production and 35% to 40% of their anticipated 2020/21 soybean production. Some farmers in Mato Grosso have been even more aggressive already selling up to 75% of their anticipated 2020/21 production. This compares to about 12% forward contracted at this time last year and about 8% average.

The reason for the aggressive selling was record high domestic soybean prices due to the devalued Brazilian currency especially during the first half of May. At one point, the Brazilian currency was trading at 5.85 to the dollar and domestic soybean prices were as high as R$ 112.00 per sack (approximately $10.00 per bushel).

The Brazilian currency has since strengthened a bit and is trading in the range of 5.20 per dollar. Domestic soybean prices have eased back a little and as a result, farmer selling has eased as well. Brazilian farmers are also very well capitalized after a very successful 2019/20 growing season for the most part. Most farmers banked record profits in 2019/20 with the exception of farmers in the state of Rio Grande do Sul who suffered a severe drought and low yields in 2019/20.

Many farmers have already forward contracted enough of their 2020/21 soybean production to cover their cost of production for next year, so they probably will not be in any rush to sell much more of their anticipated production unless prices spike again.

There are a lot of uncertainties for Brazilian farmers going forward including: Brazil being in the middle of a raging Covid-19 pandemic, a highly volatile exchange rate, weather uncertainties surrounding the U.S. growing season, continued trade dispute between the United States and China, and potential tight soybean supplies in Brazil by the time the 2020/21 harvest starts next January.

If weather problems develop during the U.S. growing season, international soybean prices could strengthen giving Brazilian farmers another chance to book additional sales. The available soybean supplies in Brazil could also tighten during the second semester given the continued record levels of soybean exports. Tight supplies could also support domestic soybean prices.

China could also step up with larger purchases of U.S. soybeans during the second half of 2020, but that is not at all certain given the strained relations between the two countries and the U.S. presidential election.