VIEW FROM THE INDUSTRY: CLIMATE CHANGE, BRAZIL SOYBEAN PRICES, GRAIN FREIGHT RATES AND MORE

Interview with Marcos Araujo, Analyst, Agrinvest Commodities

Published August 2018

Macro 

What do you see as the two most important issues globally currently and why? How will these impact the market?

1 – Trade war USA x China

The soybeans trade flow is being affected by tariffs between USA and China. China will concentrate its soybean imports mainly from Brazil, which puts Brazil at risk to the extent of supply for domestic consumption for the 2018/2019 crop.

2 – Extreme weather events

The failure of climate-change mitigation and adaptation of new varieties of soybean, corn and wheat. The world coarse grains are falling at critical inventory levels.

Local

What impact will current market conditions have on market fundamentals for the next marketing year and production in your region? What are the implications for grain and oilseed pricing?

Soybean basis in Brazil should continue to strengthen for new crop. Huge stocks in United States, domestic biodiesel consumption and new truck freight regulation should pressure up local basis. Forward currency rate and corn/soybean basis are encouraging Brazilian farmers to increase acreage.  

What do you think has been the biggest change in the grain and oilseed industry over the last 24-36 months?

The traditional farmer today has access to fresh market information and in this way the so called asymmetry of information, which is a market flaw, has been overcome. Many end users are expanding their sources of supplies with direct purchase from the origins, therefore eliminating the trading middlemen. 

Do you think the role of the grain or oilseed trader has changed in the last 5 years? If so in what way?

Not really. The trading companies have been doing their good role of buying near the production and selling near the end consumption, managing the logistics and making some profit from that. 

 

What values do you think shape the global grain and oilseed industry and why?

The knowledge, the new technology development, and the liquidity of the market are important factors for the improvement of sustained production.  

Weather

What affect is/will weather have on grain and oilseed prices?

Weather is a key factor for the grain production. The global inventories are not at a comfortable level to support a major failure in production. Such failure would cause a strong food inflationary cycle in many countries, as we are seeing in the case of wheat in Europe. 

What has been strongest influence on global weather patterns and how have these affected plantings and growth?

The Global Weather Change, if projections from IPCC are confirmed, will cause major changes in agriculture. The Brazilian agriculture production in specific could suffer a loss of 50% in the output, making necessary a work in group and multidisciplinary to mitigate risks and to develop new varieties adapted for this new weather condition. 

Regional

What can we expect from the Black Sea region going forward and how will it affect the global grain industry?

The Black Sea region enables the growth of grain production, mainly in wheat and corn, taking advantage of its the geographic position.

What impact do you think the geopolitics of twitter / Trump-China relations have had a on the Brazilian and Argentina soybean market?

Due to the significant losses in the Argentine soybean production in 2018, the Brazilian soybean has had a strong valuation against USA prices.  

What do you think will be the next hotspot region and why?

In South America, in particular Brazil, gathers estimations that the country has up to 100 million hectares of damaged pastures in different levels throughout the Cerrado. These areas has the potential to become agriculture areas. 

Do you think that as China is buying more soy beans from Brazil, Brazil will be forced to export less to Europe?

Yes, but Brazil does not have enough soybean volume to substitute USA in the coming years. For the next crop 2018/19 to meet international and domestic demand (due to biodiesel regulations), Brazil needs to guarantee a production that relies on a acreage increase with a high yields to produce a record of at least 123 million tons, to avoid a rationing of demand.   

Freight

What are the major issues affecting pricing of grain freight?

The recent truck freight regulation caused a strong cost increase. For example from Sorriso to Santos  was in the recent past traded at R$300,00/mt, and today it is at R$427,50/mt. So an increase of 42,50%. This extra cost will represent 90 cents per bushel in soybean and 84 cents per bushel in corn just in logistics. The question is: Who will pay for this extra cost?

Where will the opportunities lie for traders, producers and end-users?

The government intervention on the truck freights has caused a real mess in the grain trading process, causing delays in the ag inputs sales and delivery, and also in the 2019 grain sales. 

One of the related consequences of that mess is found in the new sales of trucks to trading companies looking at diminish their logistics risks, and in the search of the players for new ways to move the grains, such as barges and railroads. So, we can foresee a new round of investments in waterways and railways. 

Technology & Innovation

What impact do you think technology is having on the industry?

The instant access to market information. The usage of smartphones connected to the main sources of information and quotes changed the decision process of the producers.  

About you

How did you get in to the industry?

20 years ago, I joined Monsanto on a program called “High Potential”. At the time I was a bank branch manager and Monsanto invited me to join their commercial team. 

If you weren’t in the grain and oilseed/agriculture industry, what industry would you have gone in to? 

I would either be an airplane pilot or a lawyer.

If you could take 3 things to a desert island that are not practical (ie. a boat, rope or a knife); what would they be?

The Bible to keep my spirit strong, a picture of my family to keep me focus, the third one I believe I would find at the desert island.   

You can hear more from Marcos at Global Grain South America, taking place on 12 - 13 September 2018.