How Low Do Soy Prices Have to Go to Stop Brazil’s Acreage Expansion?

Brazil’s soybean acreage has more than doubled since the beginning of this century, from 14m ha in 2000/01 to 36m ha in 2018/19, with 12 consecutive years of positive growth. With lower international prices, this pace slowed to 3% per year in the past four seasons. The main question is: How low will soybean prices have to go before Brazil halts its soybean acreage expansion?

photo of soybean field

Strong Prices Incentivized Expansion Through Conversion

From 2010 to 2014, Brazil’s soybean area grew by 7.3% per year, driven by strong prices (CBOT prices averaged out to USD 13.6/bu) (see Figure 1). The majority of this soybean expansion took place on previously used areas. For instance, this century, Brazil expanded soybean production on 5.5m ha of agricultural land previously used for a summer corn crop – it is worth mentioning that this did not reduce corn acreage or production, as Brazil focused its corn production on the second crop (safrinha). To an even larger extent, the soybean expansion happened on pasturelands previously used for grazing cattle. 

Figure 1: Historical soybean acreage in Brazil, 2000/01-2018/19

20190416_fig1

Operational Margins Quantify Conversion Appetite

According to Embrapa (the Brazilian Agricultural Research Corporation), 19.7% of Brazil’s territory, or 168m ha, is covered by pasturelands, of which 30m ha to 40m ha are considered underused (i.e. extensive production with low cattle yield). To better understand farmers’ appetite to convert pasture to soybean land, we compare the operational margins of those land uses.

On underused pastureland in northern Mato Grosso with a stocking rate of 1 animal unit per ha, it is possible to produce 50kg of carcass equivalent per year. In contrast, that same land could be used to produce 3mt/ha of soybeans. To compare expected operational margins for grazing cattle and soybeans in the 2019/20 season, we assumed different scenarios of currency rate and FOB prices (CBOT + export premium) (see Table 1).

It is interesting to note that Brazilian soybean FOB prices above USD 9.50/bu are expected to result in higher margins than cattle production on underused pasturelands in all FX scenarios. However, in a scenario of FOB prices at USD 8.50/bu, there would not be an incentive to convert underused pasturelands to soybean areas considering an operational margins comparison. Consequently, this value could be considered, nowadays, a bottom line to limit soybean expansion in Brazil. 

It is worth mentioning that current live cattle prices are reflecting a year of relatively stable prices, roughly adjusted by inflation. However, given the expected slowdown in supply and the more positive landscape for local demand, prices are likely to find higher levels in the coming years.

Table 1: Soybean operational margins in northern Mato Grosso in different scenarios of FOB prices and currency rates*

20190416_fig2

Logistics and Land as Investment Are Key Factors

Logistics is a key factor in this analysis, especially considering regions located in northern Brazil. All of the simulated scenarios of soybean operational margins were based on transportation costs to a port located in Santarém (one of the major ‘Northern Arc’ ports). According to ESALQ-LOG (The Group of Research and Extension in Agroindustrial Logistics), freight costs from northern Mato Grosso to Santarém are estimated at USD 59/mt, while costs to Santos are estimated at USD 92/mt. Assuming this higher transportation cost, soybean production would have an advantage over pasturelands just considering FOB prices above USD 10/bu.

Another interesting point of view in this analysis is related to land investors. According to Informa Economics, pastureland price in northern Mato Grosso is, on average, at USD 1,920/ha, while the price is estimated at USD 4,050/ha for crop areas. Assuming an investment of USD 1,000/ha on soil improvements (fertilizers, mechanical operations, etc.) as well as acquisition of machinery/infrastructure (estimated at USD 480/ha), it would result in an internal rate of return (IRR) close to 12%, assuming an investment project period of 3 years. 

Conversion Supports Agricultural Efficiency

Rabobank expects the Brazilian soybean area to surpass 45m ha by the next decade, assuming an average annual acreage growth of 2% to 3% in the next years, which will depend on the (international) price development of soybeans and competing acreage uses. Given the large availability of land (in comparison to other important global producers), underused pasturelands can be freed up from low-yield cattle production through more intensified livestock farming to increase the efficient use of agricultural land. Considering the economic and efficiency gains, soybean prices would have to drop much lower to inhibit acreage expansion.