The barter rates in Brazil are becoming unfavorable to the farmers and they will need to adjust to the new high prices.
Join Camila Dias, Argus Brazil Bureau Chief, and Kauanna Navarro, Argus Brazil Grains and Fertilizers Reporter, as they talk about what about the topic and how it will impact the fertilizer demand in Brazil.
CD: Hello and welcome to ‘Market Talks’- a series of podcasts brought by Argus weekly about the main events with an impact on the commodities and energy sectors in Brazil and worldwide. My name is Camila Dias, Argus Brazil bureau chief. In today's episode, I talk to Kauanna Navarro, reporter of the Argus Brazil Grains and Fertilizer publication, about the barter rate in Brazil and how it can impact Brazilian fertilizer demand. Welcome, Kauanna.
KN: Thank you, Camila. It is a pleasure to be here.
CD: I think we might start by saying what is the barter rate and why it is so important in Brazil.
KN: Sure. The barter rate is the ratio of the price of a bag of agriculture production to a tonne of inputs – seeds, pesticides, fertilizer – used to treat the crop. But here we are talking about just commodity fertilizers – nitrogen, phosphates, and potash. The lower the barter rates are, the better the position for farmers. In Brazil, exchanging inputs for future production is the most common way to finance crops.
CD: Some months ago, the barter rates were favorable for Brazilian farmers. What is the scenario now?
KN: Things are quite different now. Barter rates for corn and soybeans in Brazil are becoming unfavorable for farmers, as they need to offer more grain to buy fertilizer for their crops. Current fertilizer barter rates raise doubts about whether farmers will be willing to pay the price to plant the next Brazilian crops.
CD: What caused the situation to deteriorate for farmers?
KN: A rapid rally in fertilizer prices boosted barter rates. The cfr MAP price — the main phosphate that drives the other phosphate values — rose by around $500/t this year. Granular urea prices — widely used in cornfields — have more than tripled since last year. The cfr prices rose by $608/t. Granular MOP — essential for all crops in Brazil as the soil is poor in potash — appreciated by $560/t.
CD: What is the reason for the rally in all NPK components?
KN: Camila, there are a bunch of reasons. It's like a perfect storm. We are facing an energy crisis in many parts of the world. In China, the crisis reaches fertilizer production as they use coal to synthesize urea and, also, to provide energy. The situation is the same in Europe: energy competes with nitrogen production. We also see a huge increase in the raw material used to produce phosphates. We’re also competing with demand from other countries. The fertilizer market is like any other – product goes to the person paying the most. Although prices increased substantially in Brazil recently, and, maybe, some Brazilian farmers are not willing to pay, in other countries like Australia or US, farmers still are comfortable enough to pay.
CD: Kauanna, what’s going to happen if Brazilian farmers didn't pay what fertilizer producers ask?
KN: Farmers have little choice but to pay up or use less fertilizer and risk more exposure to inclement weather.
CD: What do you mean by "inclement weather"?
KN: You know, in agriculture, there are variables that we can control and others we cannot. The weather is a prime example of an uncontrollable one. But fertilizer can, in most cases, help the plant to survive some weather issues. Without the total fertilizer needed, the crop has less chance to go through more severe conditions. In some cases, the use of more fertilizer could prevent crop further losses.
CD: I see. Kauanna, you mentioned that current barter rates are becoming uneconomical for farmers, but you didn't mention what are the levels now.
KN: Fertilizer barter rates, I mean the ratio of the number of grain bags needed to buy a tonne of NPK used in the fields — is now at 26 bags per tonne of NPK in Rondonopolis, in Mato Grosso state. The ratio was 10 bags/t a year ago. The situation is similar in Sorriso, another soy-producing city in Mato Grosso state, where the ratio is at 28 bags/t, compared with 10 bags/t last year.
The average soy barter rate since December 2014 for these two cities has been 18 bags/t.
The situation is no better for corn farmers. The ratio is at 72 bags/t in Rondonopolis and 80 bags/t in Sorriso. One year ago, the ratio was 28 bags/t and 31 bags/t, respectively. The average since 2014 for the two cities is 61 bags/t, more than 15 bags/t lower than presently.
CD: And how it can be translated into the costs?
KN: It means the costs are increasing. The first estimates for 2022-23 soybean crop in Mato Grosso show that NPK fertilizer costs are on track to double from the previous cycle, according to the Mato Grosso Institute, Imea. Fertilizers and soil enhancers should represent about 50pc of estimated expenses. Imea also expects seed costs for the soybean crop will climb by up to 63pc compared to the current crop.
CD: But, Kauanna, the 2022-23 crop won’t be planted until September, right? What impacts will we see now?
KN: Yes, you’re right. But the preparation for the next crops starts now. For soybeans, the first thing we can notice is that the rising costs are having a bigger impact on anticipated sales than on farmers' current profit margins. Booked sales for next season are currently progressing slower compared to this time in 2020. Sales for the 2022-23 soybean season are at 4pc of the total production estimate, while sales booked for the 2021-22 season were at 10.4pc in November last year. And we must remember that barter rates are used in Brazil to finance the crops, and current conditions mean the farmers can invest less in the crops.
CD: And for corn? How are the costs for the 2022-23 season?
KN: We'll be planting the biggest area of the 2022-23 cycle in January 2023, so it's too early to have an estimate. But the costs in Mato Grosso for that cycle are 45pc higher than the crop planted this year.
CD: Is there any risk of lower fertilizer use in the corn season that will be sown in January 2022?
KN: Yes, but not a huge risk. About 85pc of the total fertilizer that will be used for Brazil’s winter corn crop was already negotiated. So, I'd say the risk is minimal, but I can’t say the same for the next crop. Fundamentals do not show any sign of significant falls in the short term.
CD: Thank you very much, Kauanna.
This and other episodes of our podcast are available on the Argus website at www.argusmedia.com. Visit the page to follow the events that affect global commodity markets and understand their developments in Brazil and in Latin America. We'll be back soon with another edition of “Market Talks”. See you soon!