El Niño prevents Lula from “surfing” on the merits of agriculture

In this year of municipal elections, the Lula government will not be able to count on the same luck as in 2023, when it tried to “surf” the performance of agribusiness after an unprecedented super harvest of over 300 million tons, decisive for the first deflation in the price of food at home since 2017.

Initially, the summer harvest skidded upwards due to the drought caused by El Niño in the Central-West, and the harvest balance will fall by at least 20 million tons. In basic items, such as rice and beans, the year also started on a high. Rice due to the shortage of the product worldwide, worsened by climate events and the decision by India, the largest exporter, to ban shipments. As for beans, extremes of heat and rain damaged the quality and volume of the harvest.

Also clouding the horizon are uncertainties regarding Brasília’s ability to honor the fiscal target of zero deficit in 2024, which could have repercussions on the exchange rate at a time when the price of agricultural commodities is already falling.

Prices of meat, rice and beans are beyond state control

This week, Lula celebrated the drop in the price of beef as if it were the government’s merit, when, in reality, it has nothing to do with state policies. It is the result of the livestock cycle, that is, of a time when livestock farmers are getting rid of breeders due to low profitability. The president also said that his government is committed to lowering the price of rice and beans, “what goes on the tables of working people.”

After starting the year with high peaks, the prices of rice and beans, in fact, should fall in the coming months. But, again, due to fluctuations in market supply and demand, and not due to government interference. As already happened in the year of “fat cows”, in 2023.

“The government and monetary policy have little power in agriculture”, observes the coordinator of FGV Ibre’s Price Indices, André Braz. “The government can introduce public policies to make credits available to rural producers, to try to see if it mitigates the impact on the cost and the transfers to the final price. But practically no effort has been made in this regard. Monetary policy does not reach the price of food, which depends on supply. If you don’t have the product to offer, the price will rise regardless of where the interest rate is. So, the government was unable to gain credit for the good behavior of food prices, it was really luck. “

El Niño brought damage, but less than expected

Analysts interviewed by People’s Gazette agree that the deflation recorded in 2023 in the price of food at home (-0.52% according to the IPCA) was a respite after a sequence of heavy negative economic events: pandemic (2020-21), water/energy crisis (2021) and the war between Russia and Ukraine (2022).

On the other hand, although impactful, the damage from El Niño is less than expected. Therefore, projections about inflationary pressure in the coming months vary between mild and moderate.

For agricultural commodities market analyst Vlamir Brandalizze, there will be no way to avoid the rise of some basic foods, such as rice, beans, eggs and soybean oil.

“Last year we had a drop in the prices of corn and soybean meal, which went down. Hence it was possible to produce cheap eggs. Soybean oil and eggs have already reached rock bottom. And there are beginning to be signs of reaction. There shouldn’t be a spike in prices, because we still have a good supply of corn and soybean meal. But the low phase is over. We will not have a lack of food, but a more adjusted upward value”, he predicts.

If the hypothesis of a new deflation of the items that make up the Brazilian table is remote, there is also not much talk about soaring prices. Partly due to the effect of the good harvests of our competitors, as André Braz, from FGV Ibre, points out. “When we look at international stock exchanges, the trajectory of soybean, corn and wheat prices has been downward. The supply of grains in the world is large”, he highlights.

FGV Ibre estimates food inflation at around 4% to 4.5% this year, significantly above the general target of the National Monetary Council (CMN), which is 3%. Braz, however, makes the reservation that “there is still a lot of water to pass under the bridge” and it is possible that food inflation will be lower than projected.

Cheaper commodities “hold down” the price of derivatives

“When we look at the soybean price graph in 12 months, there is a 30% drop in the producer index. Here and out there. It’s too much. With the price of grains well behaved, there is no contamination of the price of derived products. If soybeans don’t rise, soybean oil doesn’t rise and margarine doesn’t rise. If the corn doesn’t rise, the eggs or chicken meat won’t rise. If wheat doesn’t rise, bread, pasta and biscuits won’t rise. So, we end up reaping the beneficial effects due to the price reduction that these grains will present, despite the climate challenge”, emphasizes Braz.

In this scenario, the most affected ends up being the rural producer. The climate reduced productivity, but, instead of prices rising, according to the logic of a lower domestic supply, they should fall due to “robust production in the rest of the world”, as the FGV economist points out.

For the Brazilian Confederation of Agriculture and Livestock (CNA), the combination of lower prices of agricultural commodities, reduction in the summer harvest and compromise of part of the second corn harvest (due to the delay in the ideal planting window) should make the GDP of agriculture fell 0.7% this year, against an increase of 15.1% in 2023.

The painting is no longer brigadeiro heaven

“The picture is no longer brigadeiro heaven. It’s still a good harvest, but it’s not the same as 2023. El Niño impacted the soybean harvest, is impacting the corn harvest and will impact the production of vegetables and fruits”, assesses Renato Conchon, coordinator of the CNA’s economic nucleus.

This El Niño, which hit the Brazilian summer harvest so much, should be followed by a quick period of climate neutrality, between March and April, before the arrival of La Niña, from May-June onwards.

If La Niña usually brings regular rain to the central and northern regions of the country, to the south it poses a greater risk to winter crops, such as wheat, barley and livestock pastures. “In the South, the cold should arrive a little earlier and leave later, with a drier winter and risks of heavy frost. The late cold is what hinders agriculture. It’s a problem for wheat and vegetable growers”, says meteorologist Luiz Renato Lazinski.

As for beans and rice, the year started with rising prices after a combination of adverse weather conditions and a decrease in international supply. Markets are still feeling the blow from India’s decision, which accounted for 40% of global rice exports, and since July 2023 has banned shipments of several varieties to maintain prices in the domestic market, following crop failure.

At the same time, other major players, such as Vietnam and Thailand, also had smaller harvests due to climate impacts from El Niño. And, in Brazil, there was a drop in production after a severe drought in Rio Grande do Sul, which accounts for 70% of national cultivation.

Consumers swapped rice for pasta

“We had some regions where a 5-kilo package cost close to R$50. So, consumers ended up migrating to substitutes. Wheat entities reported an increase in sales of pasta, noodles and flour”, points out analyst Evandro Oliveira, from the Safras & Market agency, in Porto Alegre. To meet domestic demand, Brazil imported 1.5 million tons of rice, a record for the last twenty years.

In recent weeks, however, with the beginning of the harvest of the new crop in Rio Grande do Sul, Santa Catarina and Paraguay, the signal has reversed and pressure has begun to fall in rice prices. “This drop should be felt by consumers in April, mainly because the transmission in prices along the chain is gradual. First it occurs in the raw raw material, the paddy rice, then in the processed product, where it is already arriving, and finally on the shelves”, says the analyst.

In beans, the last cycle was hampered by excessive rain in the South and drought in the Northeast, compromising the quality of the grains. The lower supply supports prices for black beans above R$400 per bag, and for Rio beans, above R$300. “In the next cycle there should be an increase in area and, if the weather contributes, increased production, which could have a significant impact in bean prices from April, May and June, with greater supply and better quality product”, highlights Oliveira.

Thus, rice and beans should see a price reduction in the coming months, not due to government actions (Lula asked the Minister of Agriculture, Carlos Fávaro, for a plan to lower the price of these foods), but due to a fluctuation in the market. .

Scenario should improve for fruit and meat

As for fruit and vegetables, if the coming La Niña is not intense (the phenomenon is characterized by above-average rain in the Northeast and below average in the South), a better supply of short-cycle crops in the South and Southeast of the country is likely. , according to Margarete Boteon, researcher at the Center for Advanced Studies in Applied Economics (Cepea Esalq-USP).

“From the current level, and just evaluating the climate effect, in general it will be a winter with average prices lower than that observed in the summer of 2024, mainly for potatoes, tomatoes and leafy crops”, highlights Margarete.

In relation to meat, 2024 should be a year of record production, both for chicken, pork and beef. The livestock cycle is still in the sow slaughter phase, which increases the supply of live cattle in the country. “The price of meat will not be one of the villains of inflation this year. Brazil will continue to have a large volume of supply, with controlled prices throughout this season, barring any extraordinary, out-of-context occurrence that significantly alters this market dynamic”, highlights Fernando Iglesias, from the Safras & Market consultancy.

Just like rice and beans, the price of meat has much more to do with market fluctuations than with specific government intervention. It is the livestock cycle, which lasts five to six years, which has a downward trend in the price of beef.

The bad news for those planning political gains based on the price of steak is that the change in the livestock cycle should begin in 2025 and take place throughout 2026. Precisely a year of presidential elections, when, after successive periods of sow slaughter, the tendency will be for the supply of live cattle to decrease, increasing prices. In this context, trying to “surf” the price of rump or sirloin steak will definitely be a mistake.

Government should focus on fiscal policy

Instead of looking for ways to interfere in the country’s agricultural production, where it has little influence, the government should focus its efforts on a more austere fiscal policy, which aims to honor the goal of bringing the deficit to zero, according to André Braz, from FGV Ibre.

“This would end up reducing country risk, shielding the exchange rate more. If this is not honored, it could turn into inflation that will always affect the least favored. The risk is: I promised a very bold goal and did nothing to achieve that goal. Then it could get worse, increasing country risk, with negative repercussions on the exchange rate. But if that doesn’t happen, and I don’t think it will happen, we have a good chance of lower inflation than expected and a more stable exchange rate”, he concludes.