War brought gains, but showed fragile production in Brazil – 02/20/2023 – Vaivém

The invasion of Ukraine by Russia completes one year on Friday (24). With great influence on agribusiness in Brazil in the first months, the effects of the conflict are already less accentuated, but still bring great uncertainties for the sector.

International prices and supply of commodities and inputs, mainly fertilizers, may suffer new effects as a result of this conflict, which lasts longer than expected.

For Brazilian agribusiness, the war raised the level of costs, opened new windows of external opportunities, but exposed the fragility of the national production system.

Uncertainties are still large and require a much more challenging management process for producers. It is time for a more careful control in the expansion of areas and investments.

New side effects of this war would be decisive for the activity, says Maciel Silva, deputy technical director of the CNA (Confederation of Agriculture and Livestock of Brazil).

According to him, long-term contracts need to be very well evaluated, and the search for technological innovation and productive efficiency has to be constant.

Covid and the war showed that it is no longer the balance of supply and demand that guides the system. The prices of oil, gas in Europe and maritime freight and other factors external to the activity are now of great importance, says the CNA director.

In the grain sector, Daniele Siqueira, an analyst at AgRural, says that the price peak has passed, but doubts still remain about Ukraine’s production potential and about the arrangements between Ukrainians and Russians in the agreement on the export corridor. All this can come back to influence.

In the fertilizer area, Itaú BBA analysts indicate some important points for setting prices in the sector. Among them, the United States and Europe go shopping, an eventual escalation of the war between Russia and Ukraine, geopolitical problems involving China and the price of energy.

In this war, Brazil’s external dependence on important products in the production system, such as fertilizers, became clear. However, internal discussions on this fragility have intensified, forcing the country to look for new solutions, by increasing national production of inputs and seeking new technological solutions, such as faster development of bioinputs.

On the cost side, the main bottleneck was fertilizers. International prices, which were already on the rise due to the sanctions imposed by the European Union on Belarus, soared after the outbreak of war.

Last year, Brazil reduced the volume of imported fertilizers by 8.4%, but spent 63% more than in 2021. Highly dependent on the foreign market, the country accelerated purchases right after the war, according to Mauro Osaki, a researcher of Cepea (Center for Advanced Studies in Applied Economics).

In the months of May, June and July, monthly purchases exceeded 4 million tons. From January to July, the country had already purchased 8.6 million tons of potassium chloride. In the first seven months of the year, total purchases of fertilizers had already amounted to 24 million tons, 59% of the total purchased during 2022.

High prices and reduction in purchasing power made the producer put the foot on the brake in the acquisition of this input. In January 2021, farmers in Sorriso (MT) had already purchased 80% of the fertilizer they were going to use, a volume that was 65% in the same month of the following year. Last month, however, purchases were only 18.5%, according to Osaki.

For the researcher, potassium chloride prices show the effects of the war on the cost of inputs.

In January 2021, a ton of potassium chloride was worth BRL 2,010 in Sorriso. In the same month of the following year, R$ 5,428. Last January, after having reached BRL 6,911 in April 2022, it retreated to BRL 3,850.

Silva, from the CNA, says that the war has further exposed how fertilizers are the industry’s Achilles’ heel.

This led the country to look for new suppliers, such as Canada and the United States, and to think more seriously about a state policy for the sector.

The discussions accelerated the National Fertilizer Plan, which is expected to be implemented in the long term. “We are not going to be self-sufficient in this sector, but we will have a reduction in dependence”, he says.

For Silva, the shock of the war also provoked an acceleration in the search for an emerging chain of options, mainly in the development of bioinputs and other alternatives. The pace of speed in the search for bioinputs has accelerated, he says.

Brazil was affected by the costs of fertilizers, but gained with the acceleration of commodity prices, mainly those of greater importance in the production list of Ukraine and Russia.

Corn and wheat are on that list. Soybean, a product that Brazil has world hegemony in production and exports, was indirectly affected, according to the AgRural analyst.

It shows how much these prices rose with the war, accelerating food inflation around the world. In early January 2022, when signs of a possible invasion were already influencing the market, the first corn contract was at US$5.89 per bushel (25.4 kg) in Chicago. It rose as high as $8.27 in late April, retreating to $6.76 last week.

Brazil, harvesting a supercrop of the cereal, managed to export a record 43.2 million tons last year, well above the 20.4 million of 2021.

Silva says that the importance of Ukraine in corn exports and the difficulties that the war brought to the Ukrainians accelerated Brazilian sales.

China has released exports from Brazil and has already become an important market. In 2022, they bought 1.16 million tons. In January of this year alone, there were 984,000, according to Secex (Secretary of Foreign Trade).

For Daniele, high corn prices affected world consumption, which should fall to 1.16 billion tons in the 2022/23 harvest, which is not normal. The reduction was 40 million tons.

Wheat was one of the most affected products, due to the importance of both countries in the international market. They account for 28% of world exports.

The price jumped from US$7.58 per bushel (27.2 kg) in early January to US$9.26 on the day of the invasion, reaching US$13.40 in early March 2022. last time it was at $7.65.

Ukraine’s difficulties in exporting and the sanctions imposed on Russia have accelerated the viability of wheat production in Brazil, says Silva. The country achieved a harvest of 10.5 million tons and exported a record 3.1 million.

New producing regions in the country and the development of new varieties will encourage planting, according to the deputy director of the CNA.

Ukraine is not of great importance in the world’s soybean production, but the reduction in the supply of sunflower oil, which is the leader, has pushed sales of soybean oil.

Oilseed prices, which started 2022 at US$13.44 per bushel (US$27.2 kg) in Chicago, rose to US$16.62 on the day of the invasion, reaching US$17.84 on June 9, the second highest value of the product.

The historical maximum had been US$ 17.95, reached in September 2012, due to intense drought in producing countries, according to the AgRural analyst.

Lower supply of sunflower oil from Ukraine, canola crop failure in Canada and Europe, export difficulties from Argentina and temporary interruption of palm oil supply from Indonesia raised soybean oil prices in the world. In Brazil, the accumulated increase in the last four years was 164%.

The duration of the conflict between the two Eastern European countries will determine Ukraine’s planting and export capacity, an important supplier of wheat, corn and sunflower oil.

Russia, on the other hand, is little affected in production, and suffers sanctions from importers, which makes it difficult to sell its products.