Analysis: Profit falls and uncertainties hang over agriculture in 2022

The bonanza of recent years in agriculture is ending. A set of uncertainties – ranging from the question of when and where the next drought will be to factors even more foreign to the sector, such as the war between Ukraine and Russia – gives the activity an even greater risk.

Although they have brought good prices to agriculture, these factors have driven up costs, restricting profit margins in the field.

This year will be a watershed. Given the high prices of commodities, the sector will still move a lot of money, but the final balance at the tip of the pencil will not be the same as in previous years.

Within Brazil itself, a disparity between the main agricultural regions is already evident. After two crop failures and low productivity, most producers in the South are in the red. The eyes now turn to the second crop of corn, which is being sown.

In the Midwest, which is the main producing region in the country, soy was a record. Producers obtained good prices, although they had higher production costs.

Farmers from different regions of the country, however, enter the 2022/2023 crop – the one that will be sown in the second half of the year – with high costs that have not been seen in the last decade.

In the evaluation of the Ministry of Agriculture, this year the producers of the South will hold only 23% of the GVP (Gross Value of Agricultural Production). In 2021, that percentage was 29%.

The participation of producers in the Southeast rises from 23% to 27%, and that of the Midwest, from 33% to 34%.

The VBP represents the volume produced and the prices received within the gate.

Although agricultural demand is buoyant, the sector is reflecting global economic disruptions.

When the economy began to assimilate the effects of the Covid-19 pandemic, which reduced the supply of inputs and raised prices, war broke out in Ukraine, with even more adverse effects for Brazilian producers.

Now, in addition to dealing with internal issues, such as debt renegotiation, difficult insurance, decapitalization, increased costs and difficulties in accessing credit, the agricultural sector becomes more dependent on external factors.

The main one is the difficulty in obtaining fertilizers, since Russia and Belarus are responsible for 28% of these inputs imported by Brazil.

Producers’ uncertainties are relevant: they do not know when and at what price the fertilizer will arrive for planting in the second half of the year.

With such external dependence on inputs, including agrochemicals and agricultural machinery, domestic producers must reduce investments and may lose competitiveness in the foreign market.

The evaluation of Brazilian production and the income of farmers depends, in large part, on the cultivation of soy, which occupies 41 million hectares of plantation in the country.

The average cost of grain production in Mato Grosso, based on the anticipation of monthly purchases of inputs by producers, rose to R$ 4,704 per hectare in the 2022/2023 harvest.

This value represents an increase of 62% in relation to the average for 2021/2022, according to data from Imea (Instituto Mato Grosso de Economia Agropecuária).

By February, 56% of the inputs that will be used in the state had already been purchased, but at a much higher price than a year ago.

Producers who have not yet acquired the inputs will spend much more from now on due to the effects of the war between Russia and Ukraine. There will be a sharp narrowing of margins.

Considering the average costs of macronutrients, the evolution of fertilizer prices, from last year to this year, was 111%. Some specific products had a much sharper rise, according to Imea.

The numbers for soybeans, the most liquid and most important commodity for the country, show how much a reduction in margins in the field can mean for the economy as a whole.

The area, which, a decade ago, was only 25 million hectares, has been growing 5.1% per year, which is explained by the good liquidity of the sector.

Three years ago, the Gross Value of Soy Production was R$ 230 billion. Last year, it reached R$ 354 billion, an increase of 54%. In the same period, corn, another important crop, grew by 108%.

Soybeans and corn add up to 59% of the value of national production. The remaining 41% are divided between the other 22 crops monitored by the Ministry of Agriculture.

A negative impact on the two main crops stops irrigating a good part of the national economy. For every real that agriculture loses, cities stop moving BRL 3.20.

Calculations by the consultancy MacroSector indicate that nominal agricultural revenues, which had been on a rise in recent years, rose by 63% last year. This year’s evolution, however, will be much smaller, according to analysts.

The effects of foreign policies in times of war also influence Brazilian agribusiness, since the sector is highly dependent on abroad, both in sales of products and in purchases of inputs.

The recent global rise in food prices and the consequent rise in inflation make countries adopt restrictive measures in the economy.

The Fed (United States Central Bank) has already started the process of raising interest rates and signals that new highs will come ahead.

In Brazil, the market estimate is that the Selic will close the year at 13%.

The economic slowdown brings restrictions on employment and economic activity, reducing income. Food is essential, but rising prices put a larger percentage of the world’s population on the poverty line.

Economic changes bring uncertainty about the prices of agricultural products. The rise in the US dollar depresses international commodity prices.

In addition, high interest rates attract investment funds — which, operating in the commodity market, support negotiations at high levels. With the possibility of higher yields in other sectors, these funds leave the agricultural sector, which thus suffers from a depression in prices.

All this creates uncertainty in a segment that plants at very high costs, but, even with the existing demand, has no guarantee of commodity prices.

Add to these conditions the problem of market concentration in Brazil. The country sells a lot to the few and buys a lot from the few. At least 70% of Brazilian soy exports go to China, which has just announced a reduction in its GDP growth expectations.

Already 38% of the fertilizers purchased come from just two countries. One of them, Russia, is involved in a war and, due to internal difficulties and logistics, has bottlenecks in the supply of these inputs.
The Russian invasion of Ukraine also raised fuel prices.

An important component in agricultural production, especially in the sugarcane sector, oil is yet another pressure factor on producers’ costs projected for this year. In addition, this commodity is part of the formation of fertilizer prices.

More than in recent years, today planting has become a risky activity.