Estimates and Crop Assessment Division
March 31, 2005
Brazil: Farmers Are Faced With Tough Decisions in Rio Grande do Sul
|The state of Rio Grande do Sul has the fourth largest per capita income in Brazil, which amounts to approximately 4,500 U.S. dollars per inhabitant. This state of 10 million people is richly diverse with ethnic backgrounds from Portugal, Spain, Africa, Germany, Italy and Poland, that now constitute the contemporary gaucho (the typical ranchers and farmers that colonized the state).
Rio Grande do Sul, located in the southern region of Brazil, is a major grain producer of corn, soybeans, wheat, and rice. It's the largest rice producer, second largest corn and wheat producer, and third largest soybean producer in Brazil. But its main agricultural industry sector is meat, including beef, poultry, and swine. The livestock industry is a major market for feed, where most of the corn produced in the state is consumed.
The state's farm structure is characterized by small rural holdings. Farm sizes vary, ranging from 300 to 1,800 hectares. On average, the state's corn area ranges between 1 and 2 million hectares. Currently corn area is estimated at 1.2 million hectares, with a corresponding yield of 1.9 tons per hectare, producing 2.2 million tons. Farmers in this state, typically rotate between corn, soy, and wheat. For soy, the area ranges between roughly 3 and 4 million hectares. The current soy area is estimated at 4.1 million hectares, with a yield of 0.78 tons per hectare, and a production of 3.2 million tons. For wheat, the area ranges between 0.3 to 1.0 million hectares. The current wheat area is estimated at 1.1 million hectares, with a yield of 2.0 tons per hectare, and a production of 2.3 million tons.
|Naturally, yield in Rio Grande is related to weather. In Rio Grande, rainfall is more variable than in other states and crops that use more water, such as corn, are of higher risk. The high variability of rainfall has resulted in significant yield fluctuations from year to year. For example, for 2004/05, Rio Grande experienced drought conditions and corn yields are estimated to be around 1.9 tons per hectare, down 32 percent from the previous year. For 2003/04, corn yields also dropped by approximately 25 percent from the previous year; while in 2002/03, yields increased by 36 percent.
Typically, expected net returns are a valuable indicator of potential area shifts between competing land use options. In chart 1, it is shown that Rio Grande do Sul farmers net returns for 2004/05 are estimated to be down for corn, wheat, and soybeans, according to statistics provided by the Federation of Agricultural Cooperatives in Rio Grande do Sul. As can be seen in charts 2 and 3, returns have dropped because of decreasing revenues and rising variable costs of production. Variable costs of production include operational costs of using machinery, including fuel, cost of labor, inputs such as fertilizers, seeds, herbicides, and transportation. Variable cost for corn in 2004/05 is estimated to have increased by nearly $66 per hectare, for soy by $58, and for wheat by $50, to an eight-year high for all three crops. Most of this increase is from higher fertilizer and herbicide prices. Estimates of other variable costs, such as the cost of labor, fuel, and transportation, have not increased as much.
In chart 2, we see that while crop revenues have been decreasing for corn and soy during the past two years, wheat revenues actually increased in 2003/04 surpassing corn and soy revenues for the first time in recent history. Revenues for wheat dropped in 2004/05, but are still estimated to be higher than for corn and soy.
The question of course is, do farmers only look at returns to make their planting decisions? If we lag area by one year and compare 2004 area to 2003 net returns, we see in chart 1 that in 2003/04 corn returns decreased 85 percent dropping to $23 per hectare, and in 2004/05 farmers decreased corn area. For soy, returns decreased by 70 percent dropping to $97 per hectare, however, compared to corn returns, soybeans are still more profitable, thus in 2004/05 farmers increased soy area. Wheat returns increased five fold in 2003/04 and were almost as high as soybean returns for the first time in recent history and farmers increased wheat area in 2004/05.
|Chart 2. Rio Grande do Sul - Crop Revenues
||Chart 3. Rio Grande do Sul - Variable Costs
|Another major factor considered at planting season is the local or international demand. Rio Grande is a major soybean exporter, however corn and wheat are consumed mostly domestically. Wheat is used for crop rotation. The domestic demand for feed has been increasing, especially for corn, due to the growing meat industry.
In 2004/05, crop net returns are estimated to have decreased significantly for all three crops (see chart 1). As of now, corn net returns are estimated to decrease almost six fold and farmers are expected to lose $104 per hectare. Soybean returns are expected to decrease almost two fold, where farmers are expected to lose $71 per hectare. Wheat returns are estimated to decrease by almost 100 percent dropping to nearly zero returns, where losses are expected to be around $8 per hectare. If the data from the Federation of Agricultural Cooperatives in Rio Grande do Sul is correct, this will make the next planting season a very interesting one.
Obviously there are other factors involved in planting decisions such as crop rotations, stock levels, domestic and international demand, size of livestock herds, futures prices, etc. These are important factors that will be considered for planting decisions. Also, farmers will generally plant, even in years where expected returns are poor or even negative, rather than let cropland be idle. Crops need to be rotated to reduce disease pressure. Large stock levels can also discourage production of additional grain.
Farmers in Rio Grande do Sul are facing difficult decisions for next planting season as they will be experiencing rising costs of production in addition to expected revenue losses due to the 2004 drought. Despite a decline in revenue due to lower yields, state corn and soy prices are expected to increase, as state prices have been steadily increasing during the past couple years. However, domestic wheat prices are expected to drop, despite increasing wheat revenues due to better yields. So if we assume normal wheat yields, the trends for price and increasing costs of production, returns are expected to be negative, which would encourage farmers to plant less wheat. However, for rotation purposes, the expected decrease in area may be offset and result in similar area to 2004. For the case of corn, if we assume normal corn yields for 2005, the trends for price and increasing costs of production, revenues are expected to be positive, but not enough so that farmers are able to recover their losses in 2004. While for soy, using the same assumptions, returns are expected to be higher than those for corn and their costs of production lower, resulting in higher soy revenues. Using these assumptions, farmers may choose to plant more soy than corn, since they would be able to more than recover their losses in 2004.