Brazil Agribusiness Report Q3 2012

The Brazilian corn harvest for 2011/12 is expected to be better than previously forecast, as the countrys farmers have expanded the area dedicated to the crop in order to compensate for destructions linked to droughts in the main producing regions. For sugar, we forecast a recovery in the countrys production even though we expect the replanting process to be slow over the coming years, mainly because of remaining financing constraints for farmers. For livestock and dairy, we continue to see problems linked to heavy debt levels for the main companies of the sector, but we see strong sales growth potential over our forecast period. For coffee, the impact of the strong up-year in the countrys biennial production cycle on global prices should be strong, with more room for prices to come down in the coming months.

Key Forecasts

- Sugar production growth to 2015/16: 9.4% to 41.7mn tonnes. While output growth has recovered following a replanting programme, we expect this effect to wear off in the coming years. Any improvement in yields will support output growth in the medium term.

- Cotton consumption growth to 2015/16: 0.2% to 10.3mn tonnes. We believe the Brazilian textile industry will suffer less from high input costs over the medium term, helping output to recover slightly in the coming years.

- Corn production growth to 2015/16: 52.7% to 84.8mn tonnes. This will mainly come from increasing yields, which will allow Brazil to remain a global leader in corn exports. Higher yields will also come from greater use of genetically modified corn seeds. Another key growth driver will be corns use as livestock feed, which has been increasing steadily in recent years.

- 2012 real GDP growth: 3.9% (up from 2.7% in 2011; predicted to average 3.9% over 2011- 2016).

- Consumer price inflation: 6.2% average in 2012 (down from 6.5% in 2011).

- BMI universe agribusiness market value: 6.5% year-on-year (y-o-y) decline to US$168.5bn in 2011/12, forecast to increase by an average of 2.9% annually between 2010/11 and 2015/16.

Industry Outlook

The amount of Brazilian sugar to be loaded on ships waiting at the countrys main ports rose 42% in one week after rains halted operations, according to reports. Vessels were waiting to load 705,000 metric tonnes at Santos, the countrys main sugar-exporting facility, as of April 26. BMI notes that wet weather has generally led to long delays for ships entering the port, with Brazil receiving roughly 120 days of rain in 2009 and even more in 2010, each time causing disruption.

In spite of severe droughts in the countrys southern corn-producing regions, the country is set for a record crop in its 2011/12 season, which started in February. In fact, we forecast corn production to increase 16.1% y-o-y to 64.5mn tonnes in 2011/12. The corn area lost in Q411 because of droughts in the south led to cuts in estimates for the countrys production in the first months of 2012. However, high prices encouraged farmers to continue to boost plantings during the second corn crop, increasing plantings by 22.0% in Mato Grosso and 38.0% in Parana compared with the same period in 2011. Also, a return of rainfall during the second crop pushed yields higher, ensuring a strong production rebound. In a context of a stronger dollar, the weaker real has encouraged the flow of Brazilian coffee to export markets, even though the countrys supply is still in a seasonal trough. This is because the fall in the US$/BRL has cushioned the effect of the collapse of New York futures (denominated in US$) on domestic prices and has boosted demand from foreign consumers. This led coffee prices to break below multiyear level at USc175/lb in May. However, we believe most of the collapse in coffee prices is behind us.

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