Brazil’s Decreased Production Could Lead To Defaults

Trouble could be around the corner for merchants who have bought 2007/08 crop Brazilian cotton with plans to deliver it later in the year. Sources close to the Brazilian market say some growers have switched from cotton to grains, even though they have sold cotton in advance. With hectares moving to corn and soybeans, a less-than-average yielding year because of weather or pests could mean major problems for merchants depending on that crop.

Bruno Martin with Weil Bros. Cotton – Inc. in Sao Paulo said official production forecasts for the 2007/08 crop are 1.6 million tons, but he believes that number could be high as many growers have switched to corn and soybeans. Martin believes the new crop will be closer to 1.45 million tons, down from 1.53 million last year. In this case, some merchants might see defaults come harvest in July-September, as growers won’t have enough cotton to fulfill their obligations.

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“Maybe 60-70% of the crop has already been sold, so the major problem in the big reduction in Brazil is that if producers have sold as much as 70%, and if we have a shortfall of cotton, then you are going to have a phenomenon that is the worst nightmare for all cotton merchants in the world: defaults. Some guys are going to be left with their heads hanging because there is not going to be enough cotton, even to buy in the local market to try and deliver it,” Martin said.

“So those growers have a commitment to honor, but that said, some of them may have just given up and switched to grains. So the big questions are: how much cotton has been planted, and are we going to see the 1.5-1.6 million ton crop as it was suggested by the official number?”

Eduardo Santiago, general manager for Santiago Cotton Brokers in Belo Horizonte, says growers are indeed jumping out of cotton in favor of grains, and one of the reasons is the rising price of fertilizers. He believes this switch to grains will drive Brazil’s domestic cotton price high next year, but with growers selling their cotton far in advance, many may not have any surplus to realize these price gains.

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“What we have to think about is the cost of fertilizers — they have increased by over 100% during the last year. And the price of soybeans and corn have increased more than the price of cotton, and the growers are thinking for the next crop that they should plant corn and then soybeans,” Santiago said. “With the two products, they can make the same money that they will make with one crop of cotton, and it is easier to manage a plantation with corn and soybeans instead of cotton. This will cause the reduction of some cotton hectares, and this will be the discussion all this year.”

Textile Trouble?

Both Martin and Santiago believe Brazil’s textile industry could see some troubles in the upcoming months because of the U.S. recession and competition from China. Some mills are cutting back exports because U.S. retail customers aren’t buying, and the companies that are buying have recently been favoring lower-priced options in China.

“Brazil’s consumption is very elevated — I don’t know what’s going to happen in the next few months. We are looking at how the U.S. recession is going to impact the market,” Martin said. “We were thinking that the industry was actually making good money and consumption was higher, but with the U.S. recession, some mills are going to cut back on exports. This has been the thinking for the last few weeks.”

If the U.S. recession is a momentary cause for concern, the Chinese competition could send warning signs for thelong-term, according to Santiago. He believes this competition has been creeping into the Brazil market for the last few years, and said it’s not going away any time soon.

“The textile companies are suffering some competition from Chinese fabrics and manufactured clothes, and the consumption every year is going down, year by year against the imports from the China. So our growers are looking for export markets, and most of this cotton is going to Indonesia, Korea, Taiwan, Japan and Thailand.”

Caption (photo):
Bruno Martin

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