Strength of Brazilian Currency Means Real Problems For Cotton
April 2, 2009 If the estimates of Brazil’s 2006/07 cotton output and trade remain at their current levels, the country will be poised to reach record-breaking exports for the second time in three years. The 2006/07 crop of 6.5 million bales, which will trade during the 2007/08 season due to its harvest at the end of the trade year, is expected to produce exports of around 2 million bales, an improvement over the 2005/06 export record of 1.97 million bales, according to the U.S. Department of Agriculture’s Foreign Agriculture Service (USDA-FAS).
However, economic pressures are dampening hopes for another season of such high performance. For 2007/08, the strength of the exchange rate of the Brazilian Real is expected to lead to a decrease in cotton area; according to USDA-FAS estimates, that decrease is expected to be around 10%, which would result in production of 5.82 million bales if yields are typical. However, other sources have indicated that the area could be down even more.
There are multiple reasons for the expected decrease. For one, a strong Real increases the cost of production for farmers, partly due to higher fertilizer prices. Cotton requires more fertilizer than either corn and soybeans; in fact, many farmers do not fertilize at all if planting corn or soybeans in rotation following a cotton crop. A switch would also fulfill the need for crop rotation, and with prices for corn and soybeans strong, farmers have little to lose by switching away from cotton.
A Good Crop
The 2006/07 crop had very few problems, particularly in the country’s primary growing areas. Overall, the area planted to cotton was up around 25%, according to USDA-FAS and the Brazilian National Food Supply Company (Conab). The largest increases came in the state of Mato Grosso (producer of more than half of Brazil’s cotton), which increased its cotton area by 47%. Mato Grosso do Sul also was the stage for major expansion, at 45%.
The South and Southeast, on the other hand, underwent major reductions in planted area. The state of São Paulo witnessed a 37% decrease as growers shifted to sugarcane production.
In the state of Goias, there was a net gain of 16%, as cotton growing was moved to areas of higher elevation, allowing the lower-lying areas to be planted with sugarcane. In doing so, farmers in Goias reported productivity increases of as much as 20%, as the extended growing cycle paired with better technology helped boost the performance of their cotton.
Consumption Stable
Brazil’s domestic use of cotton is expected to remain stable, as it has been for most of the past 15 years. The annual growth rate has been locked in at around 1% for most of that time, while most of the growth in consumption has been on the side of synthetics (particularly for industrial uses) which have grown by an average of 5% per year over the same period. That market also shows signs of slowing, with a 5-year annual growth rate closer to 1.5%.
Estimates for Brazil’s cotton consumption in 2007/08 show the same trend continuing, with an expected increase to 4.2 million bales, up from 4.15 million bales.
In recent years, the sector has reported problems with illegal cotton shipments entering Brazil. According to numerous industry groups, approximately 60,000 bales of contraband cotton was shipped the country illegally to avoid taxes in 2005. The groups allege that most of this illegal cotton was shipped from Asia.
Export Shifts
The record levels of exports shipping from Brazil has been accompanied by a shift in destination markets. While total Brazilian exports increased 27% from 2004/05 to 2005/06, the quantity shipped to Europe was down 43%. The demand came mostly from China and Pakistan.
For the 2006/07 trading season (trading the small 2005/06 crop), a 30% reduction in exports is expected, down to a total of 1.35 million bales. Pakistan remains a major destination market, and is joined by Indonesia and South Korea — in fact, reports from the field hold that by April, South Korea had already imported 82% more cotton from Brazil than it had in the entire 2005/06 year.
For the coming crop, there are reports that as much as 65% is already sold, with around half scheduled for export.
Biotech Waiting Game
Genetically modified (GM) cotton might be right around the corner for Brazilian growers. In 2005, the country’s National Technical Commission on Biosafety (CTNBio) approved a variety of Bacillus thuringiensis (Bt) cotton for planting and commercialization. However, since the event also needs to be registered with the Ministry of Agriculture (MAPA) prior to cultivation, it was not yet available for farmers during the 2006/07 growing season.
That has not stopped growers from trying, however. As many did before GM soybean seed was legally cleared in the country, a number of farmers have resorted to the use of black market GM cotton varieties that were illegally smuggled into Brazil.
In 2006, MAPA discovered approximately 18,000 hectares (Ha) of glyphosate-tolerant Roundup Ready (RR) cotton. The offending fields were cleared and burned, and the cotton confiscated.
Policy And Prices
The government of Brazil buys and sells locally produced cotton in order to maintain control over prices. During the latter half of 2005 as prices fell, the government purchased 4,500 metric tons (Mt) of cotton, bringing stocks to their highest level of the last several years. Then in January 2007, prices rose above the minimum guaranteed price established by the Brazilian government, and continued to climb into February. The government reacted by selling almost two-thirds of its stocks in an attempt to bring down the domestic price.
Another government initiative on the cotton front is the well-received PEPRO, a premium granted to farmers who sell cotton at public auction, where the government pays the difference between the government’s reference value and the value of the premium. The country also is nearing a resolution on its tariff on textiles and ready-made garments, which it wishes to raise from 20% to 35% — the maximum allowed under Brazil’s World Trade Organization (WTO) commitments. The increase would be aimed at minimizing competition, mainly from China. Between 2004 and 2006, Brazil’s imports of apparel and footwear rose 124% (with about half coming from China), and during the same period, total apparel imports from China increased 171%.
Brazil must receive approval from all members of the Mercosul trading bloc before it can raise these tariffs.
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