Agribusiness has a Positive Outlook in 2022, but Climate and Costs are Threats

 

Agribusiness has a Positive Outlook in 2022, but Climate and Costs are Threats

Agribusiness is currently responsible for about half of Brazil's exports. The sector is expanding, with records of production and revenue generation in recent years. The year 2021, however, ended up being a little below expectations, mainly due to climate issues, and they should still affect next year.

The sector must still face high production costs, with more expensive inputs, which limits the profit margin of producers. In this case, this rise is linked to foreign political issues, but also to the devaluation of the real.

Despite this, experts consulted by CNN Brasil Business expect a positive year, supported by the forecast of a record harvest in 2022.

If the climate scenario is more favorable, agribusiness should maintain a trend of helping the positive numbers of the Brazilian economy and trade.

Performance in 2021:

Felippe Serigati, professor at FGV and member of FGV Agro, says that it is important to remember that agribusiness is not a homogeneous activity, and each sector has particular performances, which did not change in 2021.

Overall, however, he assesses that “2021 was not an exceptional year, but it wasn't too bad either. The balance is positive, but not for everyone”.

According to him, there was an expectation of production at the beginning of the year greater than that achieved by the sector. The big factor that led to this frustration was the weather, with an intense drought for most of the year and frosts in July.

“Several crops had lower productivity than expected and the investments made. The ones that suffered the most were corn, coffee and sugar cane,” he says.

At the same time, the scenario was not so negative due to the high prices of commodities abroad and the devalued real, which allowed a good income from exports to the international market. That is, even with a lower volume, prices held back revenues.

Carlos Fava Neves, professor at FEA-RP-USP, classifies 2021 as “a very good year. We had good amounts of exports even though the volume has dropped compared to 2020. Values ​​have hit records, it should reach US$ 119 billion, and income in the field grew 10% in reais”.

The big negative point, according to him, was the drought, which for the professor prevented 2021 from being “the best year in the history of agribusiness”. The fall in production generated, for example, a rise in food prices in the domestic market.

In the third quarter, agribusiness retreated 8%, the worst performance in years, and helped to take the GDP (Gross Domestic Product) to the second consecutive drop in the year.

Another negative highlight for the professor was the increase in illegal deforestation in the Amazon. “This contributes negatively to the image of agriculture, which was associated with this deforestation”, he says, which generates sanctions or a loss of consumer market abroad.

While the year, in general, was positive for the livestock sector, Fava Neves says that the performance ended up being harmed by the Chinese embargo on Brazilian beef, which lasted three months and took away from the producers their biggest consumer market.

“There was no need for such a long time of the embargo. It wasn't for the problem to have dragged on for so long. It was a negative, unnecessary fact, but the partnership must be maintained, with Brazil supplying meat and grains to the Chinese market and maintaining good prices for the Chinese consumer”, says the teacher.

Outlook for 2022

According to Serigati, the outlook for 2022 is positive, mainly due to the projections of more favorable weather conditions in much of the country, especially in the Midwest, an important soybean producing area.

Agribusiness production is divided into two crops. The first, called the summer crop, is planted in late 2021 and harvested in early 2022, and is expected to have a record production.

“For the second harvest, the situation is open. It should be a neutral scenario, but it could change, you can't be sure,” he says.

However, the positive outlook for production must face a major challenge, that of high production costs. The Confederation of Agriculture and Livestock of Brazil (CNA) already estimates that the costs should be the highest in history for the sector.

Serigati assesses that most of the factors for this are external, with a rise in the prices of inputs and fertilizers due to the mismatch between world demand and supply. At the same time, Belarus, a major supplier of fertilizers, has faced political problems with the United States and the European Union, which have imposed sanctions on the country, making exports more difficult and products more expensive.

“There is still an energy problem, whether due to the rise in commodities or the process of energy transition to greener sources, with a mismatch between demand and supply and high prices”, says the professor.

In addition to directly affecting production, fertilizers themselves demand a lot of energy in production, and the increase makes the product even more expensive. China has also been holding off the export of fertilizers to supply the domestic market, which worsens the situation.

The impact should be less in the summer crop, most of which is already planted, but it may be harder for the second crop.

Internally, the big problem is the exchange rate, with the real devalued against the dollar, reflecting political issues. “The election year tends to provide elements for the exchange rate to be pressured. If the dollar rises at the time of planting, production costs rise, but if it happens when exporting, it is positive, but it is speculation”, says Serigati.

For the  teacher, “one thing is to produce a lot, another thing is to have a reasonable income and profit. The harvest is no guarantee of a reasonable volume of income. What determines this is the exchange rate and production costs”.

Fava Neves says that the record harvest, even if positive, should also bring a challenge in transportation and storage. “There are 40 million more grains, but there has been a lot of anticipated sales, good prices and a large area growth”.

Adding the years 2020 and 2021, agribusiness has accumulated a growth of 6 million new hectares for production, which indicates a “greater volume of investors”.

The professor is betting on good performances for soybeans and corn in 2022, but the recovery for sugarcane and coffee should not come next year, as the poor production in 2021 should only recover from 2023.

Serigati says that the environmental issue is still uncertain for the sector. The year 2022 can bring both an intensification of trade restrictions through deforestation and indicate that restrictions must be punctual. However, the topic “is a source of concern”.

Another risk is a movement that has intensified with the pandemic. In general, agricultural production is sold before harvest, but the 2022 crop should have a smaller fraction of committed soybeans.

“The last two harvests, producers who waited longer to market did well. The start of the pandemic was good for them with the dollar rising, and 2021 saw commodities rally,” he says.

With that, the bet intensified in 2022, but it is risky. If demand does not match this large quantity available at once, low storage capacity should cause producers to reduce prices to sell, which may be good for inflation but will affect producer margins.

GDP

Serigati considers that the performance of agribusiness GDP in the third quarter was more of an exception than the rule, generated by exogenous factors, and not structural problems in the sector.

“Agribusiness will probably grow year to date. It may not be what you projected, but it's positive. The base scenario for 2022 is that too. Granted? No. But it's part of the risks”, he says.

For Fava Neves, the 4th quarter of 2021 should still have a result below normal due to weather effects on crops, and the traditionally weaker season for the sector. However, agribusiness should already show strong growth in the 1st quarter of 2022.

“The conditions for having a fantastic production exist, helping the recovery of Brazil's economy”, she says.

Drop in prices?

The USP professor says that the mismatch between demand and supply involving meat, sugar cane and coffee should mean that the prices of these products in the domestic market do not fall significantly in 2022.

For coffee, in particular, the expectation is that the price reaches the highest high in 25 years. In the case of beef, the end of the embargo favors the sector, but the return of demand in the country may increase the price in the domestic market.

At the same time, the greater supply of soybeans and corn should generate a slight drop, which also helps in products whose chain involves the use of these grains.

According to Serigati, food inflation was high in 2021, but it has shown signs of running out of steam. It should end the year at around 6%, and it did not rise as big as energy and fuel, the great inflationary villains, which also affected agribusiness.

“The drop depends on production costs. It does not condition the most expensive food by itself, what determines is productivity. If it is good, the price of the product will continue in the historical trend. But if the cost goes up and productivity goes down, then there may be pressure on prices,” he says.

For the professor, the large harvest should mean that, if there are no intense exogenous shocks such as climate issues and a large increase in production costs, prices should have some relief in the domestic market in 2022.

Source: CNN Brasil