Agribusiness has a positive outlook in 2022, but climate and costs are threats

THE agribusiness is currently responsible for about half of the exports of Brazil. The sector is expanding, with production and revenue generation records 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 also face high production costs, with more expensive inputs, which limits the profit margin of producers. In this case, this increase is linked to external political issues, but also to the devaluation of the real.

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

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

Performance in 2021

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

In general, however, he assesses that “2021 was not an exceptional year, but it was not so 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 that was higher than that achieved by the sector. The big factor that led to this frustration was the climate, with a intense dry most of the year and frosts in July.

“Several cultures had lower than expected productivity 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 for good revenue from exports to the international market. In other words, even with a smaller volume, prices held down revenues.

Carlos Fava Neves, professor at FEA-RP-USP, classifies 2021 as “a very good year. We had good quantities of exports, even though the volume has fallen in relation to 2020. The values ​​broke records, it should reach US$ 119 billion, and rural income grew 10% in reais”.

The big downside, according to him, was the drought, which for the professor prevented 2021 from being “the best year in the history of agribusiness”. The drop in production generated, for example, a high food prices no domestic market.

In the third quarter, agribusiness fell 8%, the worst performance in years, and helped to take the GDP (Gross Domestic Product) to the second fall in a row.

Another negative highlight for the teacher 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 the consumer market abroad.

At the same time that the year, in general, was positive for the livestock sector, Fava Neves says that performance was harmed by the embargo of China to Brazilian beef, which lasted three months and took away its biggest consumer market from producers.

“There was no need for such a long time of the embargo. The problem wasn’t supposed 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 Chinese consumers”, says the professor.

Outlook for 2022

According to Serigati, the outlook for 2022 is positive mainly due to projections of more favorable weather conditions in a large part of the country, especially in the Midwest, an important soy-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 production record.

“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 the industry’s history.

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

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

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

The impact should be smaller in the summer crop, most of which is already planted, but it could 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 during planting, production costs rise, but if it happens when exporting, it is positive, but it is speculation”, says Serigati.

For the professor, “it is one thing to produce a lot, another thing is to have a reasonable income and profit. The harvest is no guarantee of a reasonable amount 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 terms of transport and storage. “There are 40 million more grains, but there was already a lot of advance sale, 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 soy 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 onwards.

Serigati claims that the environmental issue is still uncertain for the sector. The year 2022 could bring both an intensification of trade restrictions due to deforestation and indicate that restrictions should be punctual. However, the theme “is a source of concern”.

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

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

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

START

Serigati considers that the performance of agribusiness GDP in the third quarter was more the exception than the rule, generated by exogenous factors rather than structural problems in the sector.

“Probably agribusiness will grow in the year to date. It may not be as designed, but it’s positive. The 2022 baseline scenario is that too. Granted? No. But it is part of the risks”, he says.

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

“The conditions for having fantastic production exist, helping the recovery of Brazil’s economy,” he says.

Drop in prices?

The USP professor claims that the mismatch between demand and supply involving meats, sugar cane and coffee should mean that the prices of these products on the domestic market do not have significant drops in 2022.

For coffee, in particular, the expectation is that the price will reach the biggest 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 raise the price in the domestic market.

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

Segundo Serigati, a inflation of food was high in 2021, but has been showing signs of loss of breath. It should end the year around 6%, and it didn’t have a high as high as that of energy e fuels, the great inflationary villains, which also affected agribusiness.

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

For the professor, the large harvest should mean that, if intense exogenous shocks such as climate issues and a large rise in production costs do not occur, prices should have a certain relief in the domestic market in 2022.