15/2/05 KANSAS CITY (Dow Jones)--Brazi's soybean production for marketingyear 2004/05 is forecast at 61.8 million tons on an area of 23 millionhectares, up 9.2 million tons from the previous year, according to anattache report dated Feb. 2 but posted Monday on USDA's ForeignAgricultural Service Web site.

Executive SummaryA combination of lower prices and higher production costs is puttingthe brakes on the explosive growth of Brazil's soy area. After years ofexpanding as much as 15 percent annually, the area planted with soybeansis expected to rise by 9 percent this season, to 23 million hectares.Production is also forecasted to increase 9 percent, to 61.8 millionmetric tons. The continuing battle against soy rust has contributedsignificantly to the rising cost of production for farmers at a time whenprofit margins are already narrowing due to low international prices andan unfavorable exchange rate relative to the U.S. dollar. Farmers arebeing squeezed by the need to improve cropmanagement and combat soy rust, while facing very tight profit margins orin some cases negative returns. As a result, the rapid growth of Brazil'ssoy industry, accounting for nearly half Brazil's farm exports, isstarting to slow, making it unlikely that it will overtake the U.S. insoybean production as early as next season as once predicted.

ProductionAreaAlthough Brazilian farmers are experiencing increasing costs ofproduction and lower market prices, expansion of crop land into soybeanscontinues in the frontier areas of Northeastern Mato Grosso, Tocantins,and Para. A recent post trip to expansion areas in a small aircraftrevealed that the land-clearing process continues, despite low soybean andcattle prices.While many farmers are still clearing cerrado or forested lands forpasture, it would appear that the majority of farmers are now plantingwith an initial crop of rice or simply going directly to soybeans. Somefarmers are only applying lime and doing minimal soil preparation beforeplanting soybeans after clearing, which results in less than averageyields during the first few years. As the remaining available land inNorthern Mato Grosso continues to be purchased at a rapid pace, increasingland values have pushed soybean production into the new frontier areas ofPara, Piaui, Tocantins, and Rondonia, areas with more affordable pricesand lower transportation costs due to port options such as Santarem andItacotiara.Post estimates planted area at 23 million hectares, a 9 percentincrease compared to last year. Soy expansion could slow, as farmersstruggle with higher cost of production, the exchange rate, and low CBOTprices. The potential impact of soybean rust in the U.S. will be one ofthe few variables that could cause a market upswing in Brazil's favor andcause a continued growth in area planted.

Yields2004/05 crop yields are expected to average approximately 2.7 metrictons per hectare, a significant improvement from last year's average of2.45, but shy of the record of 2.82 set in 2002/03. Yields in thecenter-west area of Mato Grosso and Goias as well as in the state ofParana could surpass the national average. Post's trip to this areaconfirmed the excellent crop management in these areas, a reflection oflessons learned from last year's rust losses.In the face of rising production costs, farmers are also looking forinnovative ways to improve yields. These methods include the use ofcheaper natural forms of phosphate, potassium sulfate, lime, and bonemeal. However, farmers in the region appear to have invested in thefertilizer and pesticide applications because the crops are in excellentcondition. Yields in Rio Grande do Sul, which accounts for 25% of Brazil'stotal soy area, will be lower than in the Center-West. This is due tocontinued dry weather, during the critical months of both December andJanuary.Overall yields in Brazil may improve due to the intensiveregion-specific research programs. The high-quality seed and technicalservices in Brazil continue to receive international recognition. The MatoGrosso Foundation has created a successful program that sponsors over 30field days and 40 technical meetings in agricultural centers across thestate. The latest technology and procedures for managing rust and otherdiseases are extended to farmers at crucial periods during the cropseason.

Soybean RustNow in its fourth year of struggling with rust, Brazilian farmers seemtobe managing the disease better and are more assiduous in theirpreventative spraying. To date, rust is present in every majorsoy-producing area, encompassing 12 states plus the federal district and401 municipalities. The state of Parana, number two in Brazilian soy area,has suffered the greatest number of rust outbreaks.The disease, which can destroy up to 80 percent of a crop if leftuntreated, has significantly raised production costs for farmers at a timewhen profit margins are already narrowing because of the drop ininternational prices and increases in the costs of other inputs. To keepthe disease in check, farmers must apply fungicides to the crop at leasttwo to three times, raising production costs by as much as 15 percent.Last season, when heavy rainfall in parts of Brazil exacerbated the rustepidemic, the country's soybean output fell for the first time in fiveyears. Over all, the fungus lowered production by 4.5 million tons lastseason, costing farmers $2 billion.Soybean rust has hit organic soybean producers in Brazil particularlyhard. Considered the second-largest organic producer of soybeans in theworld, after the U.S., last year Brazil produced 25,000 MT of organicsoybeans. It is reported that this specialty commodity receives a 40%premium above conventional soybeans, but Brazil's organic crop is now inserious jeopardy because a successful natural combatant of soybean rusthas not been discovered. Although a rust-resistant seed is underdevelopment, it may not be released for at least the next couple of years.

Production CostsWhen prices were at their peak last March, with farmers receiving asmuch as $20 for a 60-kilo (132-pound) bag of soybeans in the domesticmarket, most growers could afford the high costs of fungicides for rustmanagement. Now, with prices ranging about $12.50 a bag, many farmers areconcerned whether they will break even. This year could be the first yearof losses for many Brazilian soybean farmers, who have enjoyed severalprofitable years.They now face increasing costs of inputs, particularly fertilizers andfungicides, and in transportation (see BR4622 for more information onproduction costs).The agri-business industry believes that many growers, especially smallfarmers, will not be able to meet their financial obligations at the endof the harvest. Some banks are already offering to renegotiate andrefinance loans based on the current difficult market situation.Large, well-capitalized producers appear to be in a position toincrease their land holdings by buying farmland from bankrupt farmers. Aperiod of farm consolidation may occur if overleveraged growers are notable to renegotiate their short-term crop production loans with majorbanks and/or the multinational corporations.The current exchange rate, which is hovering at just below 2.7 Realsto the dollar, has presented farmers another challenge in their ability tomake a profit from their export sales.A local ag consulting firm has stated that, under present marketconditions, Brazilian farmers need an exchange rate of at least 2.9 Realsto the dollar to achieve positive returns. At the present, there is noexpectation that the exchange rate will return to this level in 2005.

TradeTotal Soybean exports for 2004 were 19.2 million tons, according toofficial Brazilian export statistics. This number is down slightly fromlast year's export totals, an indication of high stock levels of old cropbeans.Post is forecasting MY 2004 (year beginning February 2005) exports toincrease as the new harvest begins, because with limited storage capacity,farmers will be forced to sell their product. Although the EU and Chinacontinue to be Brazil's leading buyers of beans and their derivatives,unpredictable Chinese buying behavior continues to be a source offrustration to Brazilian farmers. Last year, soybean exports to Chinahalted in May with four shipments refused within a period of 30 days.Eight multinational companies were also prohibited from exportingsoybeans. Although the reason given for the refusal of the beans wascontamination of the shipments with treated seeds, the fungicide residuelevels were within the acceptable limits based on international standards.Total losses from the temporary suspension were estimated at $3 billion.Stricter regulations have been put in place and shipments have resumedto China. A certification of safety has also been renewed by the Brazilianagricultural ministry (MAPA), ensuring that its soybeans do not posehealth, animal, or environme ntal risks. Traders report that avian flu isslowing Chinese demand for poultry meat, which is down by 20 percentcompared to last year. As a result, demand for soy meal is also down. Witha record Chinese soybean harvest of 18 million metric tons, Chineseimports of soybeans will not improve this year.

CrushingThe delay of the early-developing soy varieties in the Center-West andproducers' hesitancy to fix prices has caused some crushers to resume at aslower pace than this time last year.One crusher in Goias will start crushing on February 11, two weekslater than originally scheduled. Prices in Rio Verde, GO are barelyreaching $10 per bag compared to $13.50 last year.Even so, Bunge has announced its plans to invest $86 million in avegetable oil refinery in Rondonopolis, MT, to be completed by the end of2006, with a capacity of 1 thousand tons per day. The project will alsoinclude an industrial oil production facility, cottonseed meal processor,and five new storage units.

PolicyThe Provisional Measure 223 was approved by Congress on December 21,2004, and signed into a full law by President Lula on January 12, 2005.Although President Lula had the authority to veto the change introduced bythe House related to the collection of royalties, he accepted the fulltext received from the Congress.The text introduced by the House (Article 7 of Law 11,092/05) forcesthe company holding the patent rights to beans planted by the farmer tocollect royalties only after showing sale invoices. This is a major changefrom a previous agreement Monsanto had with soybean producers in SouthernBrazil, under which collection of royalties were based on productionincluding biotech seeds sold illegally.This change to require sales invoices was introduced by the Houseduring the discussion of MP 223 and was due to pressure they received fromsoybean producers in Southern Brazil.According to these producers, Monsanto agreed to charge R$0.60 persoybean bag of 60 kilos during the last crop year (2003/04), but wasplanning to double the value to R$1.20 during the 2004/05 crop year. Beingfaced with growing production costs and shrinking revenues, this increaseapparently caused these farmers to reconsider their commitment.At the moment, FARSUL, the state farm bureau representing farmers fromRio Grande do Sul, is attending meetings with Monsanto representatives inorder to renegotiate the royalties that they will be assessed with thiscrop year. FARSUL has also petitioned the government for a new extensionof March 31, 2005 for Brazilian farmers to sign the declaration ofagreement (TCRAC) to market Biotech beans from its original deadline ofJanuary 31, 2005. Farmers that plant RR soybeans without signing theagreement could be denied access to crop loans or insurance from the bandsand risk fines of at least R$6,000 (US$ 2,300).