17/08/04, CEDAR FALLS, Iowa (Dow Jones)--Brazil is expected to continueto expand its soybean area in 2004/05, according to information from theU.S. Department of Agriculture's Foreign Agricultural Service web site.

OverviewBrazilian farmers have increased soybean area over the past 5 years inan unprecedented historical expansion, with total national acreage risingby 65% during the period. USDA expects this growth phase to continue in2004/05, though at a slightly reduced level from last year.In 2003/04 soybean area grew by nearly 3.0 million hectares, whereasUSDA expects sown area to rise by approximately 2.2 million this year, thereport said. The vast majority of the recent soybean expansion hasoccurred through the conversion of existing pastures that are prevalentthroughout Brazil, as well as the opening of virgin grasslands called"Cerrado." High relative profits from soybeans in recent years and stronginternational demand for Brazil's soybean exports have fueled theexpansion.Brazilian oilseed industry officials and traders report that thesizable profits earned from recent harvests have been directed toward theacquisition of new land and equipment, allowing farmers to increase boththeir scale and efficiency. The hunt for land has been especially acute inrelatively affordable but remote regions in the states of Mato Grosso,Goias, Maranhao, Tocantins, Piaui, Para, and Roraima. Farmers from allover the country are scouting new opportunities in the rapidly expandingCenter-West and Amazonian states, where land prices continue to be afraction of those in more established regions (especially the traditionalfarming states in southern Brazil). Land that has been purchased andimproved during the past six-18months is expected to come into production in 2004/05 despite the recentfall in international soybean prices.Soybeans continue to have the greatest liquidity compared tocompetitor crops (corn and cotton), while soybean prices also remain aboveyear-ago levels in August. Cotton prices by comparison have fallenapproximately 20% below last year's levels, while corn prices arereportedly below the cost of production in some regions. The overall costof crop inputs is also up significantly this year, and this situation isexpected to increase farmers interest in soybeans, as corn and cotton bothrequire far greater applications of fertilizers and herbicides.USDA currently forecasts 2004/05 Brazilian soybean production at arecord 66.0 million tons, up 26% from last year's drought and Asianrust-affected crop, the report said. Harvested area is forecast at arecord 23.5 million hectares, up 2.2 million or 10% from last year'srecord level. Yields are forecast at a near-record 2.81 tons per hectare,and close to the ong-term trend. The yield forecast assumes normal weatherconditions and sufficient moisture. It also assumes that Brazilianfarmers will better manage outbreaks of Asian rust this year, by thewidespread adoption and implementation of stricter control regimens.

Area ExpansionThe Brazilian soybean growing region has been steadily expanding forseveral decades, having its origins in the traditional southern farmingstates in the 1960's. Soybeans became established as a major oilseed cropin the late 1960's in Rio Grande do Sul when they became an integral partof a double-crop regime with wheat (which was the predominant grain crop).Since that time there has been a gradual but persistent increase in totalarea devoted to soybeans, as domestic and international demand for theoilseed grew and as suitable varieties and farming systems evolved in thecountry's different regions and climates.Soybeans have an inherent advantage over many alternative crops, inthat they do not require costly nitrogen fertilizer applications and thushave a lower cost of production, the report said. As soybean cultivationtook hold in Brazil, it displaced other less profitable or labor intensivecrops or agricultural enterprises. In the south, soybean farmingeventually established itself alongside corn as the dominant summercropping system. And as the nation's agricultural frontier itself spreadnorthward during the 1970's and 1980's to the remote plateau and savannahregion of Mato Grosso do Sul, Mato Grosso, and Goias, soybean was in thevanguard, eventually becoming the most dominant field crop cultivated intropical Brazil.The expansion of Brazil's soybean belt continues today, driven byrising global demand and the crops continuing profitability. Theavailability of vast acreages of relatively undeveloped or under-utilizedland suitable to farming enabled Brazilian entrepreneurs to quickly takeadvantage of highly favorable conditions on the international soybeanmarket by expanding their production capacity.

The devaluation of the Brazilian currency in 2001 and 2002 provided aparticularly stimulative effect, as it coincided with strong internationaldemand for Brazilian soybean exports. The devaluation substantiallyincreased the profitability of exported soybeans, which were priced in thestronger U.S. dollar, and inflated the net financial returns of Braziliansoybean producers and exporters during the period.The repatriated profits from soybean exports fueled interest andinvestment in additional land for soybean production. In the last fiveyears alone Brazilian farmers have increased cultivated soybean area by anastounding 8.4 million hectares. Historic record-breaking annual increasesin sown area have occurred during the last three successive growingseasons (since the devaluation), averaging 2.5 million hectares of newsoybean land each year.However, Brazil's soybean expansion can also be influenced by adversemarket conditions. During 1998 through 2000, U.S. soybean prices averagedbetween $ 4.38-4.93 $/bu. and Brazil's soybean area experienced marginalor no growth. Therefore, the current growth rate may not be sustainedunless soybean prices remain in a "profitable" range.The recent soybean expansion has been evident all across the country,occurring to some degree in virtually every state. The strongest growthhas been registered in the new farming regions of the Center-West andAmazonia, including the states of Mato Grosso, Mato Grosso do Sul, Goias,Minas Gerais, Bahia, Maranhao, Tocantins, Piaui, Para, Rondonia, andRoraima.In this collection of states, categorized as the expansion states,soybean area has risen 97% or over 6.1 million hectares since 1998. Bycomparison, in the older and more established farming region of the south,including the states of Rio Grande do Sul, Parana, Santa Catarina, and SaoPaulo, growth has been more constrained. In this collection of statescategorized as the traditional states, soybean cultivation has grown by34% or 2.3 million hectares in the same period. The slower overall growthin the southern states is attributed to an array of issues includingsubstantially higher land prices, comparatively small scale of existingfamily farm operations, lower capitalization, and the nearly completeregional utilization of existing arable land resources.On a state-by-state basis the rate of soybean expansion has beenvaried, with the most robust increases occurring in the primary producingCenter-West states of Mato Grosso (up 2.7 million hectares), Goias (up 1.3MHa), and Mato Grosso do Sul (up 0.8 MHa). The remaining members of theexpansion states that experienced significant growth rates in percentageterms, but who started from much smaller base acreage levels were MinasGerais (up 0.5 MHa) and Bahia (up 0.2 MHa). In comparison, traditionalsouthern producing states had lower overall growth rates but stillwitnessed substantial expansion, the report said. In particular, Parana(up 1.2 Mha), Rio Grande do Sul (up 0.8 MHa).

Soybean YieldBrazilian soybean yields have shown remarkable growth in the past 15years, increasing 78% since 1989. New high-yielding varieties developedfor the humid tropics have greatly contributed to this growth, as have themodernization of production systems and increasing rates of fertilization.Average Brazilian crop yields eclipsed those achieved in the United Statesas recently as 1999, and have remained there in spite of a growingepidemic of the fungal soybean disease called Asian rust. Brazil'scontinued predominance in global soybean yields, however, is currently inquestion as it gears up to sow a new crop in 2004/05. The United States ishaving a stellar growing season, and is free of the debilitating Asianrust problem.Brazil, by comparison, is still struggling to formulate an effectivenationwide capability to combat the endemic disease and minimize itsdestructive effects. Asian soybean rust has rapidly spread throughout thenation's soybean region during the past 2 years, decimating crops leftunprotected by fungicides. The most significant losses have been centeredin the important expansion states of Mato Grosso and Goias, which rankedfirst and third respectively in total soybean production in 2003/04, thereport said.

The government of Brazil has estimated that over 7.0 million tons ofsoybeans have been lost to the disease in these two states alone in thelast two growing seasons, incurring a net financial loss of approximatelyUS$ 1.95 billion. In addition to the outright crop losses, Brazilianfarmers also incurred an additional US$ 1.2 billion expense to purchaseagrochemicals (fungicides) to battle the disease.The reason for the massive crop losses is varied. In some cases,relentless rainfall prevented farmers from spraying effectively as theoutbreaks developed, and in others growers simply gambled that rust wouldnot affect their crops and left them unprotected. With Asian rust apermanent fixture of the soybean growing environment, Brazilian farmerswill have to do a far better job of consistently managing this disease tolimit unnecessary crop losses in the future.

The combined negative effects of Asian rust and a massive short-termexpansion of the soybean belt are being seen on national and regionalsoybean productivity. As new land is brought into production, early soycrops typically yield from 2.0 to 2.5 tons per hectare. This compares to3.6 to 4.0 tons per hectare on more established farms, where the soil hasbeen adequately amended with lime over a period of years and wherefertilization is near optimum.It generally takes three to four growing seasons before soybeans grownon newly cleared land begin yielding near their optimum levels. Thesubstantial expansion in crop area seen over the past five years,therefore, has effectively had a moderating effect on national crop yieldpotential, with the bulk of that land yet to reach optimum baselineacidity and fertility. In addition, the heavy disease loads in recentyears in high-yielding soybean regions of the Center-West has also had adampening effect. The combination of these factors has led to a distinctbreak in the longer-term soybean yield growth rate, with current yields inthe expansion states showing no growth or negative growth. The stagnationof soybean yields in the expansion states is also affecting the nationalsituation, as 53% of Brazil's soybean area and 62% of total productionemanates from this region.