Long-term Impact of Brazil’s Drought

Long-term Impact of Brazil’s Drought

Will Brazilian government step in to save drought-stricken farmers?

Julio Bergamasco is in trouble. The Brazilian farmer saw his yields cut by over half this month, as once-plentiful rains vanished, leaving his soybean crop to the whims of Mother Nature.

Bergamasco farms 750 acres near Foz du Iguaçu, Parana, a southern Brazilian region hard hit by drought. Despite no-tilling everything – a practice that contains moisture - his soybeans ended up yielding about 22 bu. per acre, barely a third of the typical 63 bu. per acre yield he’s accustomed to. About 80% of Parana state was impacted by drought, and this is the second best soybean producing state in Brazil after Matto Grosso.

The drought in southern Brazil has severely damaged soy and corn crops, like the one pictured here behind Julio Bergamasco.

Brazilian farmers have had to overcome lots of challenges in recent years, but rainfall wasn’t one of them. “This is the first time in all the years I’ve been farming we’ve had a dry season like this,” he says. “We had one rain in December, one in January, and that’s not at all normal.”

And unlike U.S. farmers, who can manage such risk with crop insurance, Bergamasco says the bank-sold private insurance he has is not worth the paper it is written on. Before planting he paid a premium - about 20% of his expected production cost - to get this insurance.  And the most he could get back in a year like this is 70% of his production cost. Even with such catastrophic loss, Bergamasco has decided it’s not worth filing a claim.

“It’s like car insurance here in Brazil,” he says. “If you use it you’ll be charged more next year. So it’s not worth it to put in a claim this time, even though we lost over half the crop. What insurance will give back is not going to cover the extra premium cost they will charge next year.”

Joao Kopp, a grain market analyst traveling with our group of 31 American farmers, says there is a good chance the Brazilian government will provide some kind of disaster assistance; otherwise, as many as 10% of these drought-stricken producers could go out of business.

If only Bergamasco had been farming where his brother Jader farms. Like so many Brazilians, he ventured north 13 years ago to make his fortune with 4,500 acres in Matto Grosso, in the Cerrado region.

The land there, says Bergamasco, is worth about $6,000 an acre compared to $10,000 per acre at his  place. Bergamasco pays about $6,000 a year in property taxes.

Tough decisions

Unlike the states, the price of soybeans has not gone up here as a result of the drought, because prices are set at the Chicago Board of Trade. Now Bergamasco is faced with some tough decisions. He has to plant another crop by March 10, generally considered the drop dead date for a double crop corn or wheat planting after soybeans.  

“It’s risky because if I don’t plant corn until after that date, it might not mature in time and a freeze can damage yields,” he says through an interpreter.” If I go with wheat it’s also risky because our government likes to buy it from Argentina or Canada. And, the government adds taxes on the fungicides needed to get a good wheat crop. Here a fungicide treatment costs four times what it does in Argentina and Paraguay, so it makes their wheat cheaper to produce.”

Government fees and taxes are a major complaint of all Brazilians these days – not just farmers. “A 300-hp tractor here would cost $150,000,” says Julio Bravo, one of our guides. “In Paraguay you would buy the same tractor for $80,000. The bad thing about taxes is, we pay, but we don’t see anything in return. Have you seen our roads?”

I heard the same story from Martin Mundstock, president of Brazilian equipment company Jacto. “We are taxed like a first world country, but we get services like a third world country,” he told me.

Bergamasco has dipped his toes in futures contracts to manage his risk. It's a relatively new practice here. A few months ago he signed a contract for 48 reals (Brazilian currency) per sack, and now the price is 42, so it worked in his favor – this time. He contracted for about 20% of his expected production. “For me it’s like a price guarantee,” he says.

To complicate matters further, the corn Bergamasco planted Jan. 2 is spiked like pineapple due to drought, and under insect stress from caterpillars. He farms within 10 kilometers of the Iguaçu National Park, and the government has determined there is some kind of risk to the ecosystem if farmers plant biotech crops that contain an insect-killing gene, so these crops must be non-GMO hybrids. Roundup Ready soybeans are acceptable.

“It cost me four times more to apply insecticides on this corn than it would using a GM corn seed,” he says. “And, we do not have a premium market for non-GM corn.”

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