In this issue of Outlook Fiesp, the scenario was one of great variation between the 2015/2016 and 2016/2017 crop seasons. In 2015/2016, lower yields for soybean and corn, particularly the latter, resulted in domestic shortage. Corn prices exploded, hurting meat supply chains.
In 2016/2017, supply was abundant, as a result of record yields in nearly all of the country's main growing areas. Other important soybean and corn growing countries, like the United States, also experienced good yields, which lowered international prices. Likewise, sugar prices dropped in 2017, after the 2016 record prices. The appreciation of the Brazilian currency compared to the dollar also did nothing to help agricultural prices.
Despite the climate risk inherent to the sector, we project lower external volatility in agricultural markets, following the overall stabilization of commodity prices. Domestically, despite the political uncertainty surrounding the upcoming 2018 presidential elections, we forecast an economic growth rebound. In this respect, the election of an anti-reform candidate could disrupt the ongoing economic reforms, threatening sustainable economic growth, with important effects on the projections presented herein.
While a return to adequate economic policies geared towards sustainable growth supports this scenario of lower volatility, uncertainty is still high, making the task of forecasting future outcomes even more complex.
Estimates of global and domestic growth determine demand for agricultural products and exchange rate fluctuations affect the industry's competitiveness. Other variables, such as credit availability and corporate debt, are also impacted by economic crises, with significant effects to agribusiness.
We have grounded our projections on the assumption that the worst of the economy's turmoil is already past us and that the macroeconomic adjustments made thus far will allow for a sustainable economic growth rebound in 2018. We have also assumed a continuous global growth, unaffected by major disruptions, and that, despite an economic slowdown in emerging countries, food demand will continue to grow, even if at lower rates compared to recent years.
Overall, the purpose of Outlook Fiesp is to fuel discussions about the various agribusiness-related industries to help identify bottlenecks and prepare proposals for the future of the sector, making it possible to anticipate the actions required to ensure the expected growth.
The model, improved over the years, establishes a global supply and demand balance where consistency is held between the main food producing and consuming economies in the world. This consistency is assessed based on stock-to-use ratios that should maintain market stability in the long run.
The projection model for Brazilian production of the commodities considered herein is based on a global food production-consumption balance. The demand of each country was set based on population and per capita income growth forecasts and on income elasticities of food demand in each country. Income and population forecasts used in the projections were those published by the International Monetary Fund (IMF) and by the United Nations (UN), respectively. The estimates of Brazilian economic growth were prepared by MB Associados, based on their macroeconomic consistency model for the country.
From a supply standpoint, food production is estimated based on yield and land availability trends for each of the main producers. Brazil is a key variable to maintain international balance because it is one of the few regions where yield gains due to land expansion are still possible. This is contrary to countries like the United States where production growth is contingent on restricted yield gains or on increasing production of a specific commodity at the expense of another, by rearranging a relatively fixed production area.
After calculating the Brazilian production needed to keep the global stock-consumption ratio on a level where prices justify an increase in global supply, the area required to achieve said production is estimated based on a projected yield curve for each agriculture commodity in each of the Brazilian regions.
A unique feature of ethanol is that domestic consumption is derived from a vehicle fleet growth and depreciation model keyed to GDP, with Flex Fuel vehicles’ share in total sales as an exogenous variable.
As for pulp, demand for forest planted areas comes from the industry's new planned investments in plants that, in the long run, should meet both domestic and international demand for Brazilian pulp.
The input variables used in the Brazilian fertilizer demand model are estimated area and yield rates. The relation between fertilizer application rates and potential yield is described in a fertilizer response curve that specifies how much NPK each crop will need per hectare. NPK consumption of each crop is calculated by multiplying the total crop area by the crop’s NPK need. Total NPK demand for Brazil until 2027 is the sum of this consumption plus fertilizer consumption for pastures, forestation and land expansions.
Future domestic supply of fertilizer nutrients is estimated based on investment projects for the expansion of the country's installed capacity for fertilizer production, taking into account historical data on installed capacity use. Based on the regional supply of these nutrients, the balance between supply and demand is calculated to determine how much fertilizer will need to be imported in 2027.
Since implementation of new fertilizer production plants has either been suspended or delayed, we have created a single scenario for the supply of those products. In this scenario, only plants in the implementation stage were taken into account, thus significantly increasing Brazil's dependence on foreign supply.
We highlight that the projections made herein are based on assumptions that may change over the outlook period. Severe climate events, opening of new markets, and changes in sanitary regulations and international protectionism are just a few of the variables that may influence projections for a given commodity.
The production of commodities such as rice, dry beans, wheat and milk is driven by domestic demand, since Brazil is not a major exporter of these commodities.
Since estimates may require adjustments due to risk factors inherent to the agricultural sector or to changes in the macroeconomic scenario, starting with this issue, the projections will be regularly updated throughout the year and when outstanding events impact the commodities analyzed. Updates will be available at: www.fiesp.com.br/outlook