Weather shocks in Brazil ripple across global commodities markets

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After enduring the worst drought in nearly a century followed by a bout of cold temperatures, areas within Brazil’s farming belt are bracing for further adversity as the La Niña weather phenomenon threatens to bring more dry conditions later this year.

In the small mountain town of Caconde in São Paulo state, third-generation coffee grower Ademar Pereira, 44, estimates that half of this year’s crop will be lost as many of the shrubs on his family’s modest plantation have succumbed to the chill.

“It was already going to be a very small harvest. And with the frost, it got worse,” he said. “There are lots of people who’ve lost everything.”

Brazil is an agricultural powerhouse and a leading exporter of commodities including corn, sugar, orange juice and meat, but this year’s weather disruptions have led to soaring prices for coffee and sugar on international markets while giving bullish corn traders further fuel.

“Brazil is such a large exporter, especially of coffee and sugar, whatever
happens in the country impacts the markets,” said Kona Haque, analyst at traders ED & F Man.

The South American nation is the world’s largest producer and exporter of coffee, and initial estimates of production losses for next year’s crop range from 10 to 50 per cent of previous forecasts, pushing up prices. Although the benchmark price for Arabica is off its July peak of almost $2.20 a pound at $1.84, it is more than 50 per cent higher than a year ago. 

A lack of rainfall that has parched soils across southern and central states, home to much of the country’s farming output, has been linked by some scientists to destruction of the Amazon.

“By deforesting part of the region, you are removing humidity that helps in the formation of rains in the centre-west, south-east and south [of Brazil],” said Lincoln Muniz Alves, a researcher at the National Institute for Space Research (INPE) who contributed to the UN’s landmark report on climate change last week.

Compounding the dryness, an unusual succession of polar air masses have moved over swaths of territory in recent weeks, pushing the mercury below zero in some places.

Agricultural experts are increasingly worried that the recurrence of La Niña could extend the drought conditions into the new year. This could disrupt the flowering of coffee trees, already weakened by drought and frost, they fear.

Line chart of ICE arabica ($ per lb) showing Brazil's drought and frosts send coffee prices soaring

“The worst-case scenario is that you have a little bit of rain and then you have three weeks of dry weather that will mean the flowers fall off and there will be no production,” said Carlos Mera, analyst at Rabobank.

The previous La Niña, the weather phenomenon caused by cooling of the Pacific Ocean that developed in the second half of 2020, was blamed for the drought conditions in the US and Latin America, and increased rainfall in Australia.

Various meteorological agencies give a more than 50 per cent chance of it occurring for a second consecutive year. Tirso Meirelles, vice-president of the São Paulo State Agriculture and Livestock Federation (Faesp), said this was a worry.

“Depending on the intensity, it could bring a drier climate for the spring and summer period, which is when we produce the grain crop. This could really affect our agricultural production,” he said.

Brazil is the number-two exporter of corn, which is mainly used for livestock feed, and many of its growers have also been affected by drought and frost. Analysts have downgraded their output forecasts, said Michael Cordonnier, a grain consultant focusing on South America.

Because of the drought, farmers in some provinces planted a month or more later than normal, but then the frosts in July killed the corn at a crucial stage of growth, he said. Corn futures soared earlier this year, with prices in Chicago jumping to a near eight-year high of $7.75 a bushel in May, although they have now fallen back to about $5.66 on better weather in the US.

“Everybody keeps cutting their [Brazil corn production] numbers,” he added, noting that the output numbers, which before the frost were generally above 100m tonnes, were about 20 per cent lower.

The weather damage is rippling out domestically in Brazil for farmers and consumers alike. A corn shortage for the livestock feed industry has forced it to turn to imports, with normal overseas purchases of about 1m tonnes expected to rise to 3.5m-4m this year, said Cordonnier.

The corn shortfall will put further pressure on rising food prices, which is “already a concern for the Brazilian government”, said Welber Barral, founder of BMJ Consultancy. Brazil’s annual inflation hit a five-year high of 8.6 per cent in mid-July.

The frost is also expected to hit orange and sugar output in the world’s top producer, reducing the quality of the crops. “If you used two oranges to make a cup of juice, you’re going to need three. It’s reduced the liquid productivity,” said Meirelles at Faesp.

The extreme weather has also reduced pasture for grazing, increasing reliance on animal feed which in turn is likely to drive up domestic beef and milk prices, he added.

While higher prices are good news for some producers, they offer little comfort to those whose crops have been destroyed. In Caconde, coffee grower Pereira fears the looming dry weather that is likely to result from another bout of La Niña.

“The weather forecasts have not been encouraging. This year’s water stress is worse than in 2020, and this scenario was aggravated by the frost,” he said.

The government intends to allocate R$1.32bn ($250m) to support coffee growers who have suffered crop losses because of frost.

But Pereira, whose farm produces speciality beans for export, is worried about the future. “I haven’t done anything else in life but produce coffee,” he said.

Additional reporting by Carolina Pulice in São Paulo

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