Extreme drought has threatened Brazilian coffee, sugar and soybean crops.
Brazil is the world's dominant producer of these crops and the market has rallied since the beginning of February over concerns about disruption to supply.
Rain has returned to Brazil, which means the recent rally is probably close to an end, although too much rain could extend the rally in soybean prices.
Extreme dry weather has become a great concern for Brazilian farmers over the past month. The southern and eastern parts of Brazil have been hit by the driest weather in decades. In January, precipitation was 50% of normal for January in this region and in some areas as low as 25% (see Dry weather hits Brazil – the south and east especially hard hit figure overleaf). The very dry weather is particularly a threat to major coffee and sugarcane crops in this region where coffee and sugar production are more intense. However, it is likely soybean crops have also felt the drought to some extent, as some major soybean crops extend into this area.
The Brazilian drought has become a worry to the market, as Brazil sits on a major part of the global production and exports of these crops. Brazil controls almost 40% of world coffee production, 30% of the world’s soybean production and over 20% of world sugar production, which makes the country the dominant producer in the world market for these crops. Brazil’s soybean production is on a record-breaking path this year. The dry weather is not likely to change this; however, the market is probably beginning to factor in lower output than previously expected.
The market reaction over the past couple of weeks has been significant. Coffee prices have seen the biggest move, rallying more than 50% since the beginning of February. Sugar prices are up around 15% since the beginning of the month and soybean prices close to 10%. Rain has returned to most of Brazil, although the dry weather continues to be a concern for the eastern part of the country, which should mostly be a concern for the sugar market and to some degree the coffee market. Hence, it is likely the recent rally is coming to an end; however, the market will anxiously await further indications on how hard crops have been by the weather. Too much rain may, however, damage soybean crops further and extend the rally in soybean prices. Brazil will begin harvesting its soybean crops over coming months.
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