Perspectives for agribusiness in 2022

External Macroeconomic Scenario

Agribusiness is a very internationally integrated sector from the point of view of its exports, which represent around 25% of its GDP (while for the Brazilian economy, the figure is 15%). Agribusiness exports are close to half of the Brazilian total. China is the main importer (37%) and the European Union (with 15%) comes in second. Approximately 44% of external revenue comes from the soy complex and 16% from meat. Therefore, exports are fundamental for agribusiness and for Brazil. There is, however, a great concentration in terms of destinations and products, which creates discomfort and concern.

The world economic growth predicted by the IMF for 2021 is 5,9% (after a drop of 3,3% in 2020) and, for 2022, 4,9%. From then on, the projection is an average of 3,3%. There will, therefore, be a recovery in 2021. There will continue to be a global economic recovery in 2022. These figures are representative of both advanced and emerging economy groups. However, Brazil contrasts with growth of 5,2% in 2021 and 1,5% (already optimistic) in 2022. For China, the numbers are 8% and 5,6% and for India, 9,5% and 8,5%. There is no major concern, therefore, regarding global demand in general and for agribusiness products in particular. The internal economy, the domestic market, will have a disappointing performance.

The concern comes from the fact that the global recovery is due to fiscal and monetary policies that heat up demand while supply in several production chains has not yet returned to its long-term trajectory. Furthermore, the energy market – oil, gas, coal (which together have risen 95% since May), electricity (damaged by climate effects) – has become disjointed with the pandemic and with political issues between countries, in addition to an arrhythmia in the processes of changing energy matrices, moving away from energy of fossil origin. The same trend was observed in the agricultural input markets. The recovery in production has not yet come, providing fuel for greater inflation around the world. Therefore, strong inflationary trends are observed, which have been accompanied by rising interest rates. It is not known how the game of forces between expansionary fiscal policies and contractionary monetary policies will end. Hence an appreciable degree of uncertainty regarding the predictions shown above.

In any case, the combination of these policies can lead to the appreciation of the exchange rate, especially the US dollar, followed by other stronger currencies. This movement has two relevant effects for Brazilian agribusiness. On the one hand, the high dollar tends to depress, to some extent, international commodity prices. In fact, falls are already expected especially for the second half of 2022 mainly for cotton and corn, but also for soybeans. Negative rates compared to 2021 between 10% and 15% are expected by futures markets. However, the levels of agricultural commodities should remain closer to the relatively high levels observed in the 2010/15 period than those of the following five-year period. However, something similar seems to occur with agrochemicals, whose prices also returned (during 2021) to the high levels of 2010. In fact, the FAO captures a co-movement (high temporal correlation) between product price indices (FFPI) and inputs (GIPI) on the international market. Fuels, on the international market, did not reproduce this evolution, but have already returned to pre-pandemic levels. In Brazil, products and inputs were pushed by the evolution of the exchange rate in Brazil.

On the other hand, devaluations of the real become more likely, although this trend has not yet appeared with intensity in the Central Bank's Focus survey. But the IMF already projects the dollar at almost R$5,90 for the end of 2022. The pace of events at the political-institutional level in Brazil does not allow us to rule out significant devaluations in the national currency over the course of next year.

The question that remains is the degree to which the devaluation of the real will compensate for the likely fall in dollar-denominated commodities. Current projections suggest that internalized international prices will suffer a moderate decline in Brazil. A realistic scenario, however, would not lead to projecting threats of significant declines in relation to the current level. The degree of devaluation of the real will be dominant in the formation of agribusiness prices.

Evidently, the volumes to be exported depend on the growth of the Chinese economy, especially, which appears to continue to grow more moderately, but still significantly. It is also very important how the health issues of livestock in China will progress and also how the “apparently” erratic decisions of that country will continue regarding the use it makes of health events in Brazil.

The armistice between the USA and China still has undefined contours, being marked by separations followed by approaches. As long as commercial issues are not brought up, there are no threats. However, the climate/environmental issue may assume more worrying proportions, with the prevalence of extra-market measures such as the establishment of quotas and tariffs or prohibitions. It is urgent that the Brazilian government does productive work in this area, changing the mood of players of the stature of China, the USA and the European Union in relation to Brazil. These socio-environmental aspects apparently have not yet been priced due to lack of predictability. But it is reasonable to imagine that, although agribusiness has been seriously committed to environmental issues, the country's image can strongly influence the establishment of broad commercial rules and policies.

Internal Macroeconomic Scenario

The prospects for Brazilian economic growth in 2022 have been getting worse sequentially. Rates already close to 1% (or lower) circulate among experts. As a more moderate phase of the pandemic takes hold, services begin to gain momentum, but industry is emerging as the sector most affected by the crisis. Investment gained some momentum but was based, however, more on imports of machinery and equipment (while national industry fell). Construction, which is expanding strongly, is beginning to show discouraging signs due to less favorable financing and interest conditions. Furthermore, political-institutional uncertainties shake investor confidence.

Inflation expectations, captured by the Central Bank, are considered moderate, although at levels still above the official target. Two questions about inflation. On the one hand, it will be largely affected by the exchange rate trajectory, which largely depends on the country's political-institutional direction, which tends to worsen in an election year like 2022. Also on the supply side, the cost of energy weighs on production – and hard on the consumer - as long as weather conditions remain severe, with water shortages.

In any case, the Central Bank has already started an aggressive process of raising interest rates that has limited potential to contain the exchange rate, none in relation to energy supply and a slow effect on inflation, which is still highly indexed in Brazil. On the other hand, the most likely effect in 2022 may be to contribute to even lower growth. In short, the Bank is unable to produce low interest rates, which were strategic for the Brazilian economy in 2019 and 2020. On the government's part, there is no possibility that it will find space for an expansive or non-contractionary fiscal policy while fiscal reforms and administrative are not defined.  

Agribusiness in 2022

The GDP volume of Brazilian agribusiness has shown over the last 20 years (2000 to 2019, to overcome the effect of the atypical year of 2020) a growth trend in average volume of 1,6% per year, while agriculture does so at almost 4,7. 0,6% (with similar values ​​for crops and livestock). The difference between these rates and the aggregate is due to the very low growth of agribusiness (7% on average). Grain volume growth has been around XNUMX%.

Agribusiness income (GDP-Income) has grown at an average rate of 0,2% per year. For agriculture, specifically, income growth has been on average 2,6%, 1,8% for crops and 4,2% for livestock. In fact, real agricultural prices (measured by their GDP deflators) have fallen by an average of 1,8% per year; agricultural, specifically, 2,6%; those in livestock, 0,4%. Growing production and falling real prices have been the hallmark of Brazilian agribusiness performance. Although points outside the curve may occur, the expectation is that the sector's average growth pattern will be maintained in 2022.

In the domestic market, demand is expected to remain relatively weak in line with the very low growth expected for 2022. There is, however, a highly relevant and probably positive aspect for agribusiness that is related to the income transfer program – expanded Bolsa Família or Auxílio Brazil. In 2020, the social impact of the Emergency Aid of almost R$300 billion was spectacular when it was finally implemented, which ended up affecting the markets in general and the food market in particular. It is estimated that 53% of the transferred resources were spent on food, equivalent to 20% of the year's agricultural VBP. In fact, it was fundamental for a large part of society in the face of general supply difficulties and the soaring dollar. It is not yet clear how powerful it will be this time. But it is certainly necessary for producers and other agents in the production chains to remain alert for a very significant impact when the program begins to be implemented. In 2020, agribusiness was seen as insensitive to the social crisis in the context of the pandemic due to the rise in food prices, which, in reality, was due to the behavior of the dollar and the unforeseen way – in time and volume of resources – in which aid was implemented, not allowing production chains to plan for this jump in domestic demand. Something of the same nature could happen in 2022, already at the beginning.

On the external front, exports should maintain their performance even if internalized prices suffer a moderate drop (something uncertain at the moment). The competitiveness and resilience of Brazilian agribusiness are well known and recognized. These characteristics will once again be put to the test in the face of the worrying situation of the supply of inputs that are highly dependent on imports. Although, as FAO indicates, prices of products and inputs in the international market tend to follow similar patterns, in Brazil the current situation is a threat (in addition to rising prices) of a lack of supply of inputs as extra-market events and measures occur. Another concern is related to the occurrence in different degrees of temporal mismatches between input purchasing operations and product sales by producers in an environment of high market volatility, including exchange rate.

By Geraldo Sant’Ana de Camargo Barros, Scientific Coordinator of Cepea, published on January 6, 2022