Brazil's agricultural sector has been battered by extremes of climate over the past year or more. The drought in the south of the country, that also devastated Argentinian agriculture, severely reduced yields for the 2009 soybean and corn crops. The dry conditions now seem well and truly over for now with torrential rains lashing the country for much of mid to late 2009. These will replenish irrigation sources in the south and have allowed planting of corn and soybean to begin on schedule after two years of delays. We now expect to see a large increase in soybean production and a small increase in corn production despite a fall in the area planted. We expect yields for the coming corn crop to benefit from the increased use of genetically modified (GM) seeds. GM seeds were approved for use for the first time for the 2009 harvest and enjoyed a rapid uptake. In the coming 2010 crop, it is estimated that up to 50% of the seeds used will be GM. An official from the ministry of agriculture's National Supply Company (Conab) was quoted in the local press saying the GM seeds could increase yields by as much as 15-20%. GM seeds will also reduce the amount of pesticides needed. Corn is the third crop for which GM seeds have been approved following soybean and cotton. On the whole we view the expansion of GM seeds as a positive development, which should see productivity increase and reduce the need for chemicals. We warn, however, that if GM and non-GM crops are not carefully segregated, it could see Brazil lose markets for its exports owing to restrictions on imports of GM crops in some markets, such as the EU. While the heavy rains have been welcomed by farmers of field crops in the south, in the north of the country the downpours have been negatively impacting yields and quality of Brazil's coffee and sugarcane. The rains through the second half of 2009 disrupted the drying process for coffee. This has meant many beans began to ferment, which negatively affects the flavour. Industry sources suggest that between 30% and 50% of the arabica crop will have to be sold at a lower grade owing to the delays in drying. For the sugar sector, the rains delayed harvest meaning millions of tonnes of cane will be left in the fields. The rains will also see sucrose content fall. Despite this, we still expect a large increase in output as the proportion of cane used for sugar production increases to around 45% from just over 40% in 2009. Many mills have been switching as much production as possible over to sugar as ethanol has not benefited from the same spike in prices. The lower price for ethanol will reduce the financial windfall the mills will reap from the sugar prices and prevent a dramatic rise in the price for cane. Domestic prices for sugar have also been held down by the appreciation of the real. The strong real has also hurt demand for Brazil's meat and dairy exports.
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