A bumper harvest and firm market rates rarely go together in the agriculture sector. But thanks to the US-China trade war, farmers in Brazil are reaping such a bonanza. As China imposed tariffs on US soya bean imports, its buyers turned to Brazil, strengthening prices in the country.
China is the world’s largest consumer and importer of soya bean. Brazil is a large producer and exporter of the protein source.
With farmers set to realize good prices, expectations are that healthy earnings will propel agriculture activity in the country, increasing the demand outlook for agricultural input sellers such as UPL Ltd.
“We expect that better Brazilian soybean realisation, increasing dependency of China and favourable currency movement are expected to increase Brazil’s soybean acreage in the next cropping cycle,” Antique Stock Broking Ltd said in a note. “We anticipate that UPL will be beneficiary as soybean/oil crops contribute ~53% of its Brazil sales, which is amongst the fastest-growing geographies.”
The company has a major presence in Brazil. Last fiscal year, one-third of its revenues came from the country. As UPL gained a foothold in Brazil—a large agrochemical market—and delivered steady growth, it emerged as a leading agrochemical firm. However, some of the sheen was lost as growth in Brazil and Latin America ebbed (see chart).
In this backdrop, the developments in the Brazil soya bean market should bring relief for investors. If the current situation raises the soya bean crop acreages in Brazil, then it should augur well for UPL, says Aditya Jhawar, analyst at Investec Capital Services (India) Pvt. Ltd.
Even so, risks persist. One, observers opine that China cannot completely do away with imports from the US as the rest of the countries including Brazil may not be able to fully meet its soya bean requirement. So, any U-turn in China’s tariffs decision can derail prices and halt the potential market share or acreage gains.
Second, weather reports from Brazil continue to paint a hazy picture of dry conditions and irregular rains. If the climate conditions continue to play spoilsport, as in the recent past, then, the market situation can continue to remain challenging.
The third factor is currency volatility. Given UPL’s presence across the globe, currency volatility can adversely impact earnings if it is not properly hedged. Also, any major impact on the US agriculture market will not go unnoticed, given the firm’s presence in the country.
The report from Antique Stock Broking says UPL may benefit from the currency movement. Jhawar of Investec Capital points out that Brazil has seen worse currency movements (in terms of depreciation) and the firm is well placed to manage it.
The situation is still evolving. The June quarterly results scheduled to be released in another month or so should provide some clarity.