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Brazil’s agricultural production rises 27%

BRL agricultural splitEnlarge GraphEconomic growth is measured by a country’s gross domestic product (GDP), which can be subdivided into three main areas: agricultural, manufacturing and services.  Investors need to understand how the growth in each of these areas drive economic growth and result in higher stock valuations.

IBGE (Brazilian Institute for Geography and Statistics) recently released the latest Agricultural Production report, showing a 27% increase in agricultural production and reaching BRL196 billion. The report is a comprehensive review of the agricultural production in Brazil for 2011 and it includes details by product and by region such as cultivated area, quantity produced and yield per hectare.

The main drivers behind the increase were favorable commodity prices jointly with favorable weather conditions. The 27% increase was led by increases mainly in sugar cane (+39%), soybeans (+35%), corn (+46%), oranges (+28%) and cotton (+76%). Grains as a whole increased 6.8%, beating the previous record once again. The graph below shows the contribution of each product to the total production in Brazilian Reais.

Soy products led the production and accounted for approximately 1/8 of the total BRL value. The increase in production was partly due to the increase in the cultivated area dedicated to soy. This increased production by approximately 3%, mainly by displacing areas usually reserved for corn. Nonetheless, corn production also increased 0.5%, therefore there was no meaningful effect on global supply.

Soybeans are the third largest export of Brazil, accounting for 14%. Brazil’s top two exports are metallurgical products (48% of exports) and transport & equipment parts (36.0% of exports). A large increase in the soybean production may boost the balance of trade (exports – imports) and boost GDP overall. While there are many other factors to evaluate the health of the Brazilian economy, this increase in agricultural output is one more positive data point for investors in iShares MSCI Brazil Index (EWZ) or other small cap versions, as those by iShares (EWZS) and Market Vectors (BRF).

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