Brazil’s Extreme Weather Is Flooding Mines, Drying Up Crops

(Bloomberg) -- Weather extremes in commodity powerhouse Brazil are reverberating through global markets, pushing up prices for everything from soybeans to metals.

Dryness and heat in the nation’s south have caused crop losses, clipping what was supposed to be record oilseed production in the world’s largest grower. Meanwhile, the northern half of the country has the opposite problem: too much water. Heavy rains have led Vale SA, the world’s second-largest iron ore producer, to halt some mine production in Minas Gerais.

The measure added fuel to iron ore’s price rally. Futures in Singapore advanced as much as 2.8% on Tuesday, bringing its gain since mid-November to 50%. In agricultural markets, soybean futures have increased 13% since early December, when adverse weather began to hurt Brazilian crops. State-owned agriculture agency Conab slashed its outlook for this year’s soy harvest due to drought, saying more cuts are possible in the coming months. A tighter supply of the oilseed used to make everything from cooking oil to animal feed may add fuel to global food inflation. 

Northern Brazil is “too wet” and the south is “too dry,” said Don Keeney, a meteorologist with commercial forecaster Maxar. That’s a typical pattern caused by the La Nina phenomenon, strengthened by other factors such as the Atlantic warming, according to Carine Gama, a meteorologist at Sao Paulo-based Climatempo.

The adverse weather is disrupting the iron ore industry in Minas Gerais state. In addition to Vale, Gerdau SA and Usiminas suspended mining operations. On Saturday, a Brazilian mining dike owned by France’s Vallourec SA overflowed near the city of Belo Horizonte, which saw 15 inches of precipitation in the first 10 days of January, exceeding the average for the whole month. 

More than 100 million tons of annualized iron ore supply could be at risk at this stage in Brazil, BTG Pactual analysts estimate. That represents roughly 7% of seaborne supply and about 30% of Brazilian supply.

“Clearly the stakes are high and we could see impacts on short-term iron ore movements”, BTG analysts Leonardo Correa and Caio Greiner wrote in a note to clients, adding economic impacts can be muted if normality is restored quickly.

The extreme weather may also lead to losses in other crops. Coffee farms in south Minas Gerais are vulnerable due to possible erosion, while corn fields in Brazil’s south have faced prolonged dryness and soybean crops in some parts of the nation’s north have seen an increase in disease amid wet weather. Still, those damages can be avoided if conditions improve soon.

There are indications weather patterns may shift next week bringing relief, Keeney said. A high pressure system that has dried out southern Brazil and Argentina is shifting toward Paraguay, which will allow rain into the region. It will also lessen, though not stop, the rainfall that has been flooding northern Brazil, he said.

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