SLC Agricola underlined the potential for a late-running battle between Brazil and the US in soybean exports as it highlighted its willingness to delay crop sales rather than pay the elevated freight costs needed to sell during peak season.

The farm operator, which controls 3,800 square kilometres of Brazilian farmland, flagged as a "point of concern" the "significant increase in freight prices" in the country, which have topped R$300 ($150) a tonne for shifting soybeans from the main growing state of Mato Grosso to port.

Freight costs have been raised by a cocktail of factors, including a limit on truck drivers' hours of eight hours a day, and rising diesel prices, which were increased last week for the fourth time since mid-2012.

Meanwhile, road delays – with the queue to unload at one of the three Mato Grosso rail terminals reaching 60 kilometres last week, let alone the waits at port – have tied up large portions of the Brazilian truck fleet, also raising costs.

'Opportune moment'

SLC said it had lowered its exposure to the problem by selling part of its crop with the freight costs locked in, leaving merchants to pick up the tab.

However, the group also stressed that for "the portion of the crop that has not yet been sold, the company has the option of storing the product in its own silos to await a more opportune moment in terms of freight costs".

Delaying sales would risk obtaining a lower gross price, with many forecasters believing that world values will decrease approaching what is currently expected to be a bumper US crop.

Indeed, there are growing ideas that, following their logistics-hampered start to export this year, the peak season for Brazilian soybean shipments will extend beyond the normal period, clashing with the seasonal pick-up in US shipments, and, according to some commentators, putting extra pressure on prices

Hedging strategy

SLC Agricola planted one-third of its soybeans with super-early varieties aimed at tapping the early market and given extra time for the sowing of follow-on crops of corn or cotton.

In Brazil, it is common practice to split soybean crops between super-early, early and conventional varieties to spread harvesting, and the risk of weather damage.

The group also revealed that it had sold some 62% of its 2013 soybeans ahead, at an average of $13.75 a bushel, compared with 55% sold ahead a year before.

For cotton, forward sales totalled 75% of the estimated crop, at 87.66 cents a pound, up from 68% a year ago - at a price of 103.0 cents a pound, which helped protect the group from the slide in New York futures below 80 cents a pound for most of the year.

'Experiencing drought conditions'

Indeed, the cotton hedging, "which guaranteed positive margins", helped limit to 0.5% the decline, to R$290.3m, in SLC Agricola's underlying earnings before interest, tax, depreciation and amortisation in 2012, despite a weather hit harvest.

After-tax earnings tumbled 76% to R$38.4m, reflecting higher prices of soybeans, which in Brazil are used as a metric for land valuations, and therefore the value of debt SLC owes on farm purchases.

The group, whose harvests last year "were heavily impact by weather conditions, especially the severe drought in western Bahia and the heavy rains in Mato Grosso and Mato Grosso do Sul", said that a lack of moisture had hurt crops currently being harvested too.

"For the 2012-13 crop year, we once again are experiencing drought conditions in the states of Bahia and Piauí – the second straight year of such conditions, which is atypical for the region."

The drought has cut hopes for the group soybean yield by 4.8%, and by 7.2% hopes for the cotton yield.

Market reaction

The yield downgrades were viewed by analysts at Itau BBA as more than offsetting the "positive" of the advance hedging positions made "at attractive prices".

The bank forecast that SLC Agricola earnings before interest, tax, depreciation and amortisation in 2013 would fall 6% below its previous estimates if the yield fears prove justified.

However, the bank retained an "outperform" rating on SLC stock, saying that "there is more upside risk in land triggers", such as an uplift in the value of the group's portfolio, "than downside risk in current earnings estimates.

"The stock is still trading at a considerable discount to its net asset value of R$27.3 per share, which we find unjustifiable."

The shares closed 0.8% lower at R$19.06 in Sao Paulo.