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April 5, 2016

With Depleted Corn Stocks Brazil Risks Running out of Corn

Brazil exported record amounts of corn in late 2015 and early 2016 and now in an unusual twist, Brazil needs to import corn to meet the demand of the livestock industry in southern Brazil. Even though the livestock industry is concentrated in southern Brazil, farmers in the region have been reducing their corn production in recent years in favor of more soybean production.

As a result, the livestock producers are now dependent on the safrinha corn production in central Brazil to meet their needs. Safrinha corn is produced as a second crop after soybeans and it now accounts for approximately two-thirds of Brazil's corn production. Unfortunately for the livestock producers, a sharp devaluation of the Brazilian currency last year led to more than a 50% increase in corn exports and the subsequent shortages of corn in southern Brazil.

The corn supplies in southern Brazil are so tight that some domestic corn prices in the state of Sao Paulo have reached as high as R$ 53 per sack of 60 kilograms or approximately US$ 6.50 per bushel. Corn prices in southern Brazil increased as much as 13-15% just during the month of March. In the state of Mato Grosso do Sul, corn prices are currently 80% higher than last year. On March 23rd of this year, the average price of corn in Mato Grosso do Sul was R$ 40.00 per sack compared to R$ 21.08 per sack one year earlier. The story is similar all across southern Brazil.

Conab estimates that the yearly domestic demand for corn in Brazil is 58.4 million tons, but the full-season corn crop which is heavily used by the livestock industry, is only projected to be 28.2 million tons or less than half of the domestic demand.

The domestic corn supplies will increase when farmers start to harvest the safrinha corn crop, but the harvest will not start until June. Even then, the corn will be harvested in central Brazil which is as much as 2,000 kilometers away from where it is needed in southern Brazil. In the meantime, livestock producers are scrambling to source enough corn to keep their facilities operating until the safrinha corn harvest begins.

As a result, Brazilian companies have now started to import corn from Argentina and Paraguay. Reuters reported last week that Brazilian companies have already contracted to import at least 250,000 tons of Argentine corn and the total amount of corn imported from Argentina and Paraguay could reach 500,000 tons.

Corn imports from Argentina in 2016 should be the highest in 15 years. In 2001 Brazil imported 321,000 tons of corn from Argentina, but for most of the intervening years, the amount of corn imported from Argentina has been very small.

The current scarcity of corn is being driven by excessive corn exports. Brazil is expected to set a new record for corn exports exceeding 30 million tons. Just during the months of January and February, Brazil exported 10 million tons of corn with 2 million tons more during the month of March. The monthly domestic consumption of corn in Brazil is approximately 4.5 million tons.

The marketing year for corn in Brazil is from February through January and Brazil closed January 2016 with carryover corn stocks of 10.5 million tons. Those stocks were cut in half with the export of 5.5 million tons in February and they were reduced even further with 2 million tons of corn exported in March. Corn stocks will be helped by the harvest of the full-season corn, but without additional imports from Argentina and Paraguay, Brazil runs a serious risk of running out of corn before the safrinha corn harvest begins in June.

The Brazilian government has attempted to help alleviate the tight corn supplies by auctioning off government-owned corn stocks. The government has conducted 13 auctions since February selling 498,000 tons of corn that they owned in Mato Grosso and Goias. These sales are intended for poultry, hog, and cattle producers as well as small family farmers primarily in northeastern Brazil.

The company Avicola GTFoods, which is located in northern Parana, announced earlier last week that they will import 90,000 tons of Argentine corn to sustain their production facilities in the state. The first shipment will be 27,000 tons with two more shipments by the end of May. The corn will come by vessel from Argentina which will be unloaded at the Port of Imbituba in the state of Santa Catarina. Food giants such as JBS and BRF have also indicated that they are in the process of importing corn from both Argentina and Paraguay in order to keep their production facilities operating.

Livestock producer organizations in Brazil are imploring the Brazilian government to adopt policies that will either increase corn production in southern Brazil or reduce the cost of transporting the corn into the region from central Brazil.

One such proposal is to offer low interest production loans for farmers in southern Brazil for the purpose of producing corn. Another proposal is to construct a railroad from central Brazil to southern Brazil in order to reduce the cost of transporting the corn. If something isn't done, local officials fear that the livestock industry will start to migrate to where the corn supply is more stable resulting in closed industries and lost jobs in southern Brazil.