April 7, 2016

Brazilian Corn Losing Competitiveness against U.S. and Argentina

Livestock producers in southern Brazil have been complaining bitterly about the very tight supply of corn and the resulting high domestic corn prices. Corn prices in the state of Sao Paulo reached as high as R$ 50 per sack of 60 kilograms recently or approximately US$ 6.40 a bushel as reported by the Center for Advanced Economic Studies (Cepea). As a result of the very high prices, Brazilian corn is losing its competiveness against corn from its two main competitors - the United States and Argentina.

According to a report in the Gazeta do Povo, using today's currency exchange rate, corn at the Port of Paranagua in southern Brazil is selling for R$ 45 per sack compared to R$ 35 to R$ 36 at the ports in Argentina and R$ 31 to R$ 32 on the Chicago Board of Trade (nearby contract). The nearby corn contract at the BM&FBovespa exchange in Sao Paulo it 50% higher than the equivalent contract on the Chicago Board of Trade. In fact, the price of corn is so high in southern Brazil that Brazilian livestock producers are now importing corn from Argentina. An estimated 500,000 tons of corn will be imported into southern Brazil between now and when the harvest begins for the second corn crop in June.

The current situation in Brazil is very different than just a year ago. In 2015, Brazil had ample supplies of corn and much lower corn prices. The lower prices, coupled with a significant devaluation of the Brazilian currency, resulted in record corn exports from Brazil. A year ago, the domestic corn prices in Brazil were 10% below the Chicago price and 20% below the price in Argentina. The record corn exports though resulted in very tight supplies and the current high prices.

It looks like domestic corn prices in Brazil may have peaked. The Brazilian currency has been strengthening recently with the potential for the impeachment of President Rousseff. The currency is currently trading at 3.6 Brazilian reals per dollar and if it strengthened to 3 to 1, the corresponding domestic price of corn in Brazil would equate to R$ 26 per sack in Chicago and R$ 30 per sack in Argentina making Brazilian corn even less competitive. As a result, domestic corn prices are expected to decline with the importation of corn from Argentina and the impending harvest of the safrinha corn crop.