January 18, 2011

Rice and Wheat Producers in Brazil Want Federal Government to Purchase Their Grain

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The Brazilian government continues to interject itself as the middle man between the grain producers and the end users in Brazil. This is a relatively new phenomenon in Brazil that started several years ago when the government announced minimum price levels for the major crops. As a result, the government is spending billions of reals in an attempt to satisfy both parties.

Currently, the government is starting to play the role as middle man once again in the rice and wheat markets. The farmers in southern Brazil produced a good crop of high quality wheat in 2010, but the millers in southern Brazil prefer to purchase wheat from Argentina due to the strong Brazilian currency and better credit terms. Due to the lack of interest in Brazilian wheat, the domestic price for wheat in southern Brazil is below the minimum set by the government and farmers are demanding that the government start purchasing their wheat at the minimum price. The government has recently announced a series of auctions to do exactly that.

The rice producers in Rio Grande do Sul are complaining about the same thing because the domestic price for rice is currently below the R$ 25.60 per sack of 50 kilograms set by the government. It is expected that the government will do the same thing for rice producers by setting up a series of auctions at which they will purchase rice at the minimum price.

In all of these programs, the government generally looses on all accounts. They pay more for the grain than the domestic market is willing to pay, they then pay for storage or transportation and many times they end up selling the grain for less than the purchase price. In other words, it's a lose, lose, lose proposition for the government. When the minimum prices were set several years ago, they were set at very high levels and the program has not been modified since. Many members of the Brazilian Congress are complaining about the high cost of these programs and they are demanding that the Minister of Agriculture recalibrate these minimum prices.

The government had to do the same thing for safrinha corn producers in Mato Grosso for 2009 and 2010. Prior to the recent strengthening of international corn prices, the domestic price for corn in Mato Grosso was below the cost of production. Prices were so low due to the extremely high cost of transporting the corn to livestock producers and exporters in southern Brazil. The farmers in Mato Grosso in a sense were growing the corn for the government. Were it not for the federal government's willingness to purchase corn at above market prices for the last two years, the farmers in Mato Grosso would be hard pressed to justify planting a safrinha corn crop.

The recent run up in corn prices has changed the dynamic of the corn market, but the rice and wheat markets in southern Brazil have not benefited nearly as much.