January 20, 2011

Gov. Auctions Are Used to Help Stabilize Grain Prices in Brazil

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

The Brazilian Minister of Agriculture is defending his department's increasing involvement in the domestic grain markets. In contrast to the Argentine government that extracts value from the grain market in the form of export taxes, the Brazilian government is trying to add value to the grain market by injecting billions of reals in order to keep the domestic market supplied with grain, increase the incomes for producers, and help to stabilize grain prices for livestock producers and end users. The Brazilian government in a sense is acting as a middle man in the domestic grain markets, but instead of taking its share of the pie, the government is spending money so other segments of the market can be more profitable.

One of the more popular programs is the PEP program (Premio para Escoamento de Produto) in which the government purchases the grain directly from the producers, cooperatives, or grain companies and then it stores and transports the grain to regions of Brazil that are deficient in grain production where it is auctioned off to end users.

On January 1st of this year, the Brazilian government owned 5 million tons of corn. Some of it was in its own facilities and the government was paying for the remainder of the grain to be stored in private facilities. The grain had been purchased through the government's minimum price guarantee program which kicks in when the market prices for corn is below the minimum price set by the government. The government then pays the storage and transportation costs until it is auctioned off to end users. When the corn is auctioned off, it tends to hold down any potential price spikes in the domestic market.

Everybody wins with these programs except for the taxpayer. The producers sell for a price higher than he could get in the domestic market. The private grain companies and grain haulers are paid to store and transport the grain. And the livestock producers, the grain exports, and the end users usually can purchase the grain at prices below the international price. All the benefits are paid for with government funds.

Conab is the agency responsible for conducting these auctions on behalf of the Ministry of Agriculture by purchasing grain from producers and selling it to end users. This week alone there are five auctions scheduled to take place involving 845,000 tons of corn, wheat, and rice. On January 19th Conab sold 295,000 tons of corn that is in government warehouses in Parana, Sao Paulo, Minas Gerais, Goias, Mato Grosso, and Mato Grosso do Sul. On January 20th Conab is going to auction off 100,000 tons of corn to poultry, swine, and dairy producers as well as feed manufactures in northern and northeastern Brazil.

Other auctions this week involves rice that is produced in Rio Grande do Sul but will eventually be resold in the northern Brazilian states of Acre, Amapa, Amazonas, and Roraima. Conab is also going to buy wheat produced in southern Brazil that will be destined for areas of northern and northeastern Brazil where wheat is not grown.