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January 25, 2016

Brazil to Sell Corn Stocks to ease Shortages in Southern Brazil

The situation of livestock producers in southern Brazil is a good example of unintended consequences. Due to the numerous economic headwinds facing the Brazilian economy, the Brazilian currency reached its weakest point compared to the U.S. dollar late last week and it closed last Friday at 4.10 to the dollar after hitting 4.17 last Thursday.

A weak currency generally stimulates exports, which should be a good thing for poultry producers in southern Brazil. Unfortunately for poultry producers in Brazil, the weak currency is also stimulating record high corn exports from Brazil, which is leading to record high domestic corn prices in Brazil and shortages of corn in southern Brazil. In the state of Sao Paulo for example, corn prices increased 18% since the first of January. In the state of Santa Catarina, the price of corn in some areas increased 50% over the past 90 days.

Southern Brazil does not produce enough corn to meet the needs of their livestock producers so additional supplies of corn must be brought in from central Brazil where there is a corn surplus. Santa Catarina must import 3.5 million tons of corn from central Brazil to meet the needs of the local livestock industry. This year, those surplus supplies of corn from Mato Grosso are going to record amounts of corn exports instead of the livestock producers in southern Brazil.

This shortage of corn will be remedied within a few weeks as farmers in southern Brazil harvest more of their full-season corn, but this remedy will only be temporary because there will not be enough supplies of full-season corn to meet their yearly needs. In fact, the corn shortage in southern Brazil has been getting worse in recent years as farmers opt for less full-season corn and more soybeans. As a result, they are producing more and more of their corn as the safrinha crop instead.

All of this led the Brazilian Minister of Agriculture last week to announce the Brazilian government will auction off 500,000 tons its corn stocks in an effort to help alleviate the tight corn supplies. Generally the Brazilian government does not accumulate large stocks of grain because there are no concerns that the country will run out of food, but the government does use its storage program to smooth out grain prices

When local grain prices are below the minimum price guaranteed by the government, the government buys grain at the minimum price to support prices for the producers. This happens quite often in Mato Grosso where farmers produce many times more corn than what is consumed domestically in the state. Conversely, when localized shortages of grain drives up the local price, the government then sells some of its stock in order to ease the high prices. This is very common in northeastern Brazil where there is always a corn deficit.

In order to relieve the shortage of corn in northeastern Brazil, the government purchases some of the excess corn in Mato Grosso, subsidizes the transport of the corn to northeastern Brazil and then sells it at a discount to small family farmers for their small livestock operations. This is an expensive and losing proposition for the government because they lose money in all phases of the operation.

The current situation in southern Brazil might actually be a win-win for the government, at least temporarily. The government will probably sell the corn for more than what they paid for it and they will save money on storage costs as well. These gains though will only be temporary because they will have to rebuild their stocks with higher priced corn in the future.

Details of the program as to when and where the auctions will be held are expected to be announced sometime this week and the Minister of Agriculture has already indicated that a significant portion of the sales revenue will go toward supporting the crop insurance program in Brazil.