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June 27, 2014

Brazil may Import another 1.0 mt of Wheat until mid-August

The Brazilian government recently announced an extended suspension of the 10% import tariff imposed on wheat imported into Brazil from outside of Mercosul countries. The goal of the suspension is to stimulate the importation of needed wheat supplies and it will remain in effect until mid-August. As a result, there may be as much as one million more tons of wheat imported into Brazil by mid-August when new crop supplies of wheat start to become available in Brazil.

The suspension of the import tariff came over the objections of wheat producers in the state of Rio Grande do Sul who still have approximately 650,000 tons of wheat to sell from last year's crop. The federal government argued that approximately half the wheat in the state will be consumed within the state and not enough wheat will be available to meet the demand in large urban areas such as Sao Paulo and Rio, so they felt that more imported wheat was needed to bridge the gap until new crop supplies become available.

In response to the tariff reduction, the state of Rio Grande do Sul is now pondering a reduction in the ICMS tax from 8% to 2% for wheat produced in the state in order to remain comparative with imported wheat.

The ICMS tax is a type of "circulation" tax imposed on products (and grain) produced in one Brazilian state and sold in another state. The tax must be paid before the products are allowed to cross state lines. The amount of the ICMS tax can vary depending on the destination of the product. For example, it could be higher for wheat going to a neighboring state, but lower for wheat going to a more distant state such as Sao Paulo in order to compensate for the higher transportation costs.

If the ICMS tax is reduced, it would only be a temporary reduction until the end of August when the new crop of wheat will start to harvested. Traditionally, Brazil imports most of its wheat from neighboring Argentina, but reduced supplies of wheat in Argentina forced Brazil to look elsewhere for needed wheat supplies.

Brazilian farmers have responded to improved wheat prices by increasing their winter wheat acreage and the country could produce a record large wheat crop if the weather cooperates. Even with a record crop, Brazil would still need to import approximately 5 million tons of wheat to meet domestic demand.