July 11, 2016

Corn Prices in Brazil Remain Strong due to Lower Production

With the reduced expectations for the safrinha corn crop, the corn carryover in Brazil is estimated to be 4.47 million tons or just short of one month's usage of 4.5 million tons. And that estimate may be optimistic given the fact that the safrinha corn production may still decline as the harvest progresses.

Market observers are commenting that things are not adding up when you consider corn exports, domestic demand, and carryover stocks. There is not going to be enough corn to satisfy everybody's demand. The market realizes this, and that is why future corn prices in Brazil are rising at the same time that corn prices in the U.S. are falling. The September corn future price on the BM&F Bovespa in Sao Paulo increased 3.85% last Friday to R$ 43.99 per sack (approximately $6.00 per bushel). For the week, September corn futures increased 10.9%. Everybody realizes that the corn supply situation in Brazil is going to stay very tight for at least another year.

The price increases last week were even more impressive given the fact that harvest pressure from the safrinha corn crop is at its peak right now and the Brazilian currency has been strengthening. Both of these factors should have resulted in lower prices, but instead, prices have moved higher.

The safrinha corn yields in Brazil are very low this year because the crop was planted late and the summer rains ended early. No one knows when the rains will end in 2017, but there is already a concern that the next safrinha corn planting could be delayed once again due to La Nina delaying the soybean planting, which will start on September 15th if there is adequate soil moisture.

La Nina generally correlates with dryer than normal conditions in southern Brazil during the September through December period. Therefore, a potential delayed soybean planting in southern Brazil could impact the safrinha corn planting in Parana, Mato Grosso do Sul, and Sao Paulo exposing the crop to potential frost damage similar to what occurred this year. There is not a strong correlation between La Nina and the weather in central Brazil. Under a worst case scenario, the corn situation in Brazil may not normalize until mid-2018.

The safrinha corn crop is the crop that Brazil exports and if the safrinha crop is smaller, than the exports will be smaller as well. In last week's report, Conab reduced their estimate of Brazilian corn exports from 25.4 million tons in June to 22.0 million tons in July. In their commentary they stated that some exporters will not be able to obtain enough corn to fulfill their export contracts and that other exporters will wash-out their export contracts in favor of selling to the domestic market where prices are higher. Last year, Brazil exported 30.2 million tons of corn.

Conab lowered the safrinha corn production by approximately 7 million tons, but they only lowered the exports by 3.4 million tons. Therefore, it is entirely possible that Brazil's corn exports may end up in the range of 20 million tons or approximately 10 million tons below last year.