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July 26, 2016

Brazilian Government tries to limit Corn Price Increases

The domestic supply of corn in Brazil is expected to remain extremely tight for the foreseeable future. As a result, domestic corn prices in Brazil continue to increase despite the fact that corn prices on the Chicago Board of Trade have collapsed.

In an effort to hold down the domestic price of corn, the Brazilian government is proposing a series of actions aimed at helping livestock producers in southern Brazil. The main proposal is to extend the suspension of tariffs and taxes on imported corn until the end of 2016. This would reduce the cost of imported corn from Argentina, Paraguay, and the United State by approximately 9.25%. Brazil essentially ran out of corn last March and April and livestock producers in southern Brazil were forced to import corn from Argentina and Paraguay to keep their livestock operations afloat.

Hog and poultry production is centered in southern Brazil and hog production accounts for 52% of Brazil's domestic corn usage and poultry production accounts for 25% of the domestic usage. Corn is the main ingredient in animal rations representing 70% of the feed cost for poultry production.

Corn prices soared earlier in 2016 when Brazil virtually ran out of corn. Corn prices declined in June when the safrinha corn harvest got underway, but corn prices started increasing again in July due to declining estimates of the safrinha corn crop, slow selling on the part of the producer, and buyers anxious to lock in their needs before the corn supply gets even tighter.

Corn prices for the nearby contract on the BM&FBovespa in Sao Paulo last Friday closed at R$ 47.39 per sack (approximately $6.50 per bushel), which was up 8% for the week. The price is approaching the historical high of R$ 53.91 per sack (approximately $7.40 per bushel) registered on June 2nd, which was before the safrinha harvest got underway. During the month of June, the corn price declined 22%, but during the month of July it has increased 15%.

Brazil is one of the world's leaders in poultry exports and according to Avisite, during the first six months of 2016, China edged out Saudi Aribia as the primary destination of Brazilian poultry exports. During the first semester of 2016, China imported 380,649 tons of poultry with Saudi Aribia importing 379,765 tons. In total value of products, China is significantly ahead of Saudi Aribia. The value of poultry exports to China during the first half of 2016 was US$ 607.7 million which was 7.3% more than the value of poultry exports to Saudi Aribia.

Going forward, China is expected to extend its lead in Brazilian imports. Compared to the same period in 2015, China has increased the volume of their poultry imports from Brazil by 76% while the value of the imports increased by 51%.