July 31, 2014

Brazil's 2014/15 Wheat Crop may not Meet Expectations

Hopes for a record large 2014/15 Brazilian wheat crop are being tested by adverse weather and low prices in southern Brazil. Frosts, floods, drought, and low prices have all combined to lower expectations for the developing wheat crop. The latest estimate of the Brazilian wheat production from Conab still points to a record large crop of 7.4 million tons (an increase of 33% compared to the 5.5 million tons produced in 2013), but some analysts are now lowering their expectations for the crop.

Brazilian farmers were expected to plant 2.6 million hectares of wheat in 2014/15 or 19% more than last year. The two biggest wheat producing states are Parana and Rio Grande de Sul and the wheat acreage in these two states was expected to increase 34% and 6% respectively. There are concerns that declining wheat prices while the crop was being planted may have resulted in less wheat actually being planted compared to intensions.

Adverse weather in Parana has also led to less than ideal development of the crop. Parts of the state experienced prolonged dry periods while the wheat was developing while other parts of the state experienced localized flooding. Recently, the entire state suffered very cold temperatures with frost and freezing temperatures recorded in many locations. Over 50% of the wheat was flowering or in early grain filling when the cold temperatures hit and there are concerns that some damage was done by the low temperatures.

In Rio Grande do Sul saturated conditions delayed the wheat planting and resulted in some replanting as well. The wheat crop in the state was in vegetative development when freezing temperatures swept across the state last week, but no significant damage is expected from the low temperatures.

One of the biggest problems for wheat production in Brazil is the possibility of heavy rains when the crop is being harvested in September, October, and November. These rains often result in lower yields and poor quality wheat. With the prospect of an El Nino developing later this year, farmers are worried that this weather phenomena could result in heavy rains just as the crop is ready for harvest.

In addition to weather concerns, low prices for their wheat crop have many farmers complaining about recent government action that actually pushed down the price of wheat. Brazil is a wheat deficit nation and traditionally most of Brazil's wheat imports came from Argentina, but a reduced wheat crop in Argentina forced Brazil to look outside of the Mercosul Trading block to source wheat. Normally there is a 10% tariff on wheat imported from non-Mercosul countries, but that tariff was temporarily suspended in 2014. As a result, cheaper wheat flooded into Brazil from North America forcing down prices.

The government justified the reduced tariffs because the imported wheat was destined for northeastern Brazil and it was cheaper to import wheat from the U.S, than it was to transport wheat by truck from southern Brazil. Wheat producers do not agree with that assessment and in fact, many are still holding wheat from last year due to the low prices.

According to the Secretary of Agriculture in the state of Parana, the price of wheat in the state has declined 14% thus far in 2014. In January the average price of wheat in the state was R$ 41 per sack (approximately US$ 8.47 per bushel) and as of this week, the price has fallen to R$ 35 per sack (approximately UD$ 7.23 per bushel). When the new crop starts to be harvested in late August or early September, the prices are expected to fall even further.