June 12, 2012

Corn Prices in Mato Grosso Fall to Near the Cost of Production

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The safrinha corn harvest has begun in Mato Grosso and a record crop is expected. The Mato Grosso Institute of Agricultural Economics (Imea) estimates that the state will produce 13.1 million tons of corn, which would be an increase of 87% compared to the 6.99 million tons produced in 2011. With such a large crop coming onto the market, corn prices in Mato Grosso have fallen significantly over the last several months.

Farmers in Mato Grosso are concerned that corn prices may even fall to below the cost of production. In northern Mato Grosso, the average price of corn has fallen to R$ 13.50 per sack of 60 kilograms, which is only slightly above the cost of production estimated at R$ 13.00 per sack. Farmers who did not forward contract their safrinha corn are being impacted the most by the price decline. Estimates are that over 50% of the safrinha corn production in the state had been forward contracted earlier in the growing season at much higher prices.

Farm organizations in Mato Grosso are now asking the federal government to step in and start purchasing corn to keep the prices from falling even further and to rebuild stocks for later in the year when corn supplies generally become tighter. The farmers would like to see the government purchase the corn for R$ 15.00 per sack in order to guarantee a small margin.

The Minister of Agriculture has expressed a concern about the falling corn prices and indicated that the government could purchase up to 2.5 million tons of corn, but no specific details were released as to when the purchases will occur. Even though details were not released, the program is expected to be similar to previous years when the government intervened in the corn market in Mato Grosso to support prices.

Mato Grosso is a corn surplus state because most of Brazil's livestock industry is concentrated in southern Brazil, which is a corn deficit region. The livestock producers in southern Brazil have been hard hit by rising feed costs caused by the severe drought which lowered full-season corn production in the southern states. In past years, the federal government has helped to solve the imbalance in the supply-demand scenario by paying the cost of transporting the corn to southern Brazil. Since there are no railroads linking the two regions, the vast majority of the corn must be transported by truck at an extremely high cost.

Solving this problem will be very expensive for the federal government. If the new program is similar to those in the past, the federal government will purchase the corn in Mato Grosso at prices higher than the current market price. They then will pay to transport the corn to southern Brazil where it will be resold to livestock producers at prices below the market price. The government will lose money in all phases of the operation.

Looking forward, the rapid decline in corn prices in Mato Grosso could impact the potential safrinha corn acreage in the state in 2012/13. The cost of fertilizers in Brazil have risen 15% to 20% thus far in 2012, which could increase the cost of production to the current market price for corn in the state. If that situation persists until the end of the year, then the safrinha corn acreage in Mato Grosso could decline in 2013.