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June 17, 2016

Tight Grain Supplies in Brazil could Spur Domestic Inflation

Tight supplies of basic grains in Brazil are expected to spur inflation during the second half of 2016. The dwindling supplies are being cause by a combination of factors including: adverse weather which reduced production, a devalued currency that encourages exports, and a lack of government owned stocks of grain to ease the tightness. The tight supplies are resulting in record high domestic prices for corn, soybeans, and edible beans which will eventually be passed on to the consumer at a time when the country is already in the midst of one of the worst recessions in decades.

Corn is Brazil's second largest grain crop and it is the crop with the biggest supply problem. A devaluation of the Brazilian currency in 2015 led to aggressive corn exports in late 2015 and early 2016 leaving the country virtually out of corn in April and May of this year. As a result, domestic corn prices have reached record highs and livestock producers and feed manufactures in southern Brazil were forced to cut back on production or import corn from Paraguay and Argentina to keep their facilities open. Domestic meat prices have already increased significantly as a result of the reduced poultry and hog production.

In recent years, Brazilian farmers have shifted the majority of their corn production to the second crop known as the safrinha crop. This is a corn crop that is planted after the first crop of soybeans is harvested. The safrinha corn crop had performed very well for the last four years, but hot and dry weather in 2016 has severely impacted the crop resulting in lower production.

Soybeans are Brazil's biggest crop and in a recent report released by Conab, they estimated that by the end of 2016, the carryover stocks of soybeans in Brazil would dwindle to 0.44 million tons or just four days' supply of domestic consumption. Domestic soybean prices have also reached record high levels which will impact the price of soybean meal used to feed livestock and soybean oil used for cooking.

The tight grain supplies are not restricted to just export crops. Staples such as rice and dry beans are also in very short supply. Conab is estimating that the carryover stocks for rice will be down 78% compared to last year resulting in just a 7 day supply of rice before the next harvest. Dry bean production has been down for two years in a row and the carryover supplies for dry beans is estimated at just a 13 day supply. Supplies this tight will result in higher prices as the market tries to ration demand.

A big part of the problem is the government's inability to purchase and store grains during times of ample supplies in order to bring those supplies back into the market during times of tight supplies. Brazil's grain storage capacity, both private and public, is woefully inadequate given the size of the crops, so there are not enough government owned stocks of grain to even out prices.