June 23, 2016
Era of Cheap Corn in Brazil is over Declares Ministry of Agriculture
For the last several years, the corn producers in Mato Grosso lamented about the very low prices they were receiving for their corn crop especially during harvest. For numerous years, the corn prices within Mato Grosso fell as low as R$ 9, R$ 10, or R$ 11 per sack (generally $2.00 per bushel or slightly lower), which was below the cost of production and below the minimum price guaranteed by the federal government. The glut of corn was the result of increasing safrinha corn acreage and good weather resulting in high yields.
The corn situation in Brazil has now changed completely. Instead of an oversupply of corn, Brazil essentially ran out of corn in April of this year. A devalued Brazilian currency spurred record corn exports in late 2015 and early 2016 resulting in the need to import corn from Paraguay and Argentina during May and June in order to satisfy livestock producers in southern Brazil.
At the same time that Brazil was running out of corn, the safrinha corn crop was suffering from hot and dry weather that resulted in the crop ending up being much smaller than originally anticipated. The result was record high domestic corn prices during April, May, and June that have now started to decline as the safrinha corn harvest brings needed supplies into the market.
According to the Public Affairs Secretary of the Ministry of Agriculture, Neri Geller, the combination of strong exports and dwindling domestic production will result in strong domestic corn prices for the foreseeable future in Brazil, thus his declaration that the era of cheap corn in Brazil is over. Now that Brazil is the second largest corn exporter after the United States, he feels that the domestic corn price will more closely track the international price of corn going forward.
Corn that had been destined for the export market is now expected to be redirected to the domestic market, which is good news for the livestock industry that was desperate for new corn supplies. The good news may be short lived through because another corn shortage in Brazil is expected to develop in early 2017 when the depleted safrinha corn supplies are exhausted.
The Secretary also announced his desire to reform the way the government maintains public stocks of corn. Up until recently, the government was in the business of purchasing corn in Mato Grosso as a way to support prices paid to farmers. During times that the market prices were below the cost of production and also the minimum price guaranteed by the government, the government would purchase the corn and then resell the corn at a discount generally in northeastern Brazil, which is chronically short of corn.
In addition to supplying corn to small family farmers in northeastern Brazil, the government would also sell off the corn stocks during times of tight supplies as a way to pressure prices. In fact, the government sold 500,000 tons of corn in May and they announced plans to sell another 500,000 tons in the months ahead, which would essentially exhaust their corn stocks. Ninety percent of the public corn stocks are traditionally held in the state of Mato Grosso, which is the largest corn producing state in Brazil.
While stronger domestic corn prices is good news for producers, it is certainly bad news for the small but growing corn-ethanol industry in central Brazil. The vast majority of ethanol in Brazil is produced from sugarcane, but the glut of corn in central Brazil over the last few years and the resulting low corn prices, convinced investors that making ethanol from corn would be a profitable venture. If the Secretary is correct and the era of cheap corn is over in Brazil, it would throw into the doubt the wisdom of investing in corn-based ethanol facilities.