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June 24, 2016

Livestock Producers in Brazil Relieved that Corn Prices are Falling

As the safrinha corn harvest advances, prices for corn is declining rapidly in the interior of Brazil to the great relief of livestock producers. In the state of Mato Grosso do Sul for example, the safrinha corn harvest is now 6% complete and the price of corn in the local market has fallen 24% from its peak. A severe shortage of corn over the last few months has led to record high domestic corn prices which forced some livestock producers to curtail production.

According to the Economics Department of the Agriculture and Livestock Federation of Mato Grosso do Sul, during the first 20 days of June, the price of corn in the state fell 24% to R$ 36.56 per sack. The decline is being attributed to both harvest pressure, a stronger Brazilian currency compared to the dollar and to a softening of international corn prices. Even with the declines, the price of corn in the state during the month of June has been 145% higher than in June of 2015.

Another factor that influences the domestic price of grain in Brazil is the relative strength of the Brazilian currency compared to the U.S. dollar. Thus far during June, the dollar has fallen 6.2% compared to the Brazilian real. A stronger local currency usually results in lower domestic prices because it reduces the competiveness of Brazilian grain in the international market. It was the devaluation of the Brazilian currency in late 2015 that spurred record large corn exports from Brazil resulting in corn shortages in 2016 and record high domestic corn prices.

Soybean prices in Mato Grosso do Sul have declined as well by 3.6% during the month of June to R$ 83.75 per sack. Even with the decline, domestic soybean prices in the state are up 52% compared to last June when they averaged R$ 56.00 per sack.

The declining corn prices is very good news for hog producers who calculate their buying power by comparing the price of live hogs to the price of corn, which is the main ingredient in feed rations. By making that calculation, it takes into account the price of hogs, the price of corn, and the currency exchange rates.

According to the Center for Advanced Studies in Applied Economics (Cepa), in eastern Sao Paulo state, an independent hog producer's purchasing power increased 20% during the month of June due to higher hog prices and declining corn prices. In other words, he needed to sell 20% fewer hogs to purchase the same amount of corn as last month. As far as soybean meal is concerned, his purchasing power increased 6.5% during June.

The story isn't quite as positive in the state of Santa Catarina, which is the largest hog producing state in Brazil. In the city of Chapeco, Santa Catarina, a hog producer's purchasing power as far as corn is concerned increased 13% during June, but it fell 8.8% as far as soybean meal is concerned.

While the price of corn has declined with the advance of the safrinha corn harvest, most analysts believe that Brazil will return to very tight corn supplies in early 2017 when the safrinha corn supply is exhausted. The 2015/16 safrinha corn crop ended up much smaller than anticipated and if corn exports are not curtailed, Brazil runs the risk of running out of corn again in early 2017.

Cattle feeders are happy with the decline