March 7, 2016

High Corn Prices Reduce Buying Power of Poultry Producers

It is sometimes difficult to assess what is happening in the Brazilian agricultural sector due to volatile exchange rates and fluctuations in commodity prices that are priced in dollars but paid in the local currency. In order to get a clearer picture of costs, it is a common practice in Brazil to calculate how many units of production are required to purchase a unit of input. For example, how many sacks of soybeans does a Brazilian farmer need to sell in order to purchase a ton of fertilizer or to purchase a new tractor. This method of comparison eliminates the confusion over exchange rates and prices for either the product or the input.

A recent study in Brazil that looked at the price of corn and poultry is a good illustration of this method.

There has been a lot of news in recent months about the huge increases in Brazil's corn exports and how it has led to corn shortages for poultry producers in southern Brazil. The surge in corn exports is the result of a devaluation of the Brazilian currency which makes Brazilian grain much more competitive in the international market. That alone would not have caused too much of a problem for poultry producers, but that combined with reduced full-season corn production in southern Brazil, has led to record high or near record high corn prices in southern Brazil.

A year ago, in February of 2015, the price of a ton of live chickens in southern Brazil was enough to purchase 4,832 kilograms of corn or approximately 186 bushels of corn. In February of 2016, that same ton of live chickens could have purchased 3,560 kilograms of corn (137 bushels of corn) or 26% less. So, either the price of chickens went down or the price of corn went up. The answer is that the price of corn has skyrocketed in southern Brazil.

The domestic price of corn in Brazil has increased approximately 55% over the past twelve months. Unfortunately for the poultry producers, the price of chicken over the last two years has basically held steady. Since corn is the main ingredient in chicken rations, this loss of buying power by poultry producers has been severe.

The price of corn has declined in recent days due to a strengthening of the Brazilian currency, but it is still a major concern for Brazilian poultry producers.