November 7, 2011

Government to Purchase Wheat from Producers in Southern Brazil

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

The Brazilian Ministry of Agriculture, in association with Conab, will conduct three auctions this week where they intend to purchase wheat from producers in southern Brazil at a guaranteed minimum price and then sell the wheat to millers across Brazil.

Wheat farmers in Brazil have been requesting this governmental action because the domestic price for wheat in southern Brazil is below the cost of production and of course, farmers are reluctant to sell their wheat at a loss. A multitude of factors are contributing to these low domestic prices for wheat including: an abundant supply of wheat from eastern Europe, surplus of wheat from neighboring Argentina, a strong Brazilian currency, tight credit in Brazil, more favorable credit and interest terms in neighboring countries, and the generally inferior quality of wheat that is produced in Brazil.

Farmers would greatly prefer to sell their wheat on the open market for a profit, but that has not been possible for the last several years. Even though selling their wheat to the government is a slow and cumbersome process, it is the only way they can make a profit growing wheat. For the government's part, this whole process is a lose-lose-lose proposition.

It's a losing proposition because the government pays above-market prices for the wheat, then it pays to store or transport the wheat to other areas of the country where it is needed, and it then sells the wheat generally at a loss. The Brazilian government has been willing to do this because it wants to give an incentive to grow more wheat in Brazil. Wheat is the only major grain for which the country is not self-sufficient and Brazil needs to import about as much wheat as it produces (2011 production is estimated at a little more than 5 million tons and 2011/12 domestic consumption is approximately 10 million tons). In recent years though, the high cost of the program has led some members of Congress to ask for a review of the entire process.

The Brazilian government conducts a similar program when the price of corn produced in central Brazil falls below the minimum price for corn set by the government. The domestic price for corn is above the minimum this year, but was not the case for the last several years in Mato Grosso. As a result, the government purchased the corn from producers in Mato Grosso and then paid to have it transported to livestock producers in southern Brazil. If this program had not been in place, farmers in Mato Grosso would not have been able to make a profit growing corn for the last several years. The very high cost of transportation makes it very expensive to produce corn in one part of the country and then to have it consumed in other regions of the country.

The government has already set the dates for eight more wheat auctions between now and the end of February.