Jun 17, 2010
Brazilian Government Running Out of Space to Store Wheat
Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.
The Brazilian government not only tries to support the price of corn and soybeans, it does the same for wheat as well. In the state of Parana for example, the minimum guaranteed price for wheat is between R$ 31.80 to R$ 33.30 per sack of 60 kilograms for the best grades of wheat (US$ 9.00 to 9.25 a bushel), but the current cash price for wheat in Parana is approximately R$ 22.00 per sack or US$ 6.10 a bushel. As you might suspect, everybody wants to sell their wheat to the government at the minimum price.
Conab is responsible for buying and storing the grain that the government purchases from the farmers. In the state of Parana, Conab has been buying wheat for several years and its storage units are full of wheat from prior years. They can't move the wheat to government silos in other states because all of their silos are full everywhere. If they try to free up space by selling the older wheat into the local market it would drive down prices even more. The only alternative is to pay to transport the wheat to other parts of Brazil and then sell the wheat to millers at local cash prices. This is a very expensive option because the government loses money when it purchases the wheat and they lose again when they sell the wheat in addition to having to pay for expensive transportation.
Even though farmers in Parana are expected to plant 16% less wheat in 2010 compared to 2009, they are expected to harvest 11% more than the drought afflicted crop of 2009. The wheat harvest is still several months away (most of the wheat in Parana is harvested during October), but officials are already worried that there will not be storage for additional wheat purchases. Parana is the largest wheat producing state in Brazil.
Establishing guaranteed minimum prices for grains seemed like a good idea at the time the program was started several years ago because at the time commodity prices were at record levels. When the program was started, government officials thought that they would rarely have to actually pay the minimum prices, but since then however, the world economy took a severe downturn and commodity prices fell as well. The cash prices for corn and wheat are significantly lower than the minimum guaranteed price and the government has struggled to make the program work. As a result, there is a move in the Brazilian Congress to reduce the minimum price guarantees and to bring them more in line with the cash market.