South America Calling

Brazil's President Dilma Rousseff has demanded the Agriculture Ministry do more to resolve the grain storage deficit in the farm heartlands of the Center-West and the grain consumption hubs in the Northeast, according to a report in Valor Economico, a local business daily.

She promised to make all necessary funds available to build silos in these regions, said the paper without citing sources.

I haven't been able to verify this information, but if true, it represents a tremendous potential boost to farmers in Mato Grosso and beyond, where there is a chronic lack of storage.

Brazil only has storage capacity for two-thirds of grain production, and only a third of Mato Grosso farmers have their own silos.

As a result, many are forced to sell soybeans and corn for export immediately after harvest when freight is at its most expensive. This put Brazil's precarious road and port infrastructure under enormous pressure and contributes to the chaos seen at ports over the last couple of months.

The government is particularly concerned about the lack of space to store the fast-expanding second-crop corn harvest in Mato Grosso and Goias, a significant portion of which was stored in the fields last year.

It is also worried about the Northeast's dependence on produce from elsewhere to feed its large meat industry and its lack of facilities to build stocks.

This situation forces corn buyers in the Northeast to live hand to mouth, completely exposed to market fluctuations.

Meanwhile, the Northeast is geographically a long way from the main corn-producing region and freight rates are exhorbitant, not least because truckers prefer to run the route from Mato Grosso to port rather than across country to the Northeast as the infrastructure is better and there is a better chance of obtaining a return load.

An ability to build stocks in the Northeast during the off season would cut logistics costs and allow the government to control supply to the region much better.

There is little tradition of on-farm storage in Brazil. In the south, from where most Mato Grosso farmers originate, product is stored in the cooperative bins. When farmers moved to the center-west, trading firms took over the cooperatives' role. Meanwhile, the trading firms were the main financiers of center-west expansion, and they had no interest in promoting on-farm storage as they wanted the grain in their own bins.

Public silos currently account for just 4.2% of total grain storage capacity and many of the center-west storage facilities are dilapidated.

Rousseff's silos initiative likely doesn't derive from a sense of guilt about past inactivity. Her concern is probably high food prices, which are driving inflation perilously close to the top end of the government's inflation target band of 6.5%.

While grain prices are not directly feeding this food inflation, the rise in logistics costs is, and this is what the government wants to ameliorate.

If the initiative really happens, and that's a fair-sized if, it is great news for Brazilian farmers. In the near term, it will make little difference though.

Mato Grosso is set to produce a record second corn crop of 17.3 million metric tons, up 11% on last year, according to the Agriculture Ministry, and farmers are starting to panic about declining prices.

Corn is quoted at R$17 per 60-kilogram bag ($3.60 per bushel) on average in Mato Grosso, while the cost of production, using high technology and averaging 96 bushels per acre, is R$16.91 per bag, according to Mato Grosso Agriculture Economy Institute (IMEA).

The government is expected to purchases some of the upcoming Mato Grosso harvest, which starts next month, Reports indicate as much as 4 mmt may be hovered up. It would be good if there were government silos in Center-West or Northeast to store it.

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