South America Calling

Brazil has a mountain of corn that it must deal with this year.

It looks highly likely the ag giant will produce substantially more than the 73 million metric tons (mmt) harvested last year, but, unlike in 2012, it can't count on a U.S. drought to stimulate export demand.

The Brazilian government reacted to the situation this week by announcing it would purchase at least 3 mmt of corn in an effort to prop up prices and build stocks.

But big question marks remain over the profitability of the crop at current prices, especially since freight rates have skyrocketed.

In order to preserve the local market, Brazil must aggressively export as it did in 2012-13 when 24 mmt were shipped.

But demand is not as strong and the massive soybean crop will likely vie with corn for space at port terminals during the June-September period.

It's a delicate situation, one that led Aprosoja, a farm lobby group, to call for the government to purchase 10 mmt this season.

Brazil's Agriculture Ministry this week pegged 2012-13 corn production at 78.0 mmt, up 7% on the year before. It raised its forecast from last month based on the excellent development of second-crop corn, which it pegged at 43.2 mmt, substantially higher than many private estimates.

Exports typically come from the second crop, the harvest of which will soon begin, but shipments from the first crop have been good, totaling 4.5 mmt in the February-April period.

Furthermore, delays to U.S. planting may offer more time to ship in August and September.

But to balance the market, Brazil will have to repeat last year's export performance. The Agriculture Ministry forecasts exports of 15 mmt and carryover stocks of 17.1 mmt.

The problem is, Brazil isn't a low-cost corn producer. According to the Mato Grosso Farm Institute (IMEA), average second-crop corn costs are $3.50 per bushel in the state, using mid-level technology.

Meanwhile, freight costs have severely cut into competitiveness. It currently costs R$260 to transport a ton of grain from Sorriso, Mato Grosso to Paranagua port -- about $3.30 per corn bushel.

It's a difficult situation that we should watch very closely.

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