South America Calling

Brazil's Corn Crunch

These are volatile times in Brazil's corn market.

With a record crop harvested in 2014-15 and the prospect of another one on the way in 2015-16, Brazil's massive meat industry should be well stocked and corn prices under pressure.

But quite the opposite is the case.

Domestic cash prices are hitting record levels even as the first-crop corn harvest starts arriving in the south, and the market is abuzz with talk of shortages in 2016.

"We could see shortages or washouts in 2016. It is a very tight situation," said Andre Pessoa, director of Agroconsult, a local farm consultancy.

The reason for all this is the devaluation of the Brazilian real and the surge in exports that it has caused.

With the real freefalling over the last year -- down 38% against the dollar in 12 months -- exporters have been able to be super aggressive.

As a result, Brazilian exports have beaten all records in 2015. With nine days to go in the 2015-16 commercial year, it appears clear that Brazil will export somewhere in the region of 36 million metric tons (mmt), some 10 mmt above the previous record set in 2013-14, according to Safras e Mercado, a local consultancy.

Brazil will ship an unheard-of 6 mmt in January.

This demand has forced local meatpackers like JBS and BRF Foods to react. As a result, Brazilian corn prices have risen 18% in 2016 and 60% over the last 12 months to reach 43.46 Brazilian reals per 60-kilogram bag ($4.48 per bushel), according to Esalq/BMFBovespa data.

The shortage would have been easier to predict if government data were not so unreliable. Official figures appear not to account for around 4 mmt of exports in the third quarter of last year, according to exporters.

The situation shouldn't be so tight, as there are carryover stocks of up to 4 mmt, but these are in the hands of well-capitalized farmers.

Meanwhile, the first-crop harvest is beginning in the south, which will supply the meat industry. That crop looks good with heavy rain not significantly affecting yields. But a sharp decline in area means output will be 7% lower than last year at 27.9 mmt, according to Agroconsult.

The smaller first crop will possibly be compensated by a larger second crop. Agroconsult pegs the second harvest, known locally as the safrinha, some 6% larger than last year at 57.7 mmt.

However, exporters have been aggressive in buying up that crop ahead of planting. Farmers have committed as much 40% of that crop already as a means of financing planting in the economically volatile times in Brazil.

That potentially leaves domestic consumers exposed in the second half of the year.

Shortages could lead to washouts and possibly imports of corn to the northeast in the third quarter, analysts warn.

And the situation could become even more critical, if the second crop fails.

Delays in soybean planting mean second-crop corn planting will be as much as a month behind schedule in parts of Mato Grosso and the rest of the Cerrado.

That means a lot of planting in March, outside the recommended window, potentially exposing crops to dry weather in April. Meatpackers, who have seen margins cut wafer thin by the run-up in local corn prices, will be praying for rains to continue into autumn.



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