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February 8, 2016

Brazil's Corn Auction did Little to Relieve Tight Supplies

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

While farmers in Brazil are pleased to see the record or near record high domestic corn and soybean prices, livestock producers in southern Brazil are being pinched financially. The combination of record large corn exports fueled by the devaluation of the Brazilian currency and reduced full-season corn production in southern Brazil has led to domestic corn prices in southern Brazil increasing roughly 50% compared to a year ago.

According to the Minister of Agriculture for the state of Parana, in January the average price of corn in the state was R$ 29.60 per sack or 42% higher than the average price of R$ 20.73 during January of 2015. In some regions of the state, the current price of corn is as high as R$ 40 per sack.

The problem in Brazil is that the corn is being produced out of place compared to where it is needed for the livestock industry and transporting the corn from around Brazil is extremely expensive. For the past decade, the trend has been to reduce full-season corn production in southern Brazil in favor of more soybeans and to increase the production of second crop corn in central Brazil. Since there are no rail or barge operations linking central and southern Brazil, the only way to transport the corn to southern Brazil is by truck, which is the most expensive way to move bulk commodities.

For a number of years, livestock producers in southern Brazil have been warning that this is unstainable and that the country could not keep reducing corn production in southern Brazil while the livestock industry continued to expand in southern Brazil. The problem finally came to the forefront this year due to the record large corn exports spurred by the devaluation of the Brazilian currency.

The Brazilian government tried to help ease the situation last week by auctioning off some of the government owned corn stocks. The government offered 150,000 tons of corn, but they managed to sell only 85% of what was offered. To put this into perspective, what was auctioned off represented basically a little more than one day's demand for corn in Brazil which is 120,000 tons. The government has indicated that they intend to sell a total of 500,000 tons of corn, but that would represent just 4 days of corn demand in Brazil.

The National Animal Feed Industry Association (Sindiracoes) in Brazil indicates that 43 million tons of corn will be needed in 2016 for animal rations mainly for poultry production, which is about half of the country's corn production. As mentioned previously, the problem in Brazil is that the corn is produced out of place compared to where it is needed.

These high corn prices are expected to spur interest in more full-season corn production in southern Brazil for the 2016/17 growing season. If farmers in southern Brazil do increase their full-season corn acreage next growing season, it will be the first increase in more than 10 years.