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March 30, 2016

Hog Producers in Southern Brazil fear Industry Collapse

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

The combination of record high corn prices and falling hog prices is leading to a "perfect storm" of economic problems for hog producers in southern Brazil. Hog producers in the states of Parana, Santa Catarina, and Rio Grande do Sul fear their industry is on the verge of collapse if something isn't done very quickly.

There are two basic causes of their problem. The principal cause are record high domestic corn prices resulting from reduced corn production in southern Brazil and record large corn exports. This has put a tremendous squeeze on available corn supplies resulting in prices as high as R$ 53 per sack or US$ 6.50 per bushel (using an exchange rate of 3.7 Brazilian reals per dollar). This situation will only be partially resolved when farmers start to harvest the safrinha corn crop in June.

The other source of their problem is declining consumer spending in Brazil. Brazil is in the midst of its worst economic downturn and political crisis in their modern history. Brazil's GDP is shrinking 3-4% yearly, inflation is over 10% and rising, unemployment is at least 10% or higher, and a corruption scandal is rocking the country. Everyone is on edge in Brazil and consumer confidence and consumer spending is tanking. As a result, hog prices are declining in the face of declining demand.

In the state of Santa Catarina, which is the largest hog producing state in Brazil, the cost of producing hogs is estimated at R$ 4.00 per kilogram, but producers are only receiving R$ 2.80 to R$ 3.20 per kilogram for their live hogs. As a result, producers are losing R$ 90 to R$ 100 per hog of 220 pounds (US$ 24.50 to US$ 27.00).

In Campinas, Sao Paulo, hog producers can purchase 4.34 kilograms of corn today with 1 kilogram of pork. A year ago, the same producer could purchase 7.05 kilograms of corn with 1 kilogram of pork. In other words, hog producers have lost 38.5% of their buying power over the past year.

The problem is most acute for independent producers. They don't have the collective buying power to get cheaper corn prices and their creditors are refusing to extend more credit to keep their operations running. Suppliers are demanding cash for feed and supplies and they are running out of cash to pay their past bills much less to continue producing hogs. Many independent producers have already curtailed their operations and many more will follow suit if something isn't done in a hurry - within 30-40 days.

Domestic corn prices should decline somewhat with the start of the safrinha corn harvest in June, but no one believes the crisis will end any time soon. Any surplus corn will be produced in central Brazil while the livestock industry is concentrated in southern Brazil. The only long term solution to this problem is to produce more corn in southern Brazil, but that would require a change in government policy and the politicians in Brasilia are preoccupied with impeachment and scandals and not with agricultural policy.

Another help would be an increase in hog prices, but as long as Brazil continues in the current economic slump and demand remains weak, hog prices are not going to improve any time soon. If there isn't some help very soon in the form of imported corn from Argentina or a pickup in hog prices, many independent hog producers will go out of business. This is the unfortunate reality across all of southern Brazil.