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March 30, 2018

Industrialization is the Cure for Low Corn Prices in Mato Grosso

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

Farmers in Mato Grosso continue to over produce corn and the combination of over supplies, lack of grain storage, high transportation costs, and very long distances to export facilities, have resulted in very low corn prices especially at harvest time. The cost of transporting the corn out of Mato Grosso to export facilities can consume as much as 80% of the value of the corn.

The solution to this dilemma is to transform cheap corn into something more valuable such as meat products or ethanol. During the 2016/17 growing season, Mato Grosso produced 30.5 million tons of corn and 31.2 million tons of soybeans. The record production of both crops resulted in an over supplied domestic market and a lack of storage space resulting in very low domestic corn prices.

In mid-2017 the price of corn in central Mato Grosso fell to R$ 11.00 per sack or approximately $1.60 per bushel. This was well below the minimum price guaranteed by the government, which was R$ 16.50 per sack or approximately $2.30 per bushel. Even though the government guaranteed a higher price for the corn, in order to obtain that price, farmers had to participate in auctions where the government purchased the corn. With these low prices, it is easy to see why ethanol producers viewed the state as a prime location for corn-based ethanol production.

The Syndicate of Sugar/Ethanol Industries of Mato Grosso (Sindalcool) reported that the state produced 1.078 billion liters of ethanol in 2016/17 including 137,800 liters of ethanol produced from corn. Most of the corn-based ethanol came from Brazil's first and only (at least for now) corn based ethanol facility located in the city of Lucas do Rio Verde in central Mato Grosso.

This facility opened in July of last year and the operators of the facility have already announced an investment of R$ 350 million (approximately $110 million) that will double the capacity of the facility. They have also announced that they will build a second facility in the city of Sorriso at a cost of R$ 1 billion (approximately $350 million). Sorriso is the largest corn producing municipality in Brazil, so there should be ample corn supplies for the new facility.

The company that operates this facility is FS Bioenergia, which is a partnership between Summit Agricultural Group from the U.S. and Fiagril from Brazil. It is not hard to see why they are so anxious to expand their ethanol production in the state. According to the Mato Grosso Institute of Agricultural Economics (Imea), the investments in these type of facilities will be paid for in as little as four years.

Other companies have taken notice and there are four more corn-based ethanol facilities in the works in Mato Grosso. In addition to these stand-alone facilities, several sugar mills in the state have retrofitted their facilities to utilize corn during the time of the year when sugarcane is not available. Usually sugarcane is not harvested during the summer rainy season which extends from December through March. Instead of suspending production for several months, these facilities continue to produce ethanol by switching over to corn. There are 10 sugar mills in Mato Grosso and 3 have already been retrofitted to utilize corn and any new sugar mill built in the state will probably also be one of these "flex" facilities.

Producing ethanol from corn in Mato Grosso is cheaper than utilizing sugarcane especially as the sugar sector faces legislative and environment barriers and a lack of credit to expand sugarcane production. It costs approximately R$ 7,000 to plant a hectare of sugarcane (approximately $875 per acre) and the return on investment is low. The sugar sector in Brazil has been economically depressed for the last 6 years. Dozens of sugar mills have gone out of business in recent years, but corn-based ethanol production offers a bright spot in an otherwise depressed sector.