Analysis: Domestic corn prices in Brazil to remain firm, limit exports in 2020

New Delhi — Corn prices in Brazil are likely to remain firm in the coming months, which could reduce export availability in 2020, even as the country prepares for a record harvest, market players said.

Last week, the local corn price indicator tracked by Brazil's Centro de Estudos Avancados em Economia Aplicada (CEPEA) touched Real 55.3/60 kg ($11.95/60 kg), the highest since the agency started recording prices in 2004.

Corn prices rose as the real weakened further against the dollar, and farmers preferred to sell soybeans over corn, the agency said.

Corn prices have averaged Real 54.31/60 kg so far in March, 36.4% above the average price of March 2019.

Livestock feed demand

Brazil exported corn aggressively in 2019, leaving few supplies for the animal protein industry.

"China began to aggressively import Brazilian pork, poultry and beef, raising prices in Brazil that stimulated expansion of meat production," said Arlan Suderman, chief commodities economist with INTL FCStone Financial Inc. "That in turn increased demand for corn in the domestic livestock industry, but exporters had already shipped supplies."

In the first two months of the year poultry meat exports rose 14% year on year, pork 33.8% and beef 4.5%, according to Brazilian customs data.

Amid low corn stocks, the harvest of the first corn crop, which primarily caters for the domestic market, is also expected to be lower than last year.

In Brazil, the first corn crop is planted during September-December and harvested in February-May, while the second, the Safrinha crop, is planted after the soybean harvest in February-March and harvested in June-July.

Corn production in the state of Rio Grande do Sul, the largest producer of the first corn crop in Brazil, is expected to be around 4.7 million mt in 2019-20, down 21.2% from last year due to drought, according to a survey by the state's Secretariat of Agriculture, Livestock and Rural Development.

Brazil will have to import about 2.5 million mt of corn this year to meet feed demand from the animal protein industry, the survey said. Despite abundant corn production, the livestock industry, concentrated in the southern region, has to import corn because transporting it from the Center-West region, where the bulk of the crop is grown, is expensive.

Brazil is expected to harvest a record 100.5 million mt of corn in 2019-20 from 100.0 million mt last season, according to national agricultural agency Companhia Nacional de Abastecimento (Conab).

Local corn demand is forecast to rise to 68 million-70 million mt in 2020, according to various estimates, from 64 million mt in 2019.

High prices to rein in exports

The domestic corn market has been paying a premium over exports. While corn prices are expected to ease once the second corn harvest hits the market in June, prices are unlikely to drop significantly and may remain firm, according to analysts.

Harvesting a big crop would certainly be expected to relieve some of that tightness, but domestic demand is expected to battle harder than in the past for those available new-crop supplies. The degree to which prices drop will hinge largely on weather during the growing season in determining the size of the safrinha crop, Suderman said.

Also, high truck freight rates in Brazil will favor interior livestock producers over export customers, he added.

These high local prices are expected to limit exports compared with last year. Brazil exported a record 42.7 million mt of corn in 2019, customs data showed.

Considering that the US, the largest exporter, may return to normal production after a challenging 2019 season, corn exports in Brazil may be in a range of 30 million-32 million mt in 2020, said Victor Ikeda, senior grains and oilseeds analyst with Rabobank.

"It is likely that Brazil will see an exportable volume when the second crop corn is harvested -- given the current level of FX, it is unlikely that even with the new safrinha supply, corn prices on the BM&F Exchange will fall below Real 40/60 kg," said Ikeda. To put that into perspective, September 2020 contracts have been around Real 44/60 kg.