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Expectation vs reality: The case of the large corn crop that grew small in Brazil

The stark contrast between expectations and reality is not unfamiliar to commodity markets. One of the most recent examples can be seen in the case of Brazil's corn production.

In December 2020, the US Department of Agriculture expected corn production in Brazil to hit 110 million mt for the agricultural year 2020-21. In the same month, the National Supply Company (CONAB) from the Brazilian Ministry of Agriculture estimated a corn production of 102.59 million mt. In April, CONAB raised its projection to 108.97 million mt. These estimates were record highs, taking into consideration an increase in planting acreage following good prices in the previous cycle, which gave a good incentive to farmers.

On Sept. 10, the USDA slashed its forecast on Brazil's output by 22% to just 86 million mt. CONAB likewise reduced its projections by 16% from the December 2020 estimates and by 21% from the April estimates to harvests of just 85.749 million mt.

USDA estimates for Brazil's corn exports

In agriculture, the weather has last word

High prices encouraged the increase in Brazil's corn planting area, and the conservative yield estimates are based on available statistical data as well as the opinion of the experts consulted by CONAB. But in the world of agriculture, the weather has the final say.

A delay in the soybean harvest led to a delay in the planting of second crop corn, or safrinha, which at the time carried the risk of exposing the main Brazilian corn crop to April droughts and early-July frosts.

Despite the optimism at planting time, drought and frosts occurred and significantly affected the crop, forcing analysts to lower their yield expectations.

The expected yields for the second corn crop, for the 2020-21 cycle, were 5.580 mt/ha in the December 2020 estimates, against 5.331 mt/ha estimated in May after the effects of the drought, and 4.056 mt/ha estimated in August after the July frosts. CONAB's latest yield estimates were at 3.982 mt/haa 29% drop between the December and September estimates.

While there is no crystal ball to predict the final yields until the harvest is weighed, yield estimates are becoming lower and more accurate as the crop hits the market.

This difference between expectation and reality has global implications since Brazil is the second main corn exporter after the US.

The drop in Brazilian corn exports

According to the USDA Brazil exported 35.23 million mt of corn in the 2019-20 marketing year.

The initial estimates for the 2020-21 period were 39 million mt, and USDA has lowered this to 22 million mt—a 44% drop between what was expected in December 2020 versus what was estimated in September.

It is expected that the estimates of Brazilian exports will continue to fall due to the strengthening of domestic demand and the poor quality of the grain that is being harvested due to frost damage.

An increase in corn exports by US, Argentina and South Africa are filling gap left by Brazil.

2021-22 cycle: Let the games begin

Attractive prices and low inventories are again expected to encourage farmers to produce a record corn crop in the next cycle. As of September, the USDA's estimate for Brazilian corn production for the 2021-22 marketing year is at 118 million mt and CONAB's at 115.957 million mt.

For exports, USDA's estimate Brazil will export 43 million mt of corn in the 2021-22 marketing year, and CONAB's estimate was at 39 million mt.

How far will reality deviate from these newly published expectations in the next cycle? Market participants and industry stakeholders continue their search for tools not for improved estimates, but also for price risk management, in an environment where is climate ultimately the determining factor.