New Delhi — The uptrend in Brazil's corn prices, even during the final stages of harvest, is not showing signs of a pullback, and are likely to remain elevated during the 2019-2020 season, analysts who spoke with S&P Global Platts said.
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The corn price indicator tracked by Brazil's Centro de Estudos Avançados em Economia Aplicada, or CEPEA, hit Real 61.25/60 kg on Aug. 31, the highest nominal price since it started tracking prices in 2004.
An array of factors have pushed up domestic corn prices in Brazil, even as international prices remained low or muted.
Among others, this year's opening stocks was 30% lower compared with a year ago at 10.2 million mt, following last season's record high exports.
Secondly, the first corn production in the state of Rio Grande do Sul plunged in 2019-2020 due to severe drought and since this had occurred amid low inventories, prices were pushed higher.
Apart from Rio Grande do Sul, Parana, Brazil's second largest corn producer, was also hit by unfavorable weather conditions which delayed the second corn harvest there.
In Mato Grosso do Sul, the delay in the planting of soybeans meant a delay in the second corn planting. The first corn crop is usually planted over September-December and harvested in February-May, while the second corn crop is planted over February-March and harvested in June-August.
Against this backdrop of adverse weather, corn demand from the livestock sector and corn-based ethanol manufacturers was robust, with Brazilian producers selling the bulk of the crop well before this season's harvest. In Mato Grosso, the largest corn producer in Brazil, farmers had sold nearly 57% of their crop around mid-January, when planting had barely started in the state.
Currently, these producers are focused on fulfilling those early commitments.
"Indeed, one of the reasons pushing corn prices higher is the slowing of farmers selling in the spot market as pre-harvest sales were boosted in the last months. My impression is that both the export market and the local industry are paying these high prices, but in small amounts or volumes of corn just in order to fulfill some prompt needs," Victor Ikeda, senior grains analyst with Rabobank, said.
"Pre-harvest sales have reduced end stocks. Producers have no interest in new sales. And domestic industries usually buy on the spot market, carrying less stocks, which supports prices," CEPEA researcher Lucilio Alves said.
Notwithstanding all of the above, Brazil's total corn production is estimated at a record 102.14 million mt in 2019-20, 2.1% higher from a year ago. Thus, the issue is not that of output, but rather of availability in the spot market.
"The atypical price appreciation in this period is due to cyclical factors in the money market and not due to the volume or quality of the grain produced. We believe that the volume of corn harvested will be sufficient to guarantee national supply," according to Brazil's national agricultural agency, Companhia Nacional de Abastecimento, or Conab, in its weekly update released on Aug. 31.
Brazil's corn prices have generally been strong, at least since June, and buyers were hoping that prices would ease during harvesting. However, producers' willingness to hold their crops as the peak exporting period begins, a favorable currency exchange rate and strong local demand are likely to keep corn prices elevated.
"In this scenario, a range from Real 55-60/60kg bag is very likely at B3 Exchange -- the upward limit is due to the animal protein industry's restrictions to purchase above these levels, while the downward limit is the FX [foreign exchange rate] [especially since the Brazilian Real is currently devalued at 5.50 to the US dollar]," Rabobank's Ikeda said.
For the short and medium terms, the expectation is that corn prices will remain firm in the domestic market, while higher prices cannot be ruled out, Brazil-based consultancy Scot Consultoria said in an Aug. 28 report.
Impact on consumption and export
Over 65% of corn produced in Brazil is domestically consumed with animal feed manufacturers accounting for the bulk of the purchase, but high corn prices will reduce livestock producers' capacity to buy the feed.
According to Rabobank's Ikeda, part of the animal protein industry, which is able to export and pass on the higher feed cost to its customers, can continue to buy corn at prevailing high prices, but producers who are unable to do so and who depend solely on domestic consumption may not be able to absorb these high corn prices.
Corn exports may be tempered by high prices, but this may not result in a significant drop in volume.
"Brazilian quotations are higher than American ones, but are at the same price as Argentina's. This may hinder new export contracts in the face of increased US supply," CEPEA's Alves said.
"I believe most of the export programs have already originated, so I don't see potential for significant changes," Ikeda said.
Most analysts peg Brazil's corn exports during the Feb. 2020-Jan. 2021 marketing year at 31 million-34.5 million mt against 41.1 million mt in the previous season.