Big Crop = Price Drop: How Brazil’s Record Safrinha Harvest Is Pushing Corn onto Global Markets
Brazil’s safrinha corn crop (the second crop of the season) will have a high yield, pressuring Brazilian corn prices. As domestic demand is not guaranteed, Brazil will have to export more corn, but how competitive Brazilian corn exports will be depends heavily on currency developments and corn prices.
Things are looking up for the safrinha harvest. The weather has been extremely favourable, especially in terms of rainfall volume and distribution in the main production areas. We expect a record safrinha corn production close to 67m tonnes, up from last year’s drought-reduced 41m tonnes, but also 23% higher than the previous record from 2015.
This positive production outlook has been pressuring corn prices in Brazil. Between January and June, the corn prices at the BM&F exchange decreased 30% (see Figure 1), pushing prices below CBOT levels again and close to the lows seen two years ago. From late 2015 to the first quarter of 2017, domestic prices disconnected from CBOT prices, for which the main reasons were:
- the intense export pace in Q1 2016 due to the great devaluation of Brazilian real
- the ensuing severe yield losses in Brazil’s 2015/16 ‘safrinha’ crop
- the lowest carry-over stocks since 2011/12, as a result of these yield losses
Figure 1: Chicago corn prices (CBOT) disconnect from Brazil prices (BM&F), January 2015 – May 2017
For the next months, we expect Brazilian corn prices to regain a stronger correlation to CBOT prices. However, for the next quarter, Brazil’s imminent harvest might add even more price pressure on Brazilian corn, and the fact that farmers continue to delay selling the largely harvested 2017 soybean crop negatively impacts on-farm storage capacities. This might force farmers to sell a larger share of their corn production on the spot market during the harvest period, increasing the grain availability and resulting in lower prices in the short term.
Demand concerns are also rising over this record corn production in Brazil. Firstly, domestic consumption of corn in Brazil will be impacted by adverse issues in the local animal protein industry, which could result in a reduced feed-ration demand, although the USDA still forecasts a 4% YOY increase. For instance, given the current level of beef prices in the Brazilian futures market, the number of heads in feedlots could be reduced, resulting in lower demand for corn.
As a consequence, Brazil will have to depend more on corn exports. Even if Brazil’s corn exports reach the 2014/15 record volume of 34m tonnes, Brazilian corn stocks in this 2016/17 crop would still increase 40% compared to last season (according to the USDA) and the stocks-to-use ratio would rise to 16.1%, which is above the 14% that was seen on average before last year’s drought-reduced supplies.
In the last five years, 70% of total Brazilian corn exports were sent to eight countries, seven of which were in Asia (see Figure 2). According to the USDA, the imports of these eight main offtakers should rise by 3.5m tonnes or 6% YOY in the upcoming 2017/18 season. Still, with expectations of continued high US corn supplies and export potential, Brazil’s export competitiveness in the international market will heavily depend on Brazilian corn prices as well as its currency development.
Figure 2: Brazil’s main corn export destinations (average), 2012-2016
Rabobank forecasts that the Brazilian real will depreciate slightly over the remainder of 2017 toward USD/BRL 3.45, from current levels of USD/BRL of 3.30, which should have a positive impact on Brazilian competitiveness. Considering Q3 2017 CBOT corn prices of USD 3.75/bu and the current exchange rate close to 3.30 USD/BRL, the export parity price in Mato Grosso is BRL 281/tonne, which is just covering production costs (see Figure 3).
Figure 3: Cost of production per tonne and corn export parity price in Mato Grosso based on a CBOT corn price of USD 3.75/bu
The forecast weaker real should provide a positive margin for Brazilian farmers, which could encourage them to sell their production. A USD/BRL of 3.40 would mean farmers in Mato Grosso still have a break-even margin if CBOT prices were to decline towards USD 3.64/bu, while a stronger real of USD/BRL 3.00 would require CBOT corn prices at USD 4.12/bu for Mato Grosso farmers to break even (see Figure 4).
Figure 4: CBOT corn prices required to cover Brazilian safrinha production costs at different currency rates scenarios
Where to go from here
Victor IkedaAnalyst - Grains & Oilseeds Read more
RaboResearch Food & AgribusinessPO Box 17100 (UC 053) 3500 HG Utrecht, The Netherlands