Rabobank Industry Note #543 - April 2016
What Is Happening to Corn Prices in
Brazil?
How Long Will This Price Rally Last?
RaboResearch
Food & Agribusiness
Research and Advisory
In Brazil, domestic corn prices began 2016 at record-high levels, despite ample
global supply and pressured international prices. Pushed by quickly rising exports
and the devaluation of the Brazilian currency, not even the traditional seasonal
pressure from the summer harvest has been able to bring down cereal prices in
the domestic market. At the end of March, cereal was traded 53 percent higher
than in the same period in 2015 (see Figure 1). The high corn prices have been
impacting the animal protein industry in Brazil. Corn is the main animal feed
component in Brazil, representing around 60 percent of all ingredients used in
feed production. Any changes in corn prices have a direct impact on the
profitability of that sector.
Renato Rasmussen
[email protected]
+55 (11) 55037485
Adolfo Fontes
[email protected]
+55 (11) 55036943
far.rabobank.com
The devaluation of the Brazilian currency has stimulated exports
Contents
The devaluation of the
Brazilian currency has
stimulated exports
1
The weakened real has
been boosting the demand
for feed rations
3
Increased corn
As a result of the devaluation of the Brazilian currency (the real), which has lost about 60
percent of its value over the past 24 months, Brazil’s corn has become much more
competitive internationally, especially against other key corn-producing countries. As a
result, the country’s corn exports gained traction from the second half of 2015, especially
after the beginning of the summer harvest. According to data from Brazil’s foreign trade
department (SECEX), Brazil exported 5.4 million tonnes of corn in February—a volume five
times higher than in the same period of 2015, when shipments totalled 1.1 million tonnes.
consumption has been
3
The second corn crop will
be decisive to corn end
3
Production in the US will
determine prices on the
4
The Brazilian currency is
likely to continue
5
Government response—
Figure 1: Price developments in the BM&FBOVESPA Board of Trade, Apr 2014-Apr 2016
intervention to protect the
BRL/metric tonne
850
800
750
700
650
600
550
500
450
400
Source: Rabobank, 2016
Page 1/7 | Rabobank Industry Note #543 - April 2016
Apr-2016
Feb-2016
Mar-2016
Jan-2016
Dec-2015
Nov-2015
Oct-2015
Sep-2015
Jul-2015
Aug-2015
Jun-2015
May-2015
Apr-2015
Mar-2015
Jan-2015
Feb-2015
Dec-2014
350
Oct-2014
6
Nov-2014
Conclusion
Sep-2014
5
Aug-2014
meat industry
Jul-2014
devaluating
Jun-2014
CBOT
May-2014
stocks in Brazil
And such a rise in exports is likely to last through 2016—at least until the end of the first
semester, when the second corn crop, which is currently being planted in most of the
Centre-West, is harvested (see Figure 2). Taking advantage of higher parity prices, many
producers decided to anticipate contracts. According to the Mato Grosso Institute of
Agricultural Economics (IMEA), forward sales reached a new record high in 2015/16.
Normally, corn sales of the second corn crop (also known as the ‘safrinha’ crop) take off
only between February and March, but this time negotiations have been strong since
December. Thus, 26 percent of planned production has already been sold, compared to a
historical average of 5 percent.
Apr-2014
eroding domestic stocks
Today
WHAT IS HAPPENING TO CORN PRICES IN BRAZIL?
In Brazil, corn prices moved sharply
higher in early 2016, despite ample world
supply and subdued international prices.
What is behind this boom and how long
will it last? Rabobank has identified four
drivers behind the price hike. The factors
that will guide the market in the
coming months are also highlighted.
March 2008
DRIVER
S
The Brazilian real
Following the sharp devaluation of the real, Brazilian
corn became very competitive in the international
market. As a result, Brazilian exports of the grain
started gaining momentum in the second half of 2015.
Exports
In February 2016, Brazil exported 5.4 million
tonnes of corn—five times more than during the
same period in 2015, when shipments totalled
1.1 million tonnes.
Stocks
With increased exports and higher domestic
consumption of poultry and pork—driven by high
beef prices—Brazilian demand for corn has
expanded significantly in 2015/16, reducing
carryover stocks to a historical minimum.
July 2015
Brazil’s 2nd corn crop
Despite heavy rainfall in several key producing
regions, planting of the second corn crop in Brazil
has more than doubled since the beginning of
March and has already reached about 1/4 of the
total expected area. Moreover, El Niño
may delay the end of the rain season
by six weeks, benefitting
yields.
FACTORS
Intervention
Given poultry, pork and beef farmers’ concern
about high corn prices, the government’s
National Supply Agency (Conab) authorized the
auction of 500,000 tonnes of government stocks
to cool the market.
China
The cooling of the Chinese economy points to
slower growth in food demand compared to
recent years. In the current scenario of high
global corn stocks, this translates into less
support for international prices.
US
As the world’s largest producer and
exporter of the grain, it is expected that an
increase in US production in 2016 will
pressure prices in Chicago. But how this will
affect Brazilian corn prices will be heavily
dictated by exchange rate developments.
Weather
The weather always has a significative impact
on the prospects of the second corn crop. The
length of the window for summer rains has
been a major concern for producers.
Despite the rise in corn prices recorded since early 2016, increases in international stocks can
push world prices up and pull domestic corn prices down, especially in a pessimistic scenario for
the global economy. This leads us to believe that Brazilian corn prices are not likely to stay at such
high levels in the medium term. This is a good time for Brazilian farmers to hedge transactions.
What Is Happening to Corn
Prices in Brazil?
Figure 2: Accumulated Brazilian corn export—the first three months of 2016 already exceed the
total volume from January to August 2015
million tonnes
30
25
20
15
10
5
0
Jan
Fev
2013
Mar
Apr
May
2014
Jun
Jul
Aug
2015
Sep
Oct
Nov
Dec
2016
Source: SECEX, 2016
The weakened real has been boosting the demand for feed rations
Besides stimulating Brazilian corn exports, the devaluation of the real against the US dollar
has also been encouraging exports by the Brazilian animal protein industry. As a result, corn
demand for rations has been increasing throughout the country, mainly for pork and poultry
production.
Thus, the weakened real has been acting as a strong incentive for an industry which was
already seeing a spike in demand over the past months. In 2015, rising beef prices in Brazil
led to a decrease of about 10 percent in consumption, compared to 2014.1 This happened
because, with beef prices at historic high levels, consumers were stimulated to seek
alternative products, thus boosting the demand for chicken and pork meat.
Consequently, Rabobank expects domestic demand for corn to rise by 2 percent, to 42
million tonnes, in 2016.
Increased corn consumption has been eroding domestic stocks
According to preliminary projections by the Brazilian supply agency (Conab), domestic corn
stocks are expected to drastically lower, to 6.5 million tonnes by the end of the 2015/16
crop year—a 35 percent drop from the 10.0 million tonnes estimated at the end of the
2014/15 season (see Figure 3). This is due to increased domestic demand for pork and
poultry products, and increased corn exports (estimated at 29 million tonnes by the
agency).
As a result of the tight stock levels, a consequent support to prices in the Brazilian domestic
market can be anticipated. After all, the domestic prices reflect expectations for future
availability of the grain to the domestic industry. However, we must carefully examine the
estimates used in accounting for supply and use of the inventories in order to appreciate the
real probability of low availability of the cereal in the domestic Brazilian market. In this
regard, a key unknown factor still looms over the Brazilian market for corn: the productivity
of the second corn crop in 2016.
The second corn crop will be decisive to corn end stocks in Brazil
¹ The fall in beef production was a
reflection of the current female
retention phase in the Brazilian herd—a
result of high calf prices—which reduces
the availability of animals for slaughter.
By projecting Brazilian corn exports based on the trend line from the past five years, we see
that corn shipments could surpass the 30 million tonne-mark in 2016 if the total harvest
(summer and winter crops) actually totals 83 million tonnes this cycle (2015/16), as
expected by Conab in its last report. It is worth noting that the current record is 2014/15,
when 31 million tonnes were exported.
However, it is still too early to be sure of such a large harvest, especially as the second corn
crops will still take four months to mature. Until then, the weather will still have a lot to say
about yields.
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What Is Happening to Corn
Prices in Brazil?
Producers always try to anticipate the installation of the second corn crop as much as
possible, as a way to avoid crop development during the end of the rainy season, which
brings increased drought risk. But this year, an unexpected drought delayed planting of
soybeans in much of the Mid-South between September and October, thus delaying the
ideal window for planting the cereal.
However, according to estimates by IMEA, the area planted with the second corn crop
doubled in the first week of March and is already 20 percent above the total expected area.
Still, it is 1.2 percentage points above the same period in 2015. This is a virtually
insignificant variation, but it has had a significant impact on domestic marketing of cereal.
The market has reacted with concern, mainly because it is a year in which the El Niño
weather phenomenon will make climatic evolution more unpredictable.
Nevertheless, at the moment, US climate monitoring agencies indicate that a change in the
pattern of winds in the Pacific Ocean should change the offset of warm water and prolong
the end of the rainy season in South-Central Brazil by four to six weeks, benefiting the
second corn crop in Brazil. This would be similar weather behaviour to that observed in
2015, when the rainy season lasted beyond the historical average, ensuring good
productivity for the corn crop.
Production in the US will determine prices on the CBOT
After the planting of the second crop corn in Brazil, the market will turn its attention to the
US. As the largest producer and exporter of corn, it is expected that US production may
significantly impact the prices in Chicago.
In this regard, at the end of March, the USDA released its estimate for the 2016/17 US corn
planting. The very large numbers surprised market players, suggesting a planting area of
34.8 million hectares, implying an expansion of cultivation area by about 6 percent.
Assuming a trend yield of 10.5 tonnes/hectare, this would result in a production of 36
million tonnes. Despite the increased availability, demand for US corn will not follow the
increase in supply and thus ending stocks in the US in 2016/17 will rise for the fourth
consecutive year and could grow by 35 percent. This new increase in world cereal supply
could trigger further declines in international prices.
Figure 3: Supply-and-demand forecast for the Brazilian crop points to reduction of cereal stocks in
the domestic market, 2005/06-2015/16f*
million tonnes
* Note: Admittedly, supply and demand remain among the most important drivers of pricing on an agricultural market.
Their impacts can be indirectly measured by the ratio between available stocks and expected consumption, expressed by
the ratio stocks/use.
Source: Rabobank, 2016
It is important to note, however, that, international prices have already moved lower
recently and Rabobank expects prices to remain confined to the USD 3.40/bushel to USD
3.80/bushel range on the CBOT (see Figure 4).
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What Is Happening to Corn
Prices in Brazil?
On the other hand, international corn prices are also strongly influenced by macroeconomic
conditions, especially the Chinese economy. Moreover, the behaviour of oil prices has also
been impacting the progress of the commodity prices. Thus, there is ample room for a
return of volatility to this market, which could cause sudden movements on the CBOT.
The form in which these possible fluctuations in international prices may translate into new
levels of prices in Brazil will be related to exchange rate developments.
The Brazilian currency is likely to continue devaluating
Recent data from Brazil’s external accounts shows that the current account deficit in 2015
reached its lowest level in six years—USD 59 billion—fully financed by the inflow of USD 75
billion of foreign exchange. In this regard, the devaluation of the Brazilian currency has
greatly contributed to such an inflow, by reducing imports and stimulating exports.
Still, despite the improvement in the external balance, the market remains concerned about
the health of Brazil’s public accounts, as recently evidenced by the double downgrade by
international agency Moody’s, which, in line with Fitch and S&P, placed Brazil in speculative
grade. It is clear that austerity measures are needed. And, in case of prolonged absence of
concrete initiatives to deal with the fiscal deficit, it is possible that additional pressure in the
devaluation of the real will again be observed.
Consequently, the developments in national policy will be main drivers of the exchange rate
over the coming months, as they have been over the past few weeks. Thus, high volatility
should follow.
Figure 4: Rabobank’s CBOT Corn price outlook, Q2 2012-Q4 2016f
USc/bushel
900
800
700
600
500
400
300
Rabobank forecast
CBOT Corn
Source: Rabobank, 2016
Government response: intervention to protect the meat industry
At the request of the breeders of poultry, pork and beef, concerned about the high price of
corn in the domestic market, Conab has so far auctioned 500,000 tonnes of public stocks to
try to cool down the prices.
The product is in warehouses in Mato Grosso, Mato Grosso do Sul, Goiás and Rio Grande do
Sul. And the total sold in all auctions to date was 347,000 tonnes. But, even in these places,
the prices strengthened. Apparently, nervousness about cereal availability in the domestic
market is still stronger than the actions undertaken so far.
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What Is Happening to Corn
Box 1: High corn prices suggest lower margins for the animal protein industry
Prices in Brazil?
Corn is the main animal feed component in Brazil,
representing around 60 percent of all ingredients used in
feed, particularly for the production of chicken, hog and
grain-fed cattle. Therefore, any changes in corn prices
can affect the profitability of the animal protein industry.
As of the beginning of 2016, corn prices have reached
consecutive records in Brazil, and in February, they were
67 percent above February 2015. Meanwhile, chicken
wholesale prices rose by a mere 14 percent, while pork
wholesale prices declined by 6 percent.
As a result, the poultry and pork industry’s margins have
been pressured, as made evident by smaller meat-tocorn ratios in February 2016 when compared to February
2015 (see Table 1).
Table 1: Ratio meat/corn—animal protein producers are buying
less corn with one kilo of meat in comparison to 2015*
February 2015
February 2016
Chicken/corn
8.9
6.1
Pork/corn
13.4
7.6
* Note: ratio=how many kg of corn (western PR) it is possible to buy for the
price of 1kg of chicken/pork sold (wholesale)
Source: CEPEA, Rabobank, 2016
Naturally, the situation is worrisome, and some
transference of this cost to consumers is anticipated.
However, an adjustment is not simple, as the possibility
of such an adjustment must take into account the
current level of beef prices (a substitute product) and its
relationship to chicken and pork prices.
In that regard, if—in the period between 2010 and 2014,
it was possible to buy 2.18kg of chicken for the price of
1kg of beef, on average—in the first two months of
2016, this indicative ratio reached 2.60, improving
chicken competitiveness, which resulted in a migration of
consumers from beef to chicken. And on the pork side,
this change has been even higher, from 1.45—the
average in 2010 and 2014—to 1.92 in the first two
months of 2016.
Therefore, poultry and pork producers theoretically could
push some of their increased costs towards consumers
without triggering a movement of consumers back to
beef products.
Moreover, the recent devaluation of the real against the
US dollar has been boosting the Brazilian
competitiveness of meat products in the international
market. As a result, a strong growth of Brazilian meat
exports is expected in 2016, which will favour companies
who have access to the international market. It is worth
noting that, as the Brazilian currency has been
devaluating proportionally more than the relative change
seen in corn prices in Brazil, animal protein exporters
continue to experience positive results.
Nevertheless, animal protein players have already been
adopting some strategies in order to minimise the
detrimental effects of increased corn costs. Aside from
increasingly focusing on traditional hedging strategies,
these players are now revising their grain sourcing
strategies, seeking the grain at more distant locations
but at a lower price. In March, corn imports by the
animal protein industry from corn produced in Paraguay
and Argentina surpassed 500,000 tonnes.
Regarding the beef sector, corn price impacts are limited
to about 10 percent of domestic production—comprised
mostly of animals in feedlots—plus around 10 percent for
some non-traditional types of grain-based nutrition
strategies. This current scenario, coupled with the
shortage of steers—due to the current stage of the
livestock cycle in Brazil—should limit the use of feedlots
in Brazil in 2016, mainly in the first half of the year,
contributing to the postponement of the beef production
recovery in Brazil for 2017.
With a negative pressure on margins—based on the
current corn developments for the animal protein
industry in Brazil, a positive outlook for Brazilian meat
exports and the possibility of a decline in corn prices
over the coming months, overall—Rabobank expects a
positive year for the Brazilian meat industry.
Conclusion
There are many variables that can influence the movement of prices in the Brazilian
domestic market. However, the downside risks seem more justified, especially against a rise
in prices that goes against the historical seasonal trend.
Despite the strong increase in the futures contracts for the marketing of corn recorded on
the Brazilian Board of Trade (BM&F) since the beginning of the year, it is possible that
increases in international stocks may press world prices and result in a cooling of domestic
corn prices in Brazil.
As a matter of fact, forward contracts for corn export in the window from August to
September already reflect a sharp drop in prices in key export regions, such as Paranagua,
in the south of Brazil, as contracts start to be closed with a 17 percent average discount.
In conclusion, Rabobank believes that the viability of sustained high corn prices in Brazil is
highly unlikely in the medium term. Nevertheless, it is worth noting that such a scenario still
points to pricing levels that are considered quite satisfactory by producers.
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What Is Happening to Corn
Prices in Brazil?
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