Porto Alegre, June 8, 2021 – A second crop with relatively normal weather progress, even having been planted with a long delay, would bring a normal price curve to port levels. A small second crop between 80/84 million tons, in the current framework of international prices, could even set new record exports. However, the production losses of the second crop grow worse every week, and internal prices resist moving to a normal curve, that is, port less freight to the interior. And it is important that they remain in this condition, in view of the future supply of the Brazilian market. With the second crop losses being irreversible, the focus is on the pace of export shipments.
The dollar finds another moment of slowdown, now breaking the barrier of BRL 5.20 and seeking a floor that could be BRL 5.00. This exchange rate movement has two effects on the Brazilian corn market. The first one is that can facilitate corn imports at a more affordable price than we had until last month. With the current exchange rate, imported corn would arrive at ports at around BRL 90/bag for an internal reference of BRL 100 CIF factory, depending on internal freight. This calculation would make corn from Paraguay and Argentina viable over the next few weeks. It is important to note that so far we have only 170 thousand tons contracted from Argentina and that they are already arriving at the Southern region ports. Paraguay will certainly be a good import option from July onwards. The government of Rio Grande do Sul exempted corn imports from ICMS until December 31. For state consumers, PIS/Cofins is still an import cost and is a federal tax. The federal government has not yet withdrawn this tariff because official institutions that make estimates for the Brazilian crop have not yet reflected the sharp production losses in the second crop. If the losses are made official and the need for greater imports is detected, the federal government may reduce these rates for a period. No need to say that such tax measures can be bullish for corn prices in Paraguay and Argentina.
The second effect is that export prices fall. Even with high premiums, prices at the port dropped to BRL 82/85 over the week for August/September. Of course, this impacts new export business, that is, if the domestic market is above these levels, the volumes held by trading companies may be bound for domestic consumers. Not only from trading companies, but also from cereal companies and resellers that originated second-crop corn will try to place these volumes on the market at the best possible price. And the domestic market is still much better than port levels.
Thus, some parameters are fundamental going forward:
– The environment of the US crop;
– The pace of Brazilian corn exports;
– The fulfillment of contracts by producers;
– Productivity at harvest time;
– The dispute between domestic demand and exporters in origination;
– Selling or retention decisions by producers.
Undoubtedly, the equation of port prices x domestic market prices and export shipment pace x supply pace in the interior will determine domestic price levels. As we have evaluated, no matter how big the second crop losses may be, we will have a good volume being reaped and offered from July in the Brazilian market. The drought itself is speeding up the crop cycle, as we are going to another week without rain in most second crop regions. Light and small grain and/or small and malformed ears will be the characteristic of a good part of this second crop.
If export shipments start aggressively from July onwards, it will not be impossible to believe in a rush of purchases by domestic consumers. It is important to note that Brazil exports corn between June and January at most national ports. Trading companies point to a volume close to 18 million tons originated from producers. We do not know whether they will receive all contracts, but as most of them involve volumes from Mato Grosso and Goiás, we believe that a good part will be fulfilled. From that point, it remains for us to check how much of this volume will actually be irreversibly linked to export shipments and what volume can be used to meet the domestic market.
It is either a total lack of experience or poor counseling to inform the market that Brazil will not export corn in the second half of the year or that the international market will not buy Brazilian corn in the half of the year. If there is a price compatible with the international market, additional volumes will end up being exported, mainly through the so-called North Arc, a region that already has less connection with the South and Southeast and may choose to export rather than passing corn on to the domestic market. The increase in the ICMS tariff by Mato Grosso last week only favors the idea that more corn is bound for exports where the tax is not levied, at the same time that it makes corn more expensive for those who want to buy it in the state and send it to the South and Southeast. As Mato Grosso accounts for 65/70% of Brazilian corn exports, what happens with the state’s sales will decide prices in other regions of the country.
Agência SAFRAS Latam
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