May 17, 2016

Conab Indicated Brazil's Corn and Soy Exports need to Slow Down

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

With all the news about the political upheaval in Brazil and the tightening soybean supplies indicated in the latest WASDE report, I think there was some important agricultural news from Brazil last week that went "under the radar."

Potential "Wash Out" of Brazil corn exports - In their May report, Conab wrote that there could be some "wash outs" of Brazilian corn exports during the second half of 2016. Brazil front-loaded their corn exports to such an extent in late 2015 that the country is now running out of corn while they wait for the safrinha corn harvest to start in June. As a result, Brazil is importing corn from Argentina, Paraguay, and a little from the U.S. Even with these imports, it has not been enough to stem the increases in the domestic price of corn in Brazil.

The price of corn last week in the city of Campinas, which is in the state of Sao Paulo, was R$ 49.50 per sack or US$ 6.50 per bushel, which is 90% higher than this time in 2015. Corn prices in Mato Grosso do Sul last week hit a record high of R$ 47.75 per sack, which was 172% higher than the previous record high for mid-May of R$ 25 per sack.

Corn prices are even higher in northeastern Brazil, surpassing R$ 50 per sack. Corn prices are expected to soften somewhat when the safrinha corn harvest gets underway, but not by very much because of the diminishing expectations for the safrinha corn crop.

The safrinha corn crop is shrinking on a daily basis due to hot and dry weather in central Brazil and the market is worried that it will not be big enough to drive down domestic corn prices in Brazil by a significant amount. The September/16 contract on the BM&F/Bovespa exchange in Sao Paulo traded last week at R$ 41.97 per sack, which is 39% higher than in September/15.

As a result, in the second last paragraph in the corn section of the report, Conab warned that there may be "wash outs" of Brazilian corn export contracts during the second half of 2016. They commented that the supply of corn from the safrinha crop may not be large enough to significantly drive down domestic corn prices. Therefore, exporters may buy back their export contracts and sell the corn instead to the domestic market where it is much more profitable.

Additionally, I think Conab's safrinha corn estimate is too high. In their May Report, Conab lowered their estimate of the safrinha corn crop by 4.2 million tons. In April they estimated the safrinha corn crop at 57.1 million tons and that was lowered 4.2 million tons to 52.9 million tons in May. The survey for the May report was conducted at the end of April and the safrinha corn crop has gotten smaller since the survey was conducted. Therefore, it is entirely possible that Conab will lower their estimate of the safrinha corn crop even more in subsequent reports making their warning of potential wash outs of Brazilian corn exports during the second half of 2016 even more likely.

As a result, this could open up additional opportunities for U.S. corn exports later this year.

Brazil soybean exports need to slow down - In their May report, Conab indicated that the soybean export pace is running ahead of last year and at the current pace, the soybean carryover in Brazil would end up below 0.5 million tons, which would be considered basically pipeline supplies. They indicated that the pace needed to slow down to insure that Brazil did not run out of soybeans before the 2016/17 harvest started in January of 2017.

The problem for both the soybean and corn crops in Brazil is that the crops are shrinking at the same time that the exports are being front-loaded and running at a very fast pace. In their May report, Conab lowered their estimate of the 2015/16 Brazilian soybean crop by 2 million tons to 96.90 million. That now puts the crop just 0.67 million tons larger than last year's crop of 96.22 million tons. It is still possible that Conab could reduce the size of the 2015/16 Brazilian soybean crop a little more resulting in even tighter carryover supplies.

Therefore, it is possible that Brazilian soybean exports will end sooner than expected later this year increasing the opportunities for U.S. soybean exports during the second half of 2016.