Jul 17, 2017

Interest Waning for Government Subsidized Corn Auctions in Brazil

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

The Brazilian government has conducted a series of auctions in recent months aimed at providing the minimum guaranteed price for corn for farmers in the center-west region of Brazil. The minimum price guaranteed for corn in most of Mato Grosso is R$ 16.50 per sack or approximately $2.30 per bushel.

In these auctions the government will subsidize the difference between the current market price in the region and the guaranteed minimum price. In other words, if the local market price is R$ 13.00 per sack ($1.80 per bushel) and the guaranteed minimum is R$ 16.50 per sack ($2.30 per bushel), the government would pay the farmer the difference between the two prices if he sold the corn to an authorized end-user.

When the corn auctions started a couple of months ago, the interest was high because international corn prices were low because there was not yet a concern about adverse weather in the U.S. In the more recent auctions, interest has waned due to increasing corn prices resulting from hot and dry weather in the western Corn Belt and the possibility that prices may strengthen going forward.

The most recent auction was held last Thursday, July 13th, and Brazilian farmers showed very little interest in committing their corn to the program. Conab's Prepo's auction on July 13th was for 880,000 tons of corn in Mato Grosso, Mato Grosso do Sul, and Goias, but they only managed to subsidize 12% of the offering. Conab's Pep auction was for 320,000 tons of corn in the same three states, but the results were even more disappointing at just 5%.

If a farmer participates in a Prepo auction, in order to receive the subsidized corn price, they have a limited period of time to sell their corn to an authorized end user. They must sell the corn to one of the following end users: poultry producers, hog producers, cattle feedlots, egg producers, fish farms, feed manufactures, food manufactures, or commercial interest that will in turn sell to an authorized end-user. The subsidized corn is not allowed to enter the export market.

Farmers generally have about ten days to make the sale and then request the difference between the local market price and the minimum price guaranteed by the government. One of the problems with this program is that it can take many months before farmers receive their payment from the government.

In the last Pep auction conducted in Goias on July 6th, farmers only received a subsidy of R$ 0.48 per sack ($0.07 per bushel), which hardly justified the time and effort to participate in the process. Farmers generally only participate in these programs when they feel the market price will not exceed the guaranteed minimum price any time soon.

The entire government subsidy program is designed to aid the marketing of 9 million tons of corn, which is only a small part of the 96.0 million tons Conab is estimating for the 2016/17 Brazilian corn crop.