May 19, 2016

Government Owned Corn Stocks in Brazil Equate to 6 Day Supply

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

The Brazilian government has a policy of purchasing grain on the open market and then storing it for future sale. They sell the grain in order to smooth out the price if there is a tight supply that drives up domestic prices. That is how it is supposed to work in theory. In practice, it has not worked out very well this year, especially for corn in Brazil.

Brazil front-loaded their corn exports late last year to such an extent that they were in serious jeopardy of running out of corn before the next safrinha corn harvest, which will begin in June. As a result, domestic corn prices in Brazil are at record high levels and they are not expected to drop very much even when the safrinha corn harvest begins.

In a situation such as this, it's the government owned grain that is supposed to be used to relieve the tight supplies. But, Conab has already sold 500,000 tons of corn this year, which was not nearly enough to satisfy the market. Now, the government only has 900,000 tons of corn left in storage, which represents 6 days of usage. The monthly corn consumption in Brazil is estimated at 4.5 million tons, or 150,000 tons per day. Therefore, with only six days of corn on hand, government sales from this point forward would do little to calm the market.

At the end of January 2016, the carryover corn stocks in Brazil totaled 10.54 million tons and Brazil exported 5.37 million tons more corn in February and 2.02 million tons more in March. Therefore, by the end of March, there were only a little more than 3 million tons of corn left in Brazil, or about a 21 day supply. That was not enough corn to safety the demand until the next safrinha corn harvest stars in June. As a result, Brazil was forced to import 600,000 tons of corn from Paraguay, 500,000 tons from Argentina, and an unknown quantity from the U.S. Even with these imports, domestic corn prices in Brazil continue to be at near record levels.

In their May report, Conab estimated the 2015/16 Brazilian corn crop at 79.9 million tons. They estimated the domestic demand at 58.4 million tons and exports at 28.4 million tons resulting in a carryover at the end of January 2017 of 5.2 million tons or one month of usage. That would be the lowest carry over since 2006/07 and that is still probably too optimistic.

The reason it is optimistic is because the safrinha corn crop has continued to decline from hot and dry weather since the survey for the May report was conducted at the end of April. In their May report, Conab lowered the safrinha corn production by 4.2 million tons, but most observers feel the safrinha corn loses could total 10 million tons or more. Therefore, Conab's estimate of 79.9 million tons for Brazil's 2015/16 corn production is expected to decline in their June report making the carryover supply even tighter.

If that were to happen, Brazil could potentially run out of corn in early 2017 unless exports or domestic consumption is severely curtailed. Most people feel it will be exports that will be reduced and the exporters will sell their corn to the domestic market instead of the international market. Therefore, Brazil's corn exports for marketing year 2015/16 could be in the low 20 million ton range instead of the current estimate of 28.4 million tons. This could open up the potential for increased U.S. corn exports.