Focus on Brazil

by Chris Lyddon
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The International Grains Council (IGC) puts total Brazilian grain production at 67.7 million tonnes in 2011-12, compared with 66 million the year before. The overwhelming majority of that is maize, with production forecast at 60 million tonnes, compared with 57.5 million tonnes in 2010-11. Wheat accounts for 5.1 million tonnes, compared with 5.9 million the previous year. The IGC figure also includes 1.9 million tonnes of sorghum, down from 2 million.

Brazil’s total grain imports are forecast at 7.4 million tonnes, compared with 7.3 million the year before. It is slated to import 6.5 million tonnes of wheat, down from 6.6 million, along with 500,000 tonnes of maize (600,000 last year) and 400,000 tonnes of barley (300,000).

The IGC forecasts a fall in Brazil’s total grain exports this year to 10.5 million from 14.1 million tonnes. That includes 10 million tonnes of maize, down from 11.5 million.

The USDA attaché, which predicts a higher, 64-million-tonne level of maize production, pointed out in a recent update that high prices had stimulated greater maize production.

“Producers are able to rely on increased capitalization thanks to the high corn prices over the last year and thanks to forward contracting,” a report published at the end of October said. “High 2010-11 corn prices, arriving at $19.50 per 60-kg sack, were up 30 percent on the price per sack a year ago.

“Corn producers are finding increased profit margins with the high corn prices. For the first time, corn producers have had success in forward contracting their 2011-12 corn crop. We forecasts that producers have forward contracted 30% to 40% of the total crop already, even before the summer corn crop has been fully planted. It appears that producers are using their increased profits and forward contracts to invest largely in better seed varieties (stacked-trait biotechnology varieties, in particular), fertilizer, agrochemicals, area and in logistics.”

Near-record soybean crop
Brazil is a massive soybean producer. In early October, the USDA’s office there forecast 2011-12 production at 75 million tonnes, just off the record 75.3 million produced in 2011-12 but noted that planting for the 2011-12 crop had only just started. There was the same story of investment driven by increased profits.

“Producers are heavily investing windfall 2010-11 profits in increased use of certified seed, genetically engineered seed, fertilizer, new machinery, soil management and other inputs,” the report said. “We anticipate these investments to result in very good national yields of 3 tonnes per hectare despite expanded first-year planted acreage that is expected to yield less than the average. Soybeans maintain a lower relative production cost and greater liquidity compared to alternative crops.”

Milling industry
According to the Brazilian milling association, Abitrigo, there are 239 mills operating in Brazil, just over 78% of them in the southern states. According to the attaché, the two states of Parana, followed by Rio Grande do Sul, account for 90% of annual Brazilian wheat production.

“In Brazil, wheat is a winter crop grown during the dry season,” the attaché said in an annual report. “Wheat competes with second-crop “safrinha” corn for planted area in the state of Parana.

“In a recent trip to Parana, we encountered numerous farmers who indicated that they had little interest in planting wheat this year due to comparatively better prices for other crops and concerns over government support levels. These farmers frequently said they were likely to plant safrinha corn or canola instead. Brazil imports approximately half of its domestic wheat consumption needs, relying mostly on Argentina to make up for the shortfall.”

Imported wheat from Canada, Argentina, and other countries has been cheaper than domestic wheat due to a strong Brazilian currency, low transportation costs and better credit terms that favor imports, Abitrigo said. “Argentina (60%) and Uruguay (16%) supply most of Brazil’s wheat imports with non-Mercosur countries, accounting for 14% of total imports.

“Since Brazilian wheat is not competitive in global markets, a government export subsidy — the Premium for Marketing of Products Program (PEP) — is used to export low-quality supplies and support domestic producers.”

The attaché has reported a belief among traders that only government programs are keeping wheat producers profitable. The exchange rate helps.

“In late September, national producers were heartened by the exchange rate depreciation as the Brazilian Real reached 1.90 against the U.S. dollar, making domestic purchases more attractive and imports less attractive to Brazilian millers,” an attaché report said. “Since then, the Real has fallen to 1.68.”

A 14% increase in imports of flour from Argentina caused controversy during the 2010-11 season.

“Brazilian wheat producers and mills allege that Argentine export subsidies are responsible for this increase, placing domestic products and their derivatives at an unfair disadvantage,” the attaché said. The report forecast imports by millers of 7 million tonnes in 2011-12. “Consumption growth, from an expanding population and increased use of wheat for feed, will fuel the growth in imports,” it said. “Poor wheat quality and low market values are the typical determinants for directing wheat for feed.”

The low quality, along with government export assistance and the absence of the former Soviet Union from grain markets, boosted exports in 2010-11 to 2.5 million tonnes, but the attaché forecast a fall to 1.1 million in 2011-12, with Russia back in the market and “poised to recoup its lost markets and block out potential wheat exports from Brazil.”

Brazil has been a world leader in the production and use of ethanol. However, the feedstock has been exclusively sugarcane. It has moved, albeit slowly, to increase the use of biodiesel. “Brazil’s current 5% biodiesel blend mandate is anticipated to increase to 7 percent late 2012 or early 2013,” the oilseeds update from the attaché said. “This will boost domestic demand and profitability in a sector that operates well under capacity,” it said.

Government support for grains
Brazil’s government operates several support programs for grains, all outlined in a recent attaché report. “Under the Federal Government Acquisition (Aquisição do Governo Federal, AGF) scheme, it can acquire agricultural products at a minimum price when the market price is below that minimum,” the attaché said. “It also allows the government to acquire products at market prices for use in the agricultural familiar program and to build strategic stocks.”

The “Risk Premium for Acquisition of Agricultural Products Deriving from Private Contracts of Sales Options (Prêmio de Risco para Aquisição de Produto Agrícola Oriundo de Contrato Privado de Opção de Venda, PROP) is a subsidy program granted in the form of a public auction for the consumer to acquire, at a future date, a determined product directly from the producer and/or cooperative at a prefixed price, utilizing a private contract for the option to sell,” the attache said. “The Premium for Marketing of Products and Value for Marketing of Products (Prêmio e Valor de Escoamento de Produto, PEP & VEP) provide the minimum guaranteed price to producers and cooperatives by paying the difference between the minimum guaranteed price and the market price.

“The objective is to supplement the supply of commodities in areas of the country considered to be deficient in agricultural production, such as the Northeast of Brazil. The difference between the programs is that in PEP the products are taken from private stocks, whereas in VEP the products are taken from public stocks.”

The Equalization Premium Paid to the Producer is a premium granted to the farmer or cooperative which sells its products at public auction, where the government pays the difference between the Reference Value established by the government and the value of the premium, it said.

Key Facts
Capital: Brasilia

Population: 203,429,773 (July 2011 est.)

Religions: Protestant 34%, Roman Catholic 34%, Muslim 3.7%, unaffiliated or other 28.3%.

Location: Eastern South America, bordering the Atlantic Ocean.

Government: Federal republic. Chief of state and head of government: President Dilma Rousseff (since, Jan. 1, 2011).

Economy: Characterized by large and well-developed agricultural, mining, manufacturing and service sectors, Brazil’s economy outweighs that of all other South American countries, and Brazil is expanding its presence in world markets. Since 2003, Brazil has steadily improved its macroeconomic stability, building up foreign reserves, and reducing its debt profile by shifting its debt burden toward real denominated and domestically held instruments. In 2008, Brazil became a net external creditor, and two ratings agencies awarded investment grade status to its debt. After record growth in 2007 and 2008, the onset of the global financial crisis hit Brazil in September 2008. Brazil experienced two quarters of recession, as global demand for Brazil’s commodity-based exports dwindled and external credit dried up. However, Brazil was one of the first emerging markets to begin a recovery. Consumer and investor confidence revived and GDP growth returned to positive in 2010, boosted by an export recovery. Brazil’s strong growth and high interest rates make it an attractive destination for foreign investors. Large capital inflows over the past year have contributed to the rapid appreciation of its currency and led the government to raise taxes on some foreign investments. President Dilma Rousseff has pledged to retain the previous administration’s commitment to inflation targeting by the Central Bank, a floating exchange rate, and fiscal restraint.

GDP per capita: $10,800 (2010 est.); inflation: 5% (2010 est.); unemployment total: 17.8%.

Currency: reals (BRL): 1.84 reals equal 1 U.S. dollar (Nov. 23, 2011).

Exports: $201.9 billion (2010 est.): transport equipment, iron ore, soybeans, footwear, coffee, autos.

Imports: $181.7 billion (2010 est.): machinery, electrical and transport equipment, chemical products, oil, automotive parts, electronics.

Major crops/agricultural products: Coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus; beef.

Agriculture: 5.8% of GDP and 20% of the labor force.

Internet: Code. .br; 19.316 million (2010) hosts and 75.982 million (2009) users.