ANALYSIS: Brazil's corn sectors faces strain as margin woes challenge top export spot

The view that Brazil would eventually overtake the US as the world’s biggest corn exporter has long been an accepted fact – a sign of the growing power of the South American country and its prodigious agricultural potential.

But unleashing millions of tonnes of corn and soybeans into global markets comes with stresses and strains and means that – even backed by such export firepower – the country’s producers and exporters face challenges even as Brazil consolidates its place in the spotlight.

Poor net corn margins are the latest reward for Brazil’s industrious farmers, where the returns for their expansive production have been besieged by high input costs, poor demand outlooks and ongoing sparring with still potent US export capacity.

The Brazilian food supply agency, Conab, has already warned that the poor returns are likely to result in a smaller planted area next year, and that could have consequences for the contested position as the world’s number one exporter.

Where did it go wrong?

Currently, Brazilian farmers are battling to remain competitive with the US on exports as poor returns means they are holding back on selling – while the economics could affect planting decisions for the new crop that is about to be sown.

That comes as the arch-rival, the US, is harvesting its crop – one that has been beset by dry weather but the USDA still expects to land at almost 385 million mt.

But it is Brazil’s domestic prices that are causing farmers the more concern, with some reports suggesting they are working at breakeven costs or even below them, which could also reduce the amount of corn they sow in the coming season.

Paraná state, Brazil's second biggest corn producer, has an average farm cost of BRL59.94/bag ($205.90/mt) for the second corn crop, according to the state’s Rural Economy Department (Deral).

That compares with bids heard on Thursday at BRL60/bag ($206.18/mt) for October delivery at the state’s main port of Paranaguá, and bids at Santos at BRL64/bag ($219.93/mt) for the same specifications but with farmers paying higher freights.

This very tight margin has discouraged farmers from selling corn while encouraging them to sell soybeans, as this is still a viable option to maintain cash flow.

The price relationship of soybean to corn is typically two to one, but the market has been closer to three to one recently, with soybean bids in Paranaguá heard at BRL 143/bag on Tuesday.

As such, farmers are selling soybeans and holding corn, according to Aldo Lobo, market analyst at Brazilian brokerage Granopar, but the dynamic only exacerbates the problem of low farmer selling and raises risks for storage and logistics.

One market analyst told Agricensus that net margins were already negative, and an increase in input costs - particularly for fuel - was just increasing the pressure.

With physical grain prices now also pressured, farmers had been left with the problem of a net margin loss, while more broadly the sector was also experiencing pressure on logistics, low farmer selling and the upcoming new crop sowing campaign, which would likely see lower planting intentions for corn, the analyst said.

With the first corn crop about to be planted, farmers delaying corn selling means many have been heavily impacted by the lower corn prices and led to some cases of negative margins, Daniele Siqueira, AgRural’s senior market analyst told Agricensus.

“Farmers in the South are sad to sow the next summer corn crop… If that goes on, 2024’s second corn crop also has the risk of lower area,” Siqueira said.

It’s a problem already acknowledged by Conab when it called for a near-5% decline in planted area for the upcoming 2023/24 crop, which is likely to yield a near 11% decline in output from the key safrinha second corn crop.

Collectively, that is likely to cut over 25% out of Brazil’s corn export prowess in the new season.

At the same time, the lack of farmer selling has made it difficult to originate corn at port, and exporters have had to hold their levels virtually stable during September and haven't been able to price lower in order to attract more business.

But there are limits as to how long they can do this.

The lack of flexibility in the domestic price – where there is limited scope for prices to fall much lower – has stoked worries of further downward movements in corn export prices, especially as Brazil now faces competition with the upcoming US corn crop.

Mississippi lifeline?

However, problems along the US Mississippi River could provide Brazilian farmers with some relief – at least in the short term.

Falling water levels along the river – a key export artery connecting the fields of the US Midwest with its primary export hub at the Gulf – are both supporting physical CIF barge and FOB cargo Gulf prices, keeping the US uncompetitive in the market for the time being.

That means that, despite the dynamic, recent sales into South Korea for delivery in January 2024, and loading in November or December, have still tended to favour Brazilian corn – although a recent tender from Korean Feed Association (KFA) suggests traders are keeping their options open.

While the winning offer, from Cargill, cited southern hemisphere supply, 11 of the 14 offers shown in the tender were on a ‘worldwide origin’ basis, rather than explicitly South American or South African.

Brazilian FOB outright levels – with little scope to be reduced – have remained steady since the start of September at averaging $223/mt with the basis over the CME’s corn future averaging 90 cents/bu.

Exports, often already booked in at an earlier date, remain strong and potential reductions in planting intentions for the summer crop and the safrinha crop ensure that values remain supported.

But, US Gulf prices have increased $3/mt since the beginning of the month stand at $230/mt on Friday, with the premium for the US Gulf over the key Santos hub widening from $3.50/mt at the start of September to now stand at a $7/mt.

And that suggests Brazil could feel the benefits of the low water levels in the vital US hub – despite the USDA forecasting a 10 million mt recovery in US exports through the new marketing year taking it to 52 million mt.

However, the current export pace suggests the appetite has not yet picked up, with current marketing year commitments for US corn standing at 11.7 million mt – down nearly 5% from the 12.3 million mt booked at the same stage of 2022.

Actual accumulated exports are well ahead of last year’s pace in the early weeks of the new US 2023/24 marketing year, with 1.3 million mt already cleared, versus 463,621 mt at the same stage as the US battled with poor quality rating and a smaller than expected 348 million mt crop.

For now, “Brazil doesn't need to get cheaper,” the lead analyst at Brazilian brokerage and consulting company Agrinvest Eduardo Vanin told Agricensus with exporters now “trying to defend the origination cost, which is more than 100 c/bu over December futures.”