Brazilian market of corn will now depend on export flow

Source:  SAFRAS & Mercado
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The markets show us a 2022 effectively very volatile, tense and with difficult trends ahead. We are trying to get out of a pandemic, in the midst of a war in an important region for agribusiness and the energy sector, as well as with many economic and political variables in a Brazilian election year. In this way, making trading decisions in a year like this is really a task that has demanded a lot from the consumer sector and growers. If prices are high, on the one hand, costs are also exorbitant and put the profitability of the 2022/23 season at risk. Therefore, trading decisions are made according to the conjuncture of events, but with a degree of doubt and imprecision rarely seen before. In fact, prices for trading corn and soybeans in Brazil were very good in the first half of the year, and now the challenge is trading the 2022 second crop.

Internal and external volatilities in commodities prices have been the main feature of 2022. Excessive inversions of price paths for commodities, exchange rate, and economic and political variables. Amid all this, we also have climatic variables that always act on agricultural expectations. The chance of surprises and strong inversions this year is immense, including price lows in the international market in the set of events. The concern at this moment, of all the marketing versions seen in market discussions, is that prices will not fall again due to factors such as the shortage of the world food supply. In this case, soybean, corn and wheat prices would not have room for decline even with record crops in 2023. This bias offered by some analysts is quite worrying, as it can lead growers and consumers to distorted decisions in a commodities scenario in which the configuration of production and stocks determines price volatility.

In the midst of this situation, we are on the verge of a record second corn crop in Brazil, as well as the development of a new US crop, which will not set any record but may satisfy a balance of stocks until 2023. The US crop, as we have already seen, will be planted within the ideal window and have the weather in July and August to define production. The definition of this crop will be the first point for the 2022/23 price curve. Then we have other variables such as oil prices, ethanol demand, the global wheat supply framework, the environment of the largest wheat exporter, Russia, will participate in world trade, and the post-pandemic and post-war trajectory of the world economy.

However, in a few moments in the recent history of Brazilian corn exports, the second crop was so important for the international market. With the questions of what the 2021 crop will be like and how the 2022 crop that is being planted in Ukraine, the global dependence on South American corn is quite evident for this 2022/23 cycle. Argentina is quickly selling its crop. After reaching the limit imposed for export registrations of 25 million tons, before the harvest, the government increased the registration to 30 million tons, which are also being sold quickly. The great fear of Argentine agribusiness is that the government will block new additional registrations later on. Therefore, Argentina may stop exporting from July onwards.

The United States has stocks to reach the 2022 crop in September without any problem. The only variable that can complicate exports is a serious problem with the local 2022 crop. This would require rationing demand and exports through prices. Undoubtedly, this is not just a local problem, but a global one, as the great alternative for substitution is wheat, which also has a tight picture at world level.

Within this assessment, the record Brazilian second corn crop, ahead of 80 million tons, places Brazil as a strong global supplier and not just as an alternative to other exporters, perhaps the only option besides the United States in the second half of the year. Thus, Brazil should have a very strong export demand in the second half of the year, with a normal US crop or not. At this point, there may be a demand for 35 to 40 million tons with shipments that will start in June and probably reach 2023. Of course, every year this has been the period in which exports have occurred, but in 2022 we see consistent premiums and trading companies opening the logistics for corn in a surprising way. Many are giving up warehouse space for soybeans to concentrate on corn shipments, not least because Brazilian growers remain restricted to soybeans sales.

Therefore, what we should expect for this second half of the year is the strong export demand and, perhaps depending on the international environment, even surpassing the record of 40 million tons. It is not necessary to point out that the domestic market will once again have to do its job of safeguarding supply until the 2023 second crop as one cannot fully rely on a summer crop in the first half of the year.

Thus, the Brazilian domestic market was tense last week with the strong cold front that devastated the country and brought risks of severe frosts for the second crop. The tension practically paralyzed business and created an environment of strong expectations. Fortunately, this premature strong cold front did not confirm the occurrence of frosts in the main second crop regions to the point of harming crops and compromising production. Rarely, did some light frosts hit parts of southwestern Goiás and southern and eastern Mato Grosso, but they did not reach areas of classic incidence such as Paraná, for example. These frosts will not affect the second crop production in these states.

Perhaps one or two more cold fronts in June may still bring some concern to crops planted later, in Paraná and Mato Grosso do Sul, but we believe that a good portion will have smaller risks of production losses, despite June still being a month that worries about frosts. From now on, the earliest harvests will begin in several locations and be destined for domestic or export demand. Exports are beginning, with the first ships with second-crop corn being scheduled for June, and, given the interest seen at ports, this flow must advance well from now on.

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