South America Calling

Brazil remains on course to produce a massive second corn crop and now needs to export its excess.

The big question is whether Brazil's overstretched logistics will allow it to ship the 19 million metric tons (mmt) that it must to reduce pressure on the domestic market and whether the government will step in to mop up the rest, said Andre Pessoa, grains analyst at Agroconsult, a local farm consultancy.

"We should celebrate the farm sector's ability to produce a big corn crop, but logistics has made it a headache," the analyst told a conference in Sao Paulo.

Brazil will produce 81.7 mmt of corn in 2012-13, up 11.9% on the year before. Growth will be underpinned by a 13.5% increase in second-crop corn production to 44.4 mmt.

Agroconsult's second-crop number is higher than the 43.2 mmt forecast by the Agriculture Ministry.

"In fact, we were forecasting production of 46 mmt until last week but rains in the first half of May weren't great. It's still a very good harvest though," he said.

Brazil exported a record 24.3 mmt in 2012-13 under exceptional circumstances with the U.S. drought leaving importers crying out for corn and a decline in Brazilian soybean output opening space at ports.

This year, the situation will be very different. Brazil produced a large soybean crop and the inability of the ports to deal with increased volumes mean there will be little space for corn exports until August.

Meanwhile, the expectation that U.S. output will recover from last year will mean Brazilian corn faces stiff competition from September.

That will make it tough to export 19.2 mmt as Agroconsult is predicting.

"The question is is the available window big enough?" Pessoa said.

Even if it is, carryover stocks will be extremely high.

Brazil will end the year with stocks of 10 mmt this season, of which 4 mmt will be built by the government, said Agroconsult.

Still, these government purchases will not be enough to prevent prices in Mato Grosso from sliding to 9 reals per 60-kilogram bag ($1.86 per bushel) in the post-harvest period, well below the minimum price of 13 reals for the region.

"The fact is the government will have to buy much more than the 4 mmt it is talking about," said Pessoa.

The problem isn't costs of corn production.

Mato Grosso second-crop corn farm costs average 10.80 reals per 60-kg bag ($2.23 per bushel) but the overwhelming weight of logistics costs means it costs 29.00 reals per bag free on board at port, higher than the Chicago September quote of 26.70 reals.

"Prices of around $5.50 per bushel would be fine for Brazilian producers, if it weren't for logistics," he said.

With no improvement in logistics likely for the next five to 10 years, the government will have to continue subsidizing corn sales

The government subsidy scheme, known as PEP, is the principle means by which the government maintains minimum prices. The subsidized corn is traditionally exported as a means of reducing pressure on the local market.

However, the subsidies to exported corn led the U.S. government to consult the World Trade Organization over whether the scheme breaks rules.

"The questioning of the PEP is just another reason to work on improving our logistics," Pessoa said.

The marketing issues will likely mean second-crop planted area will fall 4.1% to 20.5 million acres next year, according to Agroconsult.

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