Brazilian farmers can lock in 25% operating margin on their corn for next season already.

Ethanol plants in Mato Grosso are offering 32.50 reais per sack for August 2021 delivery.  Converted to U.S. dollars, it comes out to roughly cash price of $2.70 per bushel.  This may not seem that attractive in the U.S., but with lower costs and as the Brazilian currency has weakened, that $2.70 translates to a lot more money in Brazilian Real. 

I remember selling for that price several years ago. I was able to hold some corn into the off season. Selling at that price was almost unheard of. We paid for about one-third of our grain storage in the first year because of that sale. 

And now farmers can lock in their entire crop at that price if they want. 

Why is this happening? Sugarcane has long been the dominant feedstock for biofuel in Brazil. Nearly 350 plants produce ethanol from sugarcane to fuel vehicles that have a federally-mandated 27.5% ethanol blend, and some vehicles run on 100% ethanol.

Now the corn ethanol boom is beginning to change the market landscape in some areas, as demand increases. This change is still in its infancy as more ethanol plants come online. But Brazil’s number one grain state, Mato Grosso, is expected to boost corn production more than 100% in the next ten years.

An eye on soybean profits

This is all in addition to profitable soybeans. 

Typically, the corn is seen as a rotational crop to help boost soybean yields. Getting 100 bpa corn is pretty standard. It is a low investment crop, utilizing cheaper seed varieties with less technology. So even if they were to breakeven, they still like planting the corn because they know it will help boost soybean yields, which is their primary focus. 

It also helps that they are only paying one rent check as they double crop in one year.  Mato Grosso did not start out that way. They started with the single crop of soybeans. Over time, they experimented, learned and improved.

They realized while they could not plant their entire area to corn, it was worth planting some of the area. Roughly 50% of soybean acres gets double cropped to corn. Either they run out of time or they don’t think the market risk is worth the extra hassle. 

Yet, the idea of a single rent check stuck. Nobody was going to promise to pay rent for a second crop when there was no guarantees there would be one, and that common practice continues to this day.
 

No surprises so far

The Brazilian safrinha corn harvest is about 60% complete. There have not been any major surprises so far.  Farmers are finding favorable yields in Mato Grosso where they had good rains and yield loss in Parana where there was drought. 

About 1.7 MMT of corn has been exported in the first two weeks of July.  Brazil should reach 6 MMT by the end of the month as grain begins to reach the ports. 

Corn exports will lag this year, mostly due to the fact that they over-exported last year in the first semester.  This could put pressure on domestic prices but that is yet to be seen.

Brazilian corn outlook

Local analyst Safras & Mercado provided estimates for the 2020/2021 crop season in Brazil that will begin late September. They see corn production reaching 116 MMT compared to USDA estimates of 101 MMT. That would amount to 600 million more bushels. 

They also see Brazil adding 500,000 acres, reaching 48.6 million acres in total. 

Additionally, Safras & Mercado thinks the USDA estimate is too low for this season’s corn crop, seeing yield reach 107 MMT.

Reach Matthew Kruse is President of Commstock Investments.  He can be reached at 712-227-1110 or [email protected]. 

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