EDITOR'S NOTE: This article was prepared by Brazilian Market Analyst Joao Carlos Kopp, offering readers a local view of the Brazilian corn situation.

This year we suffered with an extreme drought situation that devastated crops, especially in South Brazil (Rio Grande do Sul, Santa Catarina and Parná).

But in Brazil we have ideal conditions to develop a second corn crop in Parana, Mato Grosso do Sul, Mato Grosso, Goias and Minas Gerais.

In first quarter of the year after this drought, the stocks become quite tight, pushing prices to U$ 7.46/bushel, which encouraged Mato Grosso Farmers to planting a record second corn crop.

LOCAL LOOK: This image is from a local Brazilian website showing the health of that second crop corn.

The increase in acreage was 26.5% more than the 13 million acres planted in 2011. With the increase in acreage and good rains and not significant frost episodes, we have the perfect combination for second corn crop.

Our first estimate for the overall corn crop was around 58 million metric tons MMT, while CONAB put it at 63MMT. That changed significantly, with a big increase in productivity (25%) to take yields to 161 bu/acre in some cases in South of Mato Grosso (Itiquira city) and north of Mato Grosso, where there was more moisture. We don't believe they can get the same yields in southern states, where they will likely be closer to 129 bu/acre. However, the overall crop should reach high levels of production.

One Client of mine,  Felipe Gatto, a farmer at Itiquira told me: "this year we have a really good second crop, with yields approaching those of the first crop"

The situation in Parana State is pretty good (the state is the No. 1 corn producer). This region remained unharmed by the last cold front and they advanced in good time to plant 4.6 million acres to produce around 9.6 mmt in the 2nd crop. (This information is confirmed by Local Agency DERAL).

The combination of increased yields and area led CONAB (National Agency) to raise its corn estimate to 67.7 mmt. This week we hear a lot rumors and private companies with higher estimates, taking Brazil total corn to around 73 mmt. We don't agree with this impressive number and still work with a number between 66 - 68 mmt. The larger number continues to appear too big to me and it will increase potential of price pressure in the domestic market.

Also this week, China announced lowering phitosanitary requirements for Brazil and Argentina exports. We see as a new strategy to buy more corn from South America than US to compete with higher prices in US.

Below is a chart showing the Brazil Index Corn Price (indicador Cpea/Esalq), this price is the driver to liquidations positions in the futures market at BM&FBOVESPA.

Prices fall from high on January 26 of U$ 298,5472 to U$ 195,9216. This makes Brazilian corn delivered in September U$20,00/ton Cheaper than U.S Corn and rumors about demand impacted traders.

We can't forget that Brazil has sold a lot of soybeans that will keep ports busy now, with limited logistics for exporting large volumes of corn.

But the "Contra-Point" is harvest in south of Mato Grosso which began earlier than other years and we don't have capacity to store all grains and they have few soybeans to sell.

Today I talk with Farm Futures Analyst Arlan Suderman and we discuss that Brazil can rush to export a lot corn in the next 60 days, driven first by big global demand and second by local government pressure in Brazil. The government can adopt export facilities measures PEP (Premiums for Export), meaning it could pay a premium for export of the corn to support lower prices in the country.

Very probably it will take 2 measures, first is PEP and another is an Options contract for farmers at minimum price that is now around U$102/ton. The buyer of the Options would be CONAB. This makes sense to me as CONAB's inventory's are lower,  probably below 1.5 mmt, which is very tight, for a country that consumes around 50 MMT per year.

Last Year Brazil exported around 9 mmt corn. Current prices that are lower than September 2010 and a higher U.S. dollar could lead Brazil to export more than 10 mmt, and perhaps as much as 12 mmt. Such large exports could support a price recovery in the last quarter of the year when historically South Brazil doesn't have enough inventory.

Thank you very Much.

João Carlos Kopp.