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Brazilian wheat production up as Argentinian exports shaved

Grain Brokers Australia, August 4, 2020

Brazil’s wheat production is heading for a record if its season continues to be favourable. Photo: Biotrigo Genética

WHEN talking wheat in South America, most conversations turn to Argentina. Its mantle as the biggest producer on the continent will not be challenged anytime soon, but 2020-21 wheat production in Brazil is poised to topple early forecasts and set a record on the back of favourable weather and above-average crop development.

Brazilian production is concentrated in the south of the country, especially in the states of Parana and Rio Grande do Sul. Collectively, those two states account for approximately 85 per cent of total output.

Sowing of the crop was completed in early July, and according to Brazil’s agricultural statistics agency, CONAB, the planted area in all major growing states has expanded this season to total 2.3 million hectares. In Parana, the country’s top wheat-producing state, the final planted area is expected to increase by 6.5pc, and in Rio Grande do Sul the increase is forecast at 10pc compared to 2019-20.

Wheat shapes up

In contrast to this season’s drought-affected safrinha corn crop, the wheat areas are in excellent shape going into August. As of last week, the Parana crop was classified as 90pc good to excellent compared with 63pc at the same time in 2019. CONAB has pegged the Parana yield at 3 tonnes per hectare (t/ha), up 41pc over 2019, but local state agencies have it as high as 3.6t/ha, a year-on-year increase of 71pc.

The state of Rio Grande do Sul is the country’s second-biggest wheat producer, and CONAB is forecasting a production increase over the 2019-20 season of 13pc. In the third-largest producing state of Sao Paulo, CONAB is predicting an 11pc increase in harvest output.

The increased area, condition of the crop and the favourable spring weather forecast have local analysts contemplating a national crop well above the current CONAB estimate of 6.3 million tonnes (Mt).

Local agribusiness consultant, T&F Consultoria Agroecômica, is suggesting wheat production in excess of 7.3Mt is possible if favourable seasonal conditions continue, eclipsing the 2016-17 production record of 6.7Mt. This compares to a 2019 wheat harvest of less than 5.2Mt due to a substantial crop failure in Parana.

Reasons to expand

Several factors have encouraged farmers to expand the wheat area in southern Brazil. Firstly, local prices have remained high in recent months, bolstered by strong domestic demand, depleted stocks, and limited supplies from neighbour and traditional supplier, Argentina.

Back in May, total wheat stocks in Brazil had dwindled to a record low of 170,000t as the global COVID-19 pandemic increased the domestic appetite for bread and other flour-based products.

Secondly, the Brazilian economy has deteriorated significantly in 2020 due to the COVID-19 pandemic. The Brazilian real (BRL) has lost about 30pc of its value since the start of the year, which has made imports more expensive and has pushed domestic wheat prices to record levels in BRL terms.

If the lofty production forecasts are met, it will substantially decrease Brazil’s wheat import requirements in the current marketing year. While 2019-20 season imports were approximately 7.3Mt, T&F Consultoria Agroecômica, estimates they could fall to as low as 5.5Mt if a record crop is harvested.

Dry in Argentina

The leading purveyor of wheat to Brazil is Mercosur trade bloc partner Argentina, which traditionally supplies as much as 80pc of import requirements due to the favourable customs arrangements among bloc members.

However, lack of rain and frosts in the northern and central winter-cropping regions of Argentina continue to heighten the moisture deficit, and severely hamper crop development in many districts. As a result, the Buenos Aires Grain Exchange (BAGE) has decreased its planted area forecast by 300,000ha to 6.5Mha; this is still almost 5pc higher than last season.

As of July 30, 95.9pc of the forecast area had been planted, up 1.8 percentage points compared with the previous week’s report, but lagging last year’s pace by 3.3pc. Ironically, waterlogging across the unplanted areas in the south-eastern reaches of Buenos Aires province slowed the seeding progress in the second half of July.

In last week’s report, BAGE pegged the condition of the wheat crop at 24pc good to excellent compared with 22pc the previous week, and 45pc in the same week last year. The moisture condition was reported as 40pc optimum to favourable compared with 41pc last week and 75pc a year earlier.

BAGE left its wheat production forecast unchanged at 21Mt, but cut the estimated yield to 3.14t/ha. This doesn’t quite equate, but taking the forecast area and yield, results in production of 20.4Mt. This is above the latest US Agricultural Attaché forecast of 20Mt and the Rosario Grain Exchange estimate of 18-19Mt.

As a result of the lower crop projection, the Agricultural Attaché has shaved 1.1Mt of Argentina’s wheat export forecast for the 2020-21 marketing year. It pegged exports at 13.4Mt, below the USDA’s early July estimate of 14.5Mt, which was based on final production of 21Mt.

However, producers and exporters remain concerned that the Fernández Government may increase the wheat export tax from 12pc to 15pc to help meet mounting fiscal requirements, thereby reducing competitiveness.

The 1.1Mt reduction in the exportable surplus roughly equates to the decreased import requirements from Brazil should its bumper harvest be realised in the coming months. Therefore, under this combined scenario, the impact on the global wheat balance sheet would basically be zero.

Nevertheless, with wheat production decreasing in the European Union, and mounting issues with spring wheat production in the Black Sea region, the trade is looking to the southern hemisphere to halt the downward trend in 2020-21 world wheat output.

The enormous potential of the Australian wheat crop is on the line ahead of widespread rains forecast for the coming week. This rain is critical in many areas to avoid a downward revision to Australian production forecasts. Any further hiccups to southern hemisphere production will squeeze the balance sheet and be bullish for global wheat values.

 

 

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