ANALYSIS: Iran standoff raises corn fears after Bolsonaro backing

It took time for Brazil’s corn sector to react to the news that Brazil’s national oil company, Petrobras, had refused to refuel two Iranian-flagged freighters when they called at Paranagua last week.

The Bavand and the Termeh remain at anchor as of Tuesday, with Brazil shipping line up data showing the Termeh chartered by Tehran-based Arzesh to carry 66,000 mt of corn to Iran, expected to sail on August 25.

It is part of a flotilla of vessels that are loading 715,300 mt of corn, plus a cargo each of pellets and low protein meal, in the next six weeks – the tip of what has been a very successful export story for Brazil’s corn sector.

To date, this year Iran has soaked up over 2.5 million mt of Brazilian corn, with the origin stepping in where others have hesitated in the face of increased international restrictions.

Over the past five years, Iran has become the biggest single customer for Brazilian corn and 2019 imports already outpace Vietnam – the next biggest importer – at a ratio of 2:1.

While those restrictions haven’t been directed at food, the fear that a lucrative trade could be sacrificed to political alliances has spooked some of the country’s corn exporters.

“Petrobras has claimed that if it enables the tankers to get its fuel, they risk getting blacklisted as well, for breaking sanctions. President Jair Bolsonaro in turn has pledged loyalty to the USA,” one market source said, and it is that connection that has struck a chord.

“This must be a Bolsonaro thing, he loves Trump,” a second market source said, with fears that the new president’s attempts to curry favour with his US counterpart will potentially leave Brazil’s corn trade sacrificed.

“The problem is that Iran is our biggest buyer of corn… (Bolsonaro) is not stupid, but yes, the fear (for corn exports) exists,” a second market source said.

There are factors that mitigate some of the perceived risk, however, with domestic politics and trading practicalities underpinning hopes the fate of the Bavand and the Termeh is an isolated one.

“It’s nothing to do with Bolsonaro,” a Brazil-based broker said, citing instead some of the domestic fallout from Brazil’s own anti-corruption 'lava jato' investigations and the rare involvement of two Iranian-flagged vessels.

“There are still sellers willing to do Iran, but Iran will have to pay a premium. Today it is between 20 and 25 cents/bu on the sell side,” the broker added, with bids adding a 5-10 cent premium.

And, while Bolsonaro has said his government is aligned with Washington on Iran sanctions, the worst-case scenario would be a pledge to curtail corn exports to Iran.

Such a step would spark a huge domestic backlash, according to one agriculture analyst.

“Our agriculture representatives and senators, who are very strong – Bolsonaro depends on their goodwill to approve everything in Congress – would tell him, politely, that Brazil needs to export corn to Iran. He’d reconsider,” the analyst said.

“Iran is covered from Brazil out to September, so it’s not a big deal at the moment,” the broker said, and from there Ukraine and the Black Sea corn harvest becomes available.

Tipping point

While the imminence of the Black Sea corn harvest may change the dynamic, Ukraine’s own reaction to the imposition of sanctions could provide some pointers towards the potential issue facing Brazil.

Sellers in Ukraine, despite marshalling the biggest corn harvest in the country’s history and at a time when Russia’s corn harvest was badly hit by drought, have found their appetite to sell to Iran declining with the imposition of US sanctions.

Between January and May 2019, Ukraine exported around 777,365 mt of corn to Iran according to Ukrainian government figures, down 12% on the same period of 2018, and down 19% on the same period of 2017.

Wider bilateral trade between the two nations is also an Achilles heel, and Iran is not above tit-for-tat tactics, as British-flagged oil tankers discovered in the Straits of Hormuz this week.

“This can be the tipping point for Iran – if it blocks Brazilian corn… they may turn to Argentina or pay more for Ukraine. Iran is the third biggest meat importer from Brazil and Brazil imports a lot of urea from Iran as well,” the first source said.