ANALYSIS: What does Brazil hope to gain from increased wheat output?

Brazil is expected to harvest a record wheat crop in 2022 and the country, a traditional importer, is expected to gain space in the export market as increased availability of wheat drives a more ambitious export program.

This year Brazil is expected to harvest 9.3 million mt of wheat, the Brazilian food agency Conab said in its latest report released in early October, but local consultancies believe the figure could be higher.

Some are expecting production to increase to as much as 10.5 million mt - with both figures already into all-time high territory, set to surpass the previous record of 7.6 million mt harvested in 2021.

While the figures are impressive if compared with recent years, they are not enough to significantly change the structure of the world market with the country accounting for only 1.5% of global trade.

That amounts to around 3.2 million mt of exports from the forecast 208.8 million mt of global trade projected for the 2022/23 marketing year, making it the 11th exporter in volume according to data from the USDA.

So, what does Brazil hope to achieve?

Domestically, a record crop would mean a lot but as with all big volume wheat producers, the key could be in the quality rather than the quantity as persistent rains have raised the yields but at the expense of protein content.

"The excessive rainfall in Paraná at harvest time could lead to significant quality loss to the state's crop, which has been very good from the beginning," Élcio Bento, market analyst from the local consultancy Safras & Mercado, told Agricensus.

"However, we still project a production at 10.5 million mt; a record high," Bento continued, although the consultancy has recently decreased its estimate from 10.9 million mt to 10.5 million mt.

Production in the country has been growing for the last couple of years boosted by good prices in the international market.

Add a favorable exchange rate for the real versus the US dollar - which currently stands at over 5 reais to $1 - and the reduction in international export production from important players such as the US, and Canada to the mix and Brazilian products found the push they needed to expand the production area.

Along with Brazil's own increasing domestic need, the supply scenario was aggravated further by Russia's invasion of Ukraine, which gave international prices an important increase in February and March, when Brazilian producers typically sell their crops.

Exports

This scenario has allowed Brazil to export a significant volume of wheat for the first time since 2015 when Brazil exported 1.7 million mt.

Up until 2021, the record annual volume shipped stood at 2.4 million mt back in 2012, according to data from Conab.

In 2021, the country shipped 1.1 million mt, up 101% from the previous year’s 561,000 mt.

The origin was mostly from Rio Grande do Sul and with Saudi Arabia (19%), Indonesia (14%), and Morocco (13%) the main buyers.

In 2022, from January to September, Brazil exported 2.4 million mt, up 321.3% from last year’s 589,000 mt in the same period last year.

That added a new dynamic to wheat prices.

The wheat price in Brazil has always been defined by import parity, as Brazil imports a large volume especially from Argentina.

The price that Argentinian wheat can reach Brazilian mills has typically limited how much the local producer can charge for his product in the domestic market.

In the last two years, however, Rio Grande do Sul state has generated a surplus, and export parity has started to weigh as well - even more so with Argentine production threatened by persistent drought conditions that has restriced supply and pushed prices higher.

If international prices are higher, the mills have to match these prices to ensure its supply.

“As domestic demand is stagnant at around 12 million mt and production is growing, Brazil will be a "liquid exporter" of wheat in about five years," president of the Brazilian Wheat Industry Association (Abitrigo), Rubens Barbosa told Agricensus.

Bento from Safras & Mercado says it is unlikely that Brazil will break into the top ten exporters, with volumes greater than 10 million mt, “but the country has a very good possibility of changing the domestic dynamics of production looking to export,” Bento added.

"To maintain this growing production route, international prices and the exchange rate have to be high. The high cost of imports and the possibility of selling at attractive prices on the international market," Bento stated.

Self-sufficiency

Jorge Lemainski, general manager of the wheat unit of the Brazilian Agricultural Research Company (Embrapa) believes the country will produce all the wheat that it needs in the next two or three years if the high revenue and liquidity persists.

“We will surpass 20 million mt production in 2030 if market conditions remain positive,” he said.

Embrapa has been working in the past few years to expand wheat production, which is currently concentrated in the south close to the livestock rearing states, and into the cerrado region in eastern Brazil.

In 2022, states which are not traditional producers have planted almost 300,000 ha of the total 3 million hectares area.

"Where we grow corn and soybeans we can grow wheat. We are ready to incorporate 4 million hectares into the production system with the use of cultivars specific to the cerrado," Lemainski told Agricensus.

However, Bento doesn’t think it is that simple, as in these regions other crops are likely to be more profitable, keeping Brazil from reaching full self-sufficiency.

"That depends on wheat being more expensive on the global market as a whole and on an increase in production in the cerrado region. It is possible, but I don't know if it can happen soon," Bento said.

Argentina

This year's bumper harvest in Brazil could offset losses at Brazil’s primary wheat supplier, Argentina.

Prolonged dry weather conditions have led the Rosario Grain Exchange (BCR) to recently cut its production forecast to 15 million mt - on course for what could be the smallest crop since 2015.

With a diminished crop Argentina’s export program is likely to be constrained, but Brazil will likely still need the wheat imports as the country’s own geography prevents easy internal movement between the states.

"If we continue this production increase, we have a chance of reducing Argentina's imports but it is very difficult for Brazil to become self-sufficient and stop buying," said Bento.

He highlighted that surplus production from Rio Grande do Sul is too expensive to freight to the southeast and north of Brazil, and would incur high taxes to leave the state.

Brazilian mills are also well-positioned to bring imported wheat from Argentina into the country - it has developed into a mutually benefical and convenient trade for both countries. 

The USDA has said that Brazil will this year seek to source a significantly lower volume of wheat than the historic average of about 5-6 million tons from Argentina this year.