China's corn imports spark a warning about inflation in Brazil

China’s corn imports spark a warning about inflation in Brazil

SAO PAULO (Reuters) – A possible start of corn imports from Brazil by China in 2022 is seen as a new “bullish” factor for Brazilian cereal prices in the domestic market, at a time when the national meat industry was finally coming seeing some relief in their input costs after a long period of sustained quotes.

The two countries have advanced in an agreement to allow the cereal trade. Although China is the largest importer of soy, meat and sugar from Brazil, today corn shipments to the Chinese are non-existent due to phytosanitary and transgenic reasons. But the Brazilian government hopes to make it possible for shipments to begin this year.

“It is a support factor, and support for premiums (of Brazilian corn against global futures markets). Maybe not (it’s support) for international markets. The impact of imports from China would be on the domestic price with higher costs for the local industry,” said hEDGEpoint Global Markets Grain and Animal Protein analyst Pedro Schicchi.

With Brazil’s record corn harvest in the second half of the year and expectations caused by Ukrainian cargoes that are starting to leave the ports after an international agreement to enable exports, relief in grain costs could be expected for the chicken and swine industries, which depend on of cereal to feed the creations.

But the China factor, which has already made meat prices, especially beef, higher for Brazilians, sparks a warning about inflationary pressures, when Brazil – with tax exemptions for several sectors – takes steps to try to stop the escalation of the indices of inflation.

“An untimely increase in exports (of corn) would tend to generate inflationary pressure,” said FGV/IBRE researcher Matheus Peçanha, considering that, on the other hand, the global recession is a downward factor for mineral and agricultural commodities.

The researcher recalled that the costs of feed inputs have been high due to factors such as the historic crop failure in Brazil in 2021, due to drought and frost, and the war in Ukraine, a major exporter, in early 2022 – this left the price of the corn close to 100 reais/bag, before falling back to 80 reais at the end of July.

At the same time, China and Brazil are negotiating the opening of the Chinese soybean meal market, but the fact that the Asian country is self-sufficient in the soy derivative –processing the grain imported from Brazil– does not generate inflationary concerns, at least in the short term, since Beijing would not be a big potential customer.

LOCAL IMPACT

In the international corn market, the hEDGEpoint analyst does not see major impacts from the beginning of Brazilian exports to the Chinese, since global trading is more focused on the size of the United States crop and on the resumption of shipments from Ukraine through the so-called safe” –according to him, there is a potential maximum flow of 10 million tons of Ukrainian corn.

Pedro Schicchi also recalled that the potential for imports of Brazilian corn by China is also great because the new crop from Ukraine – which guarantees part of Chinese imports – will be small, due to the war.

The lower supply from Ukraine, in fact, generated expectations that shipments from Brazil could be record above 40 million tons in 2022 – even without China, with other countries resorting to Brazilian product.

On the other hand, China is also seeking to guarantee an alternative supply to US corn, especially at a time of geopolitical tension related to the visit of US House Speaker Nancy Pelosi to Taiwan, an island that Beijing claims as Chinese territory, he told Reuters. Ariovaldo Zani, CEO of Sindirações, an entity that represents animal feed producers.

According to Zani, with the war involving Ukraine and Russia and tensions in Asia, “there are those who say that there may eventually be a political-economic alliance between Eastern Europe and China, and obviously an even greater distance between the Chinese and the United States”, in a move that echoes the trade retaliations imposed under the Trump administration.

“China is signaling to the United States that it can seek necessary inputs from other partners and Brazil is a major exporter,” he said.

S&P Global analyst Gabriel Faleiros agrees. “China is amplifying the countries it can buy from, we have a very competitive corn,” he said, noting that the Chinese have moved not to depend so much on North American corn, and the data on shipments for the 2022/23 new crop already show it.

“China coming in would bring a new foundation for prices in Brazil, depending on the volume they buy.”

Zani, from Sindirações, said that, if eventually the success of corn exports from Brazil to China is very great, this should disrupt the performance of the Brazilian meat industry, which has corn and soybean meal as important feed inputs.

Because of this, the animal feed and meat sectors are demanding some mechanism from the Brazilian government that provides more predictability about the shipments made. This would avoid “speculation”, said the president of the association of the poultry and pork producing industry ABPA, Ricardo Santin.

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