A severe drought, followed by several episodes of frost, is expected to reduce Argentine wheat harvest by 40% from initial estimates to around 11/12 million tons, which is expected to have an impact on the Mercosur partner Brazil.
Brazil traditionally purchases some 6 million tons of high quality wheat from its neighbor in the south, but market analysts are now anticipating that Brazilian mills, especially those in the Northeast, will need to resort to other suppliers, such as Russia, the US or EU.
Although forecasts pointed to an increase in Brazilian imports from other countries as early as May 2023, some mills in the Northeast have already taken action by purchasing wheat from Russia. Some seven vessels with Russian grains are expected in the coming months.
“The crop failure has already caused the price of Argentine wheat to rise at an unusually unfavorable time, close to the harvest. Thus, mills in the Northeast started to buy Russian grain, which is cheaper,” says Christian Saigh, vice president of the Wheat Industry Union of São Paulo (Sindustrigo).
Last week, wheat available FOB (without import costs) in Argentina cost an average of US$ 370 per ton, while Russian wheat was priced at US$ 330. The French/European product costs around US$ 350, while the American or Canadian wheat costs around US$ 430.
The Argentine wheat harvest begins this month and runs through January. Usually, trade with Brazil intensifies at the beginning of the year; therefore, Saigh believes that the stock available for export in the neighboring country will end around May. “The war in Ukraine made other countries see Argentina as a potential supplier of wheat, so Brazil has more competition.”
According to Luiz Carlos Pacheco, analyst and partner at T&F Consultoria, it isn’t easy to know how much Argentina has on hand at the moment because the government’s export quota refers to the volume that trading companies can buy rather than what actually leaves the country. “8.5 million tons of the quota of 10 million tons were traded, generating tax collection. However, this does not imply that this volume has already reached a foreign destination,” he claims.
Last week, the Rosario Grain Exchange lowered its forecast for Argentina’s 2022/23 harvest by 1.9 million tonnes to 11.8 million. The previous week, the Buenos Aires Grain Exchange had already reduced its estimate by 1.6 million tons to 12.4 million. The initial volume for the season was 20.5 million tons of wheat.
Despite this, other factors may cause the demand from Brazil to be lower than in previous years. First, according to the National Supply Company, Brazil will have a record wheat harvest of 9.5 million tons. This will allow for an internal reorganization of the cereal, which should migrate from Rio Grande do Sul to Paraná (which also experienced crop failure) and Sao Paulo.
Another point is that the mills are expected to grind less wheat this year than in 2021 because of a reduction in consumption.
Saigh from Sindustrigo notices that the entire industry is experiencing a retraction in consumption following the pandemic’s peaks in 2020 and 2021. Brazil imported 4.6 million tons from January to September, compared to 4.9 million during the same period last year.
Daniel Kummel, CEO of Arapongas Mill and president of the Wheat Industry Union of Paraná (Sinditrigo-PR), recalls that Brazil has a quota of 750.000 tons, exempt from the Mercosur Common External Tariff (TEC) and predicts that it will be used in 2023.
However, unlike Canadian and American wheat, Russian wheat can only be imported by mills on the coast. The Russian product’s entry was restricted a few years ago by the Ministry of Agriculture to reduce the risk of pests, fungi, and weeds.
Pacheco, from T&F, also believes that some trading companies will prefer not to buy Russian grain while the war continues for fear of being subject to restrictions from Western governments.