Voluntary Report - public distribution

**Date:** 6/7/2005

**GAIN Report Number:** BR5616

BR5615

**Brazil**

**Grain and Feed**

**Wheat Update**

**2005**

**Approved by:**

![](media/image1.wmf)William Westman, Agricultural Counselor

U.S. Embassy

**Prepared by:**

Oliver Flake, Agricultural Attaché

**Report Highlights:**

Post forecasts 2005/06 production at 5.0 million tons on 2.3 million
hectares and imports are forecast at 5.2 million tons for the trade
year. Forecast imports for 2004/05 remain unchanged at 5.0 million tons
with Argentina supplying the vast majority. Brazilian prices have
recovered somewhat over the past few months but changes regarding
domestic taxes on wheat and wheat flour are likely to depress consumer
prices in the top producing states of Parana and Rio Grande do Sul.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Unscheduled Report

Brasilia \[BR1\]

\[BR\]

  --------------------- ----------- ------------- ----------- -------------- ----------- -------------- ---------
  **Brazil**                                                                                            

  **Wheat**                                                                                             

                        **2003**    **Revised**   **2004**    **Estimate**   **2005**    **Forecast**   **UOM**

                        **USDA      **Post        **USDA      **Post         **USDA      **Post         ** **
                        Official    Estimate      Official    Estimate       Official    Estimate       
                        \[Old\]**   \[New\]**     \[Old\]**   \[New\]**      \[Old\]**   \[New\]**      

  **Market Year Begin**             10/2003                   10/2004                    10/2005        MM/YYYY

  **Area Harvested**    2464        2464          2756        2756           2500        2300           (1000 HA)

  **Beginning Stocks**  656         886           508         701            1379        1321           (1000 MT)

  **Production**        5851        5851          6021        5845           5000        5000           (1000 MT)

  **TOTAL Mkt. Yr.      5179        5339          5000        5000           5200        5200           (1000 MT)
  Imports**                                                                                             

  **Jul-Jun Imports**   5559        5558          5000        5000           5500        5500           (1000 MT)

  **Jul-Jun Import      369         369           0           50             0           150            (1000 MT)
  U.S.**                                                                                                

  **TOTAL SUPPLY**      11686       12076         11529       11546          11579       11521          (1000 MT)

  **TOTAL Mkt. Yr.      1378        1375          50          25             50          50             (1000 MT)
  Exports**                                                                                             

  **Jul-Jun Exports**   1378        1375          50          25             50          50             (1000 MT)

  **Feed Dom.           200         200           300         300            200         200            (1000 MT)
  Consumption**                                                                                         

  **TOTAL Dom.          9800        10000         10100       10200          10200       10400          (1000 MT)
  Consumption**                                                                                         

  **Ending Stocks**     508         701           1379        1321           1329        1071           (1000 MT)

  **TOTAL               11686       12076         11529       11546          11579       11521          (1000 MT)
  DISTRIBUTION**                                                                                        
  --------------------- ----------- ------------- ----------- -------------- ----------- -------------- ---------

# Production

Large wheat crops in 2003 and 2004 reduced import need significantly
with Brazil supplying over 50 percent of consumption needs. This coming
year production should supply nearly 50 percent of demand (see table
below) with Post forecast production for 2005/06 at 5.0 million tons on
2.3 hectares. Meanwhile, Brazilian government forecasts by both IBGE and
CONAB are for 5.7 million tons of production. Posts forecast production
is below the government forecasts due to lower expected planted area in
Rio Grande do Sul (RS). Some Post contacts suggest that area could be as
much as 30 percent less than last year due to adverse planting weather
and poor price prospects. Pasture or alternative cover crops should
replace wheat in some parts of the state. Post also forecasts yields
down from last year since much of the wheat in RS and Parana was planted
late, thereby increasing the risk of frost and being subject to reduced
daylight hours. Furthermore, it is expected that producers will cutback
on fertilizer use due to its high costs and low prices for the soybean
harvest. Fertilizer sales are reportedly 20 to 30 percent behind the
pace of last year. Production financing is also a major challenge and
many producers are laden with heavy debt from last year and interest
rates that have been on the rise for the past six months.

+----------+-----------------+-----------------+---------------------+
| ####     |                 |                 |                     |
| ##### Pr |                 |                 |                     |
| oduction |                 |                 |                     |
|  as a Pe |                 |                 |                     |
| rcentage |                 |                 |                     |
|  of Tota |                 |                 |                     |
| l Supply |                 |                 |                     |
+----------+-----------------+-----------------+---------------------+
|          | Production      | Imports         | **%                 |
|          |                 |                 | Production/Total    |
|          |                 | (Marketing      | Supply**            |
|          |                 | Year)           |                     |
+----------+-----------------+-----------------+---------------------+
| 1999     | 2,403           | 7,698           | **23**              |
+----------+-----------------+-----------------+---------------------+
| 2000     | 1,666           | 7,201           | **19**              |
+----------+-----------------+-----------------+---------------------+
| 2001     | 3,250           | 7,007           | **32**              |
+----------+-----------------+-----------------+---------------------+
| 2002     | 2,925           | 6,727           | **30**              |
+----------+-----------------+-----------------+---------------------+
| 2003     | 5,851           | 5,179           | **53**              |
+----------+-----------------+-----------------+---------------------+
| 2004     | 6,021           | 5,000           | **55**              |
+----------+-----------------+-----------------+---------------------+
| 2005\*   | 5,000           | 5,200           | **49**              |
+----------+-----------------+-----------------+---------------------+

\*Post Forecast

Post expects a slight retraction in planted area in the center-west as
area shifts to dry beans due to high prices, particularly in Goias.
Additionally, planted area in the South, where the vast majority of
wheat is grown, is not expected to be greater than last year.
Nevertheless, planted area in Parana is expected to be greater than the
previous Post forecast. This is primarily due to a recovery in wheat
prices and dry soil conditions that forced producers to plant wheat
instead of winter corn. Wheat prices reached a low in December at R\$46
per ton below the government set minimum price to just R\$354 per ton.
Since then, prices have been on the rise but may fall again over the
next few months due to strong Argentine imports and changes to domestic
taxes on wheat and wheat flour.

<table style="width:100%;">
<colgroup>
<col style="width: 16%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 6%" />
<col style="width: 7%" />
<col style="width: 6%" />
<col style="width: 7%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 7%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="13"><p><strong>2004/05 Parana Wheat Prices</strong></p>
<p>R$ Per Ton Wholesale</p></td>
</tr>
<tr class="even">
<td></td>
<td><p>June</p>
<p>04</p></td>
<td>July</td>
<td>Aug</td>
<td>Sept</td>
<td>Oct</td>
<td>Nov</td>
<td>Dec</td>
<td><p>Jan</p>
<p>05</p></td>
<td>Feb</td>
<td>Mar</td>
<td>Apr</td>
<td>May</td>
</tr>
<tr class="odd">
<td><p>Parana</p>
<p>Price</p></td>
<td>572</td>
<td>507</td>
<td>446</td>
<td>412</td>
<td>381</td>
<td>378</td>
<td>354</td>
<td>374</td>
<td>353</td>
<td>394</td>
<td>450</td>
<td>416</td>
</tr>
<tr class="even">
<td>Parana Price less Gov. price ($400)</td>
<td>+172</td>
<td>+107</td>
<td>+46</td>
<td>+12</td>
<td><strong>-19</strong></td>
<td><strong>-22</strong></td>
<td><strong>-46</strong></td>
<td><strong>-26</strong></td>
<td><strong>-47</strong></td>
<td><strong>-6</strong></td>
<td>+50</td>
<td>+16</td>
</tr>
</tbody>
</table>

Source: Wholesale prices from Deral

\*Post forecast

# Trade

Argentine wheat is currently arriving at the port of Santos, near Sao
Paulo, at R\$420 per ton. To compete, producers in Rio Grande do Sul
(RS) would have to sell at R\$370 per ton given high transportation
costs. However, producers in the state are unwilling to sell at such low
prices and therefore are restricted to selling to nearby markets such as
Curitiba. Wheat growers are likely to face falling prices over the next
several months with the recent elimination of the ICMS tax in Sao Paulo
state on wheat flour and imported wheat. It is estimated that over one
million tons of flour were shipped into the state of Sao Paulo from
southern Brazil last year. Therefore, millers in Sao Paulo, who's mills
run at only 40 percent capacity, successfully lobbied the state
government to remove the 12 percent ICMS tax on wheat flour produced in
Sao Paulo and sold within the state. With Sao Paulo flour now 12 percent
cheaper, mills in the south will face more intense competition.

The elimination of the tax also applies to imported wheat. Therefore,
Argentine, and potentially U.S. supplies, will arrive at mills priced 12
percent lower, thereby forcing sellers in Parana and RS to drop the
price of their wheat to remain competitive in Sao Paulo. As stated
above, many cooperatives in Parana and RS are unwilling to sell at
prices sufficiently low to compete with Argentine supplies. Therefore,
it is expected that the pace of Argentine purchases will continue steady
over the next few months.

Though Argentine prices have risen over the past few months, as seen in
the chart below, with the falling HRW/Argentine spread some contacts
believe that remaining exportable supplies are quite large. This is
primarily due to some early season Argentine sales to importing
countries with the option to change destination. As Argentine prices
have risen, these buyers have opted for cheaper supplies. Therefore,
Post believes that actual Argentine exports will fall short of reported
sales, thereby freeing up more supplies from Brazil. Given the current
and expected pace of Argentine shipments to Brazil, Post has increased
the July/June import forecast to 5.0 million tons, which is 200,000 tons
above the previous forecast.

![](media/image2.wmf)

The chart above illustrates that U.S. Hard Red Winter wheat (HRW) is
competitive into Brazil, primarily the Northeast, at around U.S. \$10
per ton over Argentine supplies and significant imports of U.S. wheat
occur when U.S. prices are even or slightly below the price of Argentine
wheat. This is primarily because U.S. supplies of HRW and Soft Red
Winter (SRW) are considered higher quality and preferred by Northeastern
millers. Though the HRW/Argentine spread has narrowed over the past
several months, U.S. wheat is still uncompetitive at an \$18 premium.
U.S. wheat also faces a 10 percent tax applicable to all wheat from
non-Mercosul suppliers, so the actual U.S. premium is greater than \$30
per ton. Nevertheless, Argentine exportable supply, though larger than
some currently estimate, is diminishing and prices are expected in
increase minimally before harvest in December. Meanwhile, the price of
HRW is expected to fall over the next several months due to a large
forecast harvest, increased export competition, and rising stocks. In
fact, the average producer price for U.S. wheat is forecast down \$22
per ton from last year. This combination of falling U.S. prices and
steady to increasing Argentine prices should narrow the price spread and
thus there is a possibility of limited (up to 50,000 tons) imports of
U.S. wheat by Brazil before the Brazilian harvest in October and
November. Contacts suggest that up to 25,000 tons of SRW have already
been purchased for June or July delivery.

U.S. wheat benefits in the Northeast of Brazil from a slight freight
advantage over Argentine supplies and exemption form the Merchant Marine
tax. However, U.S. wheat faces the Common External Tariff of 10.0
percent as well as competition from wheat supplies from Southern Brazil
that receive a transportation subsidy to the Northeast. Under this
subsidy program know as "Market the Harvest" (PEP, in Portuguese), the
government subsidizes the freight cost from Southern Brazil to the
Northeast in an attempt to encourage northeastern mills to buy more
Brazilian supplies from southern production states. Under the PEP, a
Northeastern miller that buys wheat from the south receives a set
premium to compensate for transportation. In theory, this premium should
be the difference between the government set minimum price in the south
and the price of imported wheat to the Northeast. Though much attention
lately has been focused on U.S. domestic support, little attention is
paid to this highly protectionist subsidy.