Brazil seeks alternate wheat supplies as Argentina's crop seen shrinking

Brazil is likely to turn to alternative wheat suppliers such as the US, Canada, and Russia, despite a record output, to fulfill its requirements in the marketing year 2022-23 (October-September) as its traditional supplier Argentina is expected to see a sharp decline in its wheat harvest.

Brazil's national agricultural agency CONAB has pegged its wheat output in MY 2022-23 at a record 9.36 million mt, up 21.9% from MY 2021-22.

The US Department of Agriculture scaled up Brazil's wheat output estimates in MY 2022-23 to 9.2 million mt in October, 19.5% higher on the year.

Brazil is one of the world's largest wheat importers, with domestic consumption above 12 million mt per year, below its output capacity. However, Argentina's wheat output is seen declining over 40% lower on the year in MY 2022-23.

The USDA has also estimated wheat output to increase in southern provinces of Brazil such as Parana and Rio Grande do Sul in MY 2022-23. It has pegged output in Rio Grande do Sul at 3.9 million mt and in Parana at 3.3 million mt.

However, some in the trade circles believe a significant portion of the harvested wheat will be of lower-protein variety as persistent rains have raised the yields but at the expense of protein content.

"Excessive showers in Parana at the time of harvest may lead to significant quality loss in the state's crop," a trader based in Curitiba, Parana said.

Argentina's wheat output estimates have been further scaled down for MY 2022-23 on concerns of drought and frost conditions in the key growing regions.

The Rosario Grains Exchange, or BCR, on Oct. 27, reduced Argentina's forecast for wheat output in MY 2022-23 to 13.7 million mt, 1.3 million mt lower than previous estimate. In MY 2021-22, Argentina had harvested 23 million mt wheat.

Argentina usually accounts for most of Brazil's wheat imports.

Trade Scenario

Brazil will be actively looking for alternative supplies, particularly from the US, Canada, and Russia.

However, Brazil may find it difficult to source wheat as the global market is tight and prices may see a further increase after Russia pulled out of the Black Sea Grain corridor. The Black Sea grain corridor had allowed Ukraine to ship wheat through Black Sea, which had been blocked between February July due to the Russia-Ukraine war.

"Usually, Brazil imports around 6 million mt from Argentina but this year nearly 2 million-2.5 million mt may come from out of the Latin America," a trader based in Parana said.

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

It has also reduced its estimate for Brazil's wheat imports slightly, despite the output increasing sharply.

The USDA has pegged Brazil to import 6.2 million mt wheat in MY 2022-23, down from 6.4 million mt in the previous year.

Traders also 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.

As of now Argentina's FOB prices of wheat are $420/mt on Oct. 31, data from International Grains Council said.

IGC data also showed US hard red winter wheat FOB prices at $444/mt on Oct 31. S&P Global Commodity Insights data showed Canadian Western Red Spring origin wheat FOB price at $396.93/mt and Russian 12.5% protein wheat at $322/mt for Nov. 1.

"If you combine the freight charges with the FOB prices, it seems that the import prices for Argentina will remain cheaper compared with the US, Canadian, or Russian origin wheat," an exporter based in Rio Grande do Sul said.

Brazil's exports may increase

The anticipated rise in wheat output in MY 2022-23 has also allowed Brazil to look into ways to increase its exports of feed wheat.

The USDA has projected Brazil to export a record 3.5 million mt wheat in MY 2022-23, against exports of 3.1 million mt in MY 2021-22.

Brazil usually exports most of its feed-grade wheat while importing milling-grade. Since it has a sufficient supply of corn, it usually replaces its feed-grade wheat with corn.

Most of the wheat exports from Brazil are from Rio Grande do Sul, with Saudi Arabia (19%), Indonesia (14%) and Morocco (13%) accounting for significant share.

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.