Rice has made headlines in recent weeks, amid the sharp rise in prices throughout the chain, inevitably reaching the end consumer. The price paid to producers has risen by more than 50% since July, with the monthly average going from R$ 64.50/50 kg bag that month to the current R$ 103.50/sc in the first half of September. There is not just one element or even one link responsible for the escalation, but rather a combination of factors that will be discussed below.
It is known that rice cultivation in Brazil has been losing area for years to other crops due to the low profitability of the producer, who has been looking for alternatives in crops with a better financial perspective. The interesting prices of soybeans and even corn in recent years have fueled this rice migration dynamic. Furthermore, national production was concentrated in Rio Grande do Sul, on crops irrigated with high technology. And despite the clear tendency to reduce the area, production has remained relatively stable, supported by productivity gains derived from intensification
technology in the remaining areas with culture.
In the last harvest year alone (2019/20) productivity grew by 9% on the national average and 13% in RS. One of the factors that explained the insufficient prices and the consequent lower profitability of the crop in recent years was the tendency to reduce consumption, which only increased again in the last two harvest years. The surprise element this year, observed from March onwards, was the increase in consumption associated with the pandemic, which redirected consumption outside the home and into homes. This strengthened demand and prices for several staple foods, not only in the rice sector. It is important to note that this demand shock also occurred in other countries and some of them even restricted exports out of concern for food security, which generated a sharp rise in international rice prices, although abroad prices have already returned to normal.
There was also crop failure in Thailand, an important producing country, putting pressure on the supply side of the global balance. According to Conab's figures, production in the 2019/20 harvest year grew by 6.7%, to 11.183 million tons, while consumption increased by 5.1%, reaching 10.8 million tons. Although the variation in consumption was smaller, it returned to the highest level of the last four years. In the previous two years, the equivalent of 1.7 million tons had fallen
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Additionally, the exchange rate devaluation increased the competitiveness of exports, with greater product direction to the foreign market, mainly to Venezuela. But rice exports should end the 2019/20 harvest year (until Feb/21) with growth of just 139 thousand tons, for a total of 1.5 million tons. However, the country also imports the product, although the trade balance is in surplus. Imports are estimated at 1.1 million bags, up 6%. On the stock side, Conab estimates that it will arrive in February at 537 thousand tons, which is equivalent to 5% of national consumption. And despite current high prices, inventory relative to consumption is no different from previous years.
So, if production grew (almost double consumption in absolute terms) and ending stocks are not lower than the previous year, why have prices risen so much? It is estimated that little product is still in the hands of producers, but there are those with better capital who opted and were able to wait for the market to react to the upward trend in food prices, which began to reverberate in rice prices in April. A similar situation occurred in the corn market, with the good harvest not preventing high prices from being sustained in the face of a moderate supply from more capitalized producers. The difference is that in the case of rice, this “greater profitability” only happened this year. And the majority, having already sold in advance, will not take advantage of the currently very high margins.
Furthermore, another very important factor that strengthened demand was the government's emergency aid, which supported the most needy families, with broad use of these resources for food and construction materials. It is possible that the greater demand for basic foods is also a reflection of high unemployment, in addition to the radical change in where many people consume food, something that still persists.
What lays ahead?
We are four months away from the start of the arrival of the new Brazilian harvest, a period in which the economic crisis and continued financial aid (although smaller) should sustain demand. On the supply side, the government's exemption from the tariff of 10% for paddy rice and 12% for processed rice, from outside Mercosur, will be valid for 400 thousand tons until the end of the year, which is equivalent to around 15 days of consumption. Furthermore, the devalued Real against the Dollar means that the product imported from Thailand is currently priced in Brazil at around R$ 85.00/bag, which does not leave room for large drops. This means that the measure will help more towards increasing liquidity and improving availability a little but leaves little room for a more significant price correction.
Conab's first forecast for the year 2020/21 points to an increase of 12% in the planted area, a reflection of high prices, but with an average productivity lower than this year's, which was surprising. As a result, production should grow by 7.1%, to 11.982 million tons, with the ending stock ending the cycle (Feb/22) at 817 thousand tons, 52% higher than estimated for Feb/21.
There are prospects for improved supply and lower prices for consumers, but this tends to only occur at the beginning of next year with the arrival of the new harvest.
Source: agrolink
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