Agriculture Insights: Brazil corn exports to China move closer

Author Argus

Brazil is finally moving closer to start shipping corn to China seven years after an export protocol signed between the two parties. This comes at a time of tightening import supply for China, with high corn prices in the US and increasingly uncertain flows from Ukraine. How can Brazilian imports reshape China’s corn market? Is China set to see strong receipts anytime soon or are there still many bureaucratic, technical hurdles left?

In this Agriculture Insights podcast Argus’ AgriMarkets Editor Bilal Muftuoglu is joined by Brazil Agriculture and Fertilizer Deputy Editor Alessandra Mello, to discuss the feasibility of Brazilian corn exports to China.


Bilal Muftuoglu: Hello, and welcome to another episode of "Argus Agriculture Market Insights" podcast. In today's episode, I'm joined by Alessandra Mello, Argus Brazil Agriculture and Fertilizer Deputy Editor. Welcome, Alessandra.

Alessandra Mello: Thank you. It's a pleasure to be here.

BM: Well, thanks for taking your time. Today, we'll take a look at a recent update for the agricultural market, especially on the grains side, as Brazil and China are moving closer to corn trade. And with the election now behind us, we can say that Brazil is on track to embark on a new geopolitical direction. And this comes at a time of growing uncertainties in the global corn market, especially with logistical challenges both in the U.S. and Ukraine, two key suppliers of corn to China. Does this mean that stars are finally aligned for Brazilian corn exports to China? Do you think there are still key logistical or bureaucratic hurdles left?

AM: Well, yes, I think. Doors have finally opened for Brazilian corn to be exported to China, but the process is still very complex. First, regarding your question about Brazil's political scenario, current president, Jail Bolsonaro, a right-wing politician, has been involved in controversial statements regarding China several times. After all, he has always been very close to former U.S. president, Donald Trump. So, now with the election of Luiz Inácio Lula da Silva, who takes over the presidential seat in January, Brazil and China's relationship is expected to improve.

More than that, the international market, especially developed countries, have a much more positive image of Lula compared to Bolsonaro. Now, it's still difficult to say whether this will really have an effect on the volume of soybeans and corn shipped to China. Market participants believe that in the end, for these agricultural commodities, what really matters is the global supply and demand figures, and this political scenario is unlikely to bring any significant change. Then, you asked me about logistics and bureaucracy hurdles. Yes, there are many difficulties because the traceability demanded by China has greatly restricted the logistical viability of these corn exports.

BM: Thanks for that answer, Alessandra. Yeah, it kind of sounds like there are some logistical hurdles left, but looking at it from a volume perspective, corn trade with China could imply an additional shipment of up to four million of the product from Brazil per year, and that's according to market participants' expectations. What does that mean in terms of logistics? Do you think this could put pressure and potentially cause higher probing costs or even delays? Can you say the Brazilian logistics are ready?

AM: Well, I think it's worth remembering how was the recent release of some companies to export to China. The agreement signed between the two countries foresees that Brazil should prove that corn cargos are not contaminated by any of the 18 quarantine pests listed in the protocol. A corn traceability system has been put in place to track all the locations the cargos pass through. So, the Ministry of Agriculture started to inspect the units of the trading companies that requested the authorization to export corn to China. The first list of units approved was released on November 2nd. In this list, there are five important terminals located in the Port of Santos, but one of them, T39, belonging to trading company, Caraburu [SP], is new and is still only partially operating, so it's estimated that only in the second half of 2023 it could export corn.

Another terminal is Cutrale terminal, a large global exporter of orange juice which operates little soy and corn, so it would also be for the second half of next year. In this scenario, there would be three terminals left in Santos that, in theory, would make it possible for the trading companies COFCO, Bunge, Cargill, Louis Dreyfus, and Amaggi to export in December and January 2023. Terminals have also been approved at the port of Itaqui in Maranhão State in Northern Brazil, but market participants believe that it lacks economic viability. Corn at Itaqui usually has a 4-cent discount in relation to the premium charged at the Santos/Tubarão FOB market. "The northern ports have been meeting a growing demand from markets such as Egypt and Europe, so it would not make sense to start exporting to China through this region at this time," they said.

Finally, we can mention the port of Paranaguá in Paraná State, which had four terminals approved, two of them, Interalli and Roche [SP], handle cargo from different trading companies in a pool model, which is not allowed by the traceability system required by China. It would be very difficult in these terminals to isolate cargos from a certain company to prove their origin. Bunge's terminal in Paranaguá does not have an adequate draft for the ships that usually transport corn in Brazil, so only Cargill's terminal in Paranaguá would be left. This is the main logistical bottleneck at the moment. For soybeans, the qualified terminals operate in a pool, with cargos from several trading companies because there is not such a strict phytosanitary requirement.

BM: Right. Thanks for that, Alessandra. And perhaps to delve deeper into administrative challenges, one area of contention was the fungus content in Brazilian corn, which initially delayed China's approval of imports from Brazil months after the two countries signed the agreement. Has any action been taking place since then to enhance track and growth in Brazil?

AM: I talked to the Brazilian secretary of agricultural defense, Jose Guilherme Leal, to understand in detail how the Brazilian corn export control works for the main countries, the main buyers. He explained that there are two controls, a phytosanitary one and a quality one. Quality control is usually done by the private sector. The phytosanitary one, on the other hand, basically consists, for most of the Brazilian corn-buying countries, only in the issue of a phytosanitary certificate, which attests the absence of live insects, and also includes a treatment with chemical products. A quality control is also done to certify that there are no undesirable residues in the cargo such as agrichemical residues. However, in the case of China, there is a great concern about avoiding the entry of pests and the presence of weeds that can affect the Chinese corn crops, which are very different from Brazil, and that's why they increased inspections. The Brazilian secretary said that Chinese requirements were too strict in the past and that it was almost impossible to meet them.

But with the protocol signed this year, there was some flexibility. Even so, it's as soon as necessary to do a complete traceability of the corn to prove that quarantine pests are not present. Therefore, the first actions we're taking for the '21-'22 season, which has already been harvested, the Ministry of Agriculture is inspecting 600 establishments of at least 30 companies that have requested authorization to receive the certificate that authorizes exports to China. Warehouses and terminals are visited and documents are checked. On November 2nd, as I mentioned, at least with 136 authorized units was released, which was practically the same number that the government was able to inspect. That's what the secretary said.

Discussions for the '22-'23 corn harvest are ongoing, but it's likely that the certificate will also include a phytosanitary document from the property where the corn was produced. The secretary said that the associations that represent farmers and cooperatives have already started to guide the interested parties. My opinion below is that it will be a very complicated task. Brazil has more than 5 million rural properties. It's not known exactly how many produce high-tech corn, but it's likely that only the most modern and most organized will have access to this market.

BM: That sounds like we can have a consolidated start to the trade flows. All of that is really interesting, but so far, we mostly talked about technical challenges, if I can call it like that, but how about looking at it from the Chinese perspective and from a trade perspective? Would you say that the market is perhaps overestimating Chinese demand? Because when we look at China's imports of wheat, corn, as well as soybeans, they have declined quite a bit in the past months. How are Brazilian exporters viewing this, the ones that you talk to regularly? Are there expectations of a demand recovery in the near term, especially in view of rumors that China might lift some COVID restrictions soon?

AM: Well, first let's analyze the Brazilian side. How much corn can Brazil ship? Do you remember the port terminals that I mentioned? Let's consider that the Port of Santos would have conditions to ship a maximum of five ships per month during the Brazilian corn export season, which occurs from July to December. Then, the maximum we could send there next year would be 9.5 million tons. Market participants believe that shipping half of these would be something feasible, so we are talking about 4.7 million tons. This number is close to estimates made by market consultants throughout this year. They considered that Ukraine was exporting, on average, 8 million tons to China, and that with difficulties due to the conflict with Russia, Brazil could occupy at least half of this market. The fact is that nobody knows exactly what the exported volume will be. Everyone is trying to guess, in fact.

Now, you ask me if volumes are being overestimated. Thinking about the recent behavior of China to reduce imports of many agricultural commodities. The analyst in Brazil, in order to drop scenarios, look closely at the margin of the Chinese swine industry, which has returned to profit. This is the engine of demand. They think that the economy slowdown is more centered in the reduction of investments and infrastructure, and not in the reduction of family consumption. So, demand for agricultural commodities is still firm, according to them. Larger volumes of soybean and corn imports are expected in 2023.

BM: Yeah, I guess that is true that, you know, people continue to eat, so demand could be there. But perhaps, again, on the topic of near term, some market participants and analysts loaded the possibility of Brazil exporting as much as 1 million tons of corn to China by the end of this year. As in, you know, by the end of December. What's your take on this? Could the political transition in Brazil potentially slow the sort of shipments to China?

AM: So far, market participants have estimated that Brazil may export 1 million tons to 2 million tons of corn to China between December and January. Most of them base this estimate on the movements that COFCO, a Chinese company, has been making during the second half of this year. Besides COFCO itself, the expectation is that other trading companies such as Cargill and Louis Dreyfus, which often already have contracts signed with COFCO, will also see some opportunities in this initial phase. But everything is already priced in. What we have seen is a certain anxiety, a climate of expectation among traders with low liquidity in the [inaudible 00:13:37] of our own cargo market at the beginning of November due to all the difficulties we have already mentioned here today.

So, I don't know if I made it clear in the beginning, the logistical problem of competition with soybean and in the ports, this is not a big issue. Traditionally, the strong season for soybean export in Brazil is the first semester. Corn, on the other hand, uses the ports in the second half of the year because it is corn harvested in the Cerrado region. The winter harvest, today the largest in the country, and Brazil still exports much less corn than soybeans. Therefore, space in the ports would still exist in theory.

BM: Okay, understood. So, if exports can actually start, then 1 million is not potentially unrealistic.

AM: Yes.

BM: But so far we talked about, you know, the situation in Brazil and China, but perhaps it's a good idea to end this podcast by looking at what's happening in other key suppliers of China. How do you think the Brazilian exporters are viewing the situation, especially in the U.S., and maybe Ukraine? As we briefly mentioned at the start of our podcast, water levels on the Mississippi River have yet to rise, and U.S. corn prices continue to weigh on the U.S. export and sales space. At the same time, there's similar clarity on the renewable or sustainability of Ukraine's grain quota beyond late November.

AM: Well, exactly. This is also a factor for the optimism regarding the growth of Brazilian corn exports. The volume should rise from 20.6 million tons last year to more than 43 million tons in 2022. Next year, it could be even higher, more than 45 million tons, probably. The problems on the Mississippi River are making Brazilian corn more competitive than U.S. To give you an idea, there are reports of Mexican and American companies asking prices, asking offers of Brazilian corn through the northern ports that have become more viable to supply themselves with the grain. Another competitor, Argentina, is set to suffer again with dry weather this summer, reducing corn production. And Ukraine, as we know, everything is very uncertain regarding the grain corridor, even if it's maintained, few people believe that the Ukrainians will return to producing and exporting their full capacity in the short term or in the medium term. In this scenario, Brazil would have opportunities to take advantage, is what most believe for now.

BM: Alessandra, many thanks for sharing your insight today. I think it's an exciting time to cover the grains market, the corn one in particular, and I think we're just gonna have to see how much market share Brazil will take from the U.S. and Ukraine, especially, in the Chinese corn market. As usual, Argus will continue to monitor the market as closely as possible, and report as objectively as possible. Alessandra, thanks, again, for taking your time today.

AM: Thank you.

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