Drop in Brazilian Wheat Output Alters Commodity Price Dynamics

The substantial drop in the wheat output in the states of Rio Grande do Sul and Paraná due to excessive rainfall, coupled with increasing imports, has reshaped the pricing dynamics of the commodity. According to analyst Elcio Bento from Safras & Mercado consultancy, this shift represents a deviation from the export parity concept, with the market now basing quotes on import parity. Import parity serves as a benchmark for countries facing supply shortages.

Rio Grande do Sul is expected to harvest 3.3 million tonnes of wheat this year, marking a nearly 50% decrease compared to the previous crop. Milling industries consume around 1.9 million tonnes per year. Unlike 2022, when the state exported 2.4 million tonnes of wheat, the new cycle will likely see more shipments flowing in the opposite direction. Bento notes, “Half of the wheat (from the current crop) has a low quality; certainly, Rio Grande do Sul will need to import.”

He stresses that the National Food Supply Company (Conab) has been conducting Premium for Product Flow (PEP) and Premium Equalizer Paid to Rural Producer (Pepro) tenders to support wheat flow. These operations will shift Rio Grande do Sul wheat stocks to the Northeast, further changing the supply situation.

According to the analyst, mills in Rio Grande do Sul are expected to import 350,000 tonnes of wheat in the 2023/2024 season, compared to only 17,000 tonnes in the previous season and 199,000 tonnes in the 2021/2022 cycle. Bento asserts that domestic commodity prices rose in November to align with import parity. While the benchmark for calculations was previously the quotes from other competitors in the international market, such as Russia, the values in Brazil are now determined by the logistical costs of importing wheat from abroad.

For example, in October, internal prices for the commodity in the state were around R$1,050 per ton, says Bento. “To reach the port of Rio Grande at the same price that Russian wheat was leaving the Black Sea, it was necessary to sell at R$1,021 per ton. In other words, domestic quotes were only 2.8% below the parity line with Russian wheat,” highlighted the analyst in a report. Currently, wheat is quoted at around R$1,250 per ton internally. “The export parity in relation to Russian wheat would be R$945 per ton. The spread increased to 32%,” explained Bento.

By calculating the import parity, using the cost of purchasing Argentine wheat as a reference, Bento explains that producers could sell a ton for R$1,295 to reach the price of imported wheat. The indicated value in the market was 19% lower. “At the beginning of the fourth week of November, the market price (R$1,250/ton) was only 2% below parity with wheat from the main Brazilian supplier abroad,” says the consultant.

Given this scenario, Bento still sees room for further increases in wheat prices, but this trend is limited by the entry of the new Argentine harvest into the market. “From January onwards, a considerable amount of Argentine wheat will come into play, and this wheat arrives in Brazil at a price similar to current prices. The market has aligned with the reality of international prices and is now consolidating the new price. Still, I don’t see room for significant increases in the short term,” he offered.

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