Commodity Shuttle: Crop failure with rain and drought will prolong food inflation

The expected lower pressure from food on the consumer’s pocket should not occur in the coming months. The current drought affects exactly the products that are the most important in the daily lives of consumers.

Drought in the South and excess rain in parts of the Southeast and Midwest will reduce supplies of beans, milk, rice, corn and soybeans. Products that do not go directly to the consumer’s table, such as soybeans and corn, weigh in the formation of the costs of proteins and vegetable oils.

Rural inflation began more sharply in 2018. From that year to the end of 2021, food prices were 43% higher for consumers, a rate higher than the 24.6% of general inflation for the period.

The data are from Fipe (Fundação Instituto de Pesquisas Econômicas), which also indicates an acceleration at the beginning of the year.

In the first four weeks of this month (data that include prices for the last three weeks of December and the first of January), foodstuffs rose 1.2% in the city of São Paulo, above the 0.57% of total inflation for the period.

Fipe considers that, of every R$ 100 spent by people from São Paulo with an income of one to ten times the minimum wage, R$ 25 is spent on food. The highs in retail are reflecting price increases in the countryside, accelerated after the damage caused by weather conditions in the country.

Consumers will take time to recover their purchasing power. Agricultural products, with the exception of rice and pork, are at record price levels in the countryside. On the other hand, the prospects of economic recovery, and the consequent return of employment, are distant.

With the crop failure, final food stocks, already projected to be reduced for this year, should be even smaller. Beans and corn are the ones of most concern.

The legume planting area has been losing ground to soybeans and corn, due to the better profitability of these two. This year, Paraná, the main producer of beans in the first harvest, reduced the area by 9%, and the state is one of those that will have a drop in production due to the drought.

Conab figures, which still do not indicate the total size of the damage caused by the drought, indicate a production potential of 988 thousand tons of beans in this first harvest. In the assessment of the agency, the potential of the South region and the states of Minas Gerais and Goiás, areas affected by drought or excessive rain, was 650 thousand tons.

Ending stocks, projected at 239 thousand for the 2021/22 harvest, are 9% lower than the average of recent years. This is a product of which the country has difficulty building stock, and the adjustment of demand ends up being made by price.

Rice is among the few products that start the year with falling prices, compared to 2021. The excess heat in Rio Grande do Sul, the main national producer, however, reduces the supply of water in the reservoirs and the expected productivity does not is guaranteed.

Corn ending stocks are projected at 9.6 million tons this season, 28% less than expected before the worsening of the drought.

These figures from Conab do not yet include the reduction in production predicted by independent consultants. The break in this summer crop will reduce the cereal supply in the first half, since the winter crop —the off-season, which has the highest volume—is not yet sown.

Brazil bets on the winter crop, estimated at 86 million tons. Last year, the volume harvested was only 61 million, due to drought and frost.

A new break in this year’s safrinha would make the country, once again, dependent on imports, in addition to reducing the capacity for exports. Domestic consumption is 77 million tons.

Corn may have other bullish factors. Estimates are for a readjustment in oil prices, which gives support to the cereal. At least one-third of US corn production goes into ethanol production. In Brazil, corn already represents 10% of the production of this fuel.

In addition to the effect of higher prices, due to the crop failure, domestic consumers will pay more for food due to external competition.

World demand continues to accelerate, and China still maintains expectations of a good evolution of GDP (Gross Domestic Product).

With this, the Chinese will continue to take soy, sugar and meat, products that are already at high price levels in Brazil in 2022, compared to the beginning of 2021.

In addition to external demand, which also causes domestic prices to rise, there is pressure on production costs for farmers.

Transport, energy, dollar, interest and difficulties in obtaining inputs force a rise in commodity production costs. If there is demand, these costs are passed on to prices.

Food has reached a very high level in recent years, which keeps some consumers away from shopping, due to loss of income.