Wheat and Wheat Milling Industry in Brazil

Brief Background of the Wheat and Wheat Milling Industry in Brazil

On November 22th, 1990, entered into force the Law 8,096 that revoked the Decree-Law 210. The Law 8,096 declaredfree, nationwide, commercialization and industrialization of wheat any source, releasing, as a consequence, the marketing and wheat industrialization in Brazil, without the economic agents are more attached to limits, quotas and governmentcontrols, including to import the grain. The sector passed through an intensive transformation as result of the sudden deregulation and opening to the international market, especially Argentina, where the production costs were below those found in Brazil and by consequence, produced wheat with more competitive prices than Brazil.

Recent Aspects of the Wheat Milling Industry in Brazil

The Government is currently adopting interventionist measures directed towards the sector, whether through Federal Government Loans (EGF), the Minimum Price Guarantee Policy (PGPM) and Production Distribution Award (PEP). In practice, the PEP is a subsidy in two fields. The producer, where he charges the difference between the minimum price and market price and at companies as a subsidy for transporting wheat from the producing region to the mill.

Despite having evolved considerably in recent years, the productivity of national wheat cultivation is still low in relation to the main world wheat producers. The disadvantages involve climatic conditions unfavorable to the winter crop in the majority of the national territory, associated to soil characteristics, and has influenced the quality of Brazilian wheat and/or production costs for the grain.

Despite the government efforts to guarantee the producer’s income, the suppliers, especially Argentina, are able to deliver the grain at lower costs if compared to the domestic wheat costs and/or with higher quality standards.

The table below presents Brazilian wheat consumption in the last 4 years:

Source: United States Department of Agriculture – USDA

The domestic production remains insufficient to attend the consumption. Thereby, Brazil is still highly dependent on imported wheat grain, mainly from Argentina. The import need imputes the mills a strong vulnerability regarding fluctuations in international commodity prices, which is influenced by external factors, including speculative movements. Nowadays, the imports reach half of the domestic consumption.

General Aspects of the Wheat Milling Industry Competition

According to the USDA (United States Department of Agriculture), the global wheat production for the 2018/2019 harvest was forecasted in March of the current year at 733.0 million tons, 3.9% LOWER than the 763.1 million tons obtained in 2017/2018. As major wheat producers, we highlight China, the European Union, India, Russia and the United States, with the United States and Russia being the largest exporters in the world. Brazil is ranked among the 5 largest importers in the world, and in 2018 Argentina, based on data released by the Brazilian Wheat Industry Association – Abitrigo was responsible for supplying most of the demand for wheat imported by Brazilian mills.

The tables bellow shows the world largest producers, consumers and exporters of wheat, as well as the production and consumption of Brazil and Argentina:

Source: United States Department of Agriculture – USDA

Source: United States Department of Agriculture – USDA

Source: United States Department of Agriculture – USDA

Perspectives for the Wheat Milling Industry

The National Supply Company (Companhia Nacional de Abastecimento – Conab) pointed out that the wheat planted area in 2017/2018 harvest was 6.6% higher compared to the previous year, reaching 2,042.4 thousand hectares, and the production was 27.3% higher compared to the previous year. Production reached 5,427.60 thousand tons, versus the 4,253.50 thousand tons recorded in the previous year. The forecast for planted area in 2019 is that of 5,631 thousand tons, 3.7% higher than the previous year.

Brazilian wheat is affected by subsidies granted by the European Union, the United States and Canada. In the absence of subsidies, Brazil would be competitive in this sector, because despite suffering from climatic aspects, which are less favorable than the climate of other countries, and more expensive prices for some inputs, it has relatively cheap labor force and can count with two annual crops.

The consumption of wheat in Brazil has grown in recent years due to the population’s income growth and consequent increase in food demand. The graph below shows the evolution of wheat consumption in Brazil during the last decade.