Corn and soybean meal are the main inputs for animal feed, highlighting the preponderance of the cereal, which is around 60% of the components used.
In 2021, the significant corn crop failure maintained a scenario of restricted availability and high prices. This situation weighs on meat production costs, resulting in less favorable exchange ratios between the protein and the input.
Thus, there were high expectations for the 2021/22 crop, bearing in mind that the carryout and the summer harvest mostly guarantee the grain supply in the first half of the year. Unfortunately, however, the South of Brazil suffered from a lack of rainfall in the crop development and production period estimated at 25 million tonnes by StoneX, a volume below that recorded in the previous cycle and the more than 30 million tonnes previously expected for the current summer crop. Given this scenario, corn prices remain very strong, a situation that the highs in Chicago have also reinforced due to the conflict between Russia and Ukraine.
Therefore, the hope for relief on the supply side falls on the "safrinha," whose harvest only starts in the middle of the year.
Thus, when comparing the exchange ratio between corn, pork, chicken, and beef in São Paulo, it can be seen that 2022 started with very unfavorable results. Before talking about the numbers, it is important to remember that the exchange ratio informs how many kilos of input could be acquired by selling 1 kg of a live animal. This is one of the main indicators to understand how the variation in grain prices impacts the operation.
Accordingly, in February 2022, 1 kg of the live hog was equivalent to only 4.5 kg of corn, a ratio lower than the one observed in all of 2021 and far below the 3-year average. As for the chicken, the exchange ratio with corn in February was at 3.1, a level close to, but lower than, the one registered in the same month of 2021, when it reached 3.2. The results have also remained well below the 3-year average. As for cattle, 1 kg of animal in February is equivalent to 14.4 kg of corn, a level in line with a year before but below the average for the period.
Live chicken and corn exchange ratio in SP (kg/kg)
Source: StoneX and Cepea. Design: StoneX.
Live hog and corn exchange ratio in SP (kg/kg)
Source: StoneX and Cepea. Design: StoneX.
For soybean meal, the picture since last year differs from that observed for corn, but prices have also strengthened.
In 2021, Brazil harvested a record soybean crop exceeding 135 million tonnes, which eased the supply of the oilseed and byproducts after a tight second half of 2020. Initial estimates for the 2021/22 crop currently being harvested indicated another year of absolute record, with production possibly exceeding 145 million tonnes. However, the drought in the South of Brazil has strongly affected this perspective, with significant losses mainly in Rio Grande do Sul and Paraná. Thus, StoneX estimates that production will reach only 121.17 million tonnes, a situation that fuels the possibility of tightening the global balance sheet and supporting grain prices, with impacts on byproducts.
With this, the exchange ratio between hog and meal was only 2.4 in February this year, a considerably lower level than a year before, when it was over 3. The ratio between live chicken in São Paulo and meal presented the same behavior, staying at only 1.7, which was still higher than the one registered in February 2021, but remained below the 3-year average for the month.
The ratio between live cattle and soybean meal has also been falling in recent months, standing at 7.9 in February this year, a level below the average.
Live cattle and soybean meal exchange ratio in SP (kg/kg)
Source: StoneX and Cepea. Design: StoneX.
Live chicken and soybean meal exchange ratio in SP (kg/kg)
Source: StoneX and Cepea. Design: StoneX.
Live hog and soybean meal exchange ratio in SP (kg/kg)
Source: StoneX and Cepea. Design: StoneX.
In addition to a significant increase in the prices of inputs used by livestock farmers, especially corn, an important factor to understand the deterioration of the purchasing power of animal protein producers is the difficulty they face in passing on the increase in costs to the end of the chain.
It is important to remember that the country has come from a turbulent period due to the pandemic. The high unemployment rate, high inflation, reduction of the wage mass, and purchasing power act against new significant increases in meat prices. Even though exports, especially beef, continue at high levels, this has not been enough to compensate for the resistance of the domestic market, which is the main destination of the protein produced in the country.
Between February 2021 and 2022, the prices of soybean meal and corn advanced, respectively, 14.6% and 15.2% in São Paulo, the prices paid for chicken and beef advanced 10.5% and 12.8% in the same period. In the case of hog farmers, this scenario is even more alarming since, in the interval analyzed, the price of the animal in São Paulo fell about 21.5%.
Furthermore, it is worth mentioning the beef sector. Contrary to pork and chicken production, the use of feed is not so widespread in this market, predominantly feeding on pasture. In this context, the acquisition of corn and soybean meal gains more importance only in the inter-crop period – approximately between June and December – when some farmers opt for confinement production. Therefore, the analysis of the exchange ratio for beef brings important perspectives for the supply of this protein in the second semester.
As previously highlighted, the exchange ratio between beef and corn and beef and meal is below the last 3-year average, indicating that the livestock farmer suffered from the relative increase in feed prices. This factor could inhibit the confinement activity, reducing the volume of animals available for slaughterhouses in the second semester.
However, feed is only a part of the producer's costs. Only 20% of the expenses with the feedlot are with feed.
The main factor is the purchase of animals for fattening, the so-called feeder cattle.
In recent years, the supply of this animal was quite lean, which made its acquisition difficult and expensive. However, in 2022, after a long period of withholding cows, there are signs that the availability of feeder cattle has increased. According to StoneX's follow-up, the average premium of the feeder cattle price over the live cattle price in the state of São Paulo in March of the last three years was 11.8%. Currently, this premium practically does not exist, with the arroba of cattle before and after fattening trading at the same value.
This cheapening of the replacement is characterized as a great opportunity for the confiner, representing a large reduction in expenses. Therefore, even with the increase in feed prices, there may be an increase in the volume of animals fattened in intensive systems since the total costs in 2022 should be lower than in recent years.
