Brazil: Internal market loses liquidity with tax framework for corn

Brazilian agribusiness was hit by the federal government’s tax aggressiveness last week in a surprising way. The decline in PIS/Cofins credits will significantly alter a commercialization profile that has evolved over the last few years and created commercial links and internal operational methods that made business viable without converting into additional costs. Partially, some segments ended up losing some of their competitiveness in the purchases of corn, given the transfer of such tax benefits to prices to producers in cooperatives, particularly. In fact, the tax credits will continue, they just cannot be deducted from other taxes levied on the chain.

The domestic corn market had a difficult week in terms of sales. Initially, the exchange rate effect on domestic prices could have been more positive in a normal situation over the week. Prices firmed in Mato Grosso, for example, between BRL 38/40 a bag, for well-located regions, given the price support in ports, particularly Santarém (PA), the only one with the best volume of shipment scheduled for June. On the other hand, local industries have stopped buying until there is a better legal and tax understanding of operations involving taxes such as PIS/Cofins. The fuel sector was significantly affected throughout its sales chain and, of course, raw materials will be affected if the sector is unable to pass on the new costs to the final price. The loss of market liquidity and/or more competitive prices in relation to exporters are the key points for industries.

In other states, the situation is no different. Cooperatives, traders, and transport companies were trading using PIS/Cofins credits. This was converting the market to a pricing model with these taxes included and making operations more difficult for segments that do not use rebate credits. A good part of CIF trading in some states involves this tax credit mechanism. The loss of viability of this mechanism caused a sharp halt in sales last week, and this may go on until cooperatives and traders find a new adjustment point in the formation of internal prices.

The situation, unfortunately, represents an increase in taxation across the entire agribusiness chain, as it is not just negotiations involving a daily flow of corn or soybeans but all other inputs, machines, equipment, and so on. For example, until further understanding, corn imports from Paraguay should be affected by not allowing this adjustment of credits for general tax rebates. PIS/Cofins should become a cost in import operations for corn and any other merchandise. Now, we need to wait for the Congress’ position, negotiations and votes in the political environment. However, it seems clear that the government’s intensity and aggressiveness will force sectors to negotiate a new rate of this tax, preventing an increase in the tax burden that would make certain sectors unfeasible, such as the soybean crushing segment, which has already indicated this operational unfeasibility. The same may happen to the corn ethanol sector.

The queue of shipments in June gains a little strength with 1.2 mln tons on schedule, with the greatest liquidity being concentrated in the port of Santarém, in Pará. The other ports still have very discreet schedules, with Santos not having any ship appointment for June yet. The exchange rate could be a factor in favor of port prices in the coming few days and help support prices, while prices in the interior will have new discounts due to the new tax burden on operations.

Tags: corn, Brazil, prices, Market