Lula government starts spending Conab millions to regulate prices

An old and, for many, outdated tool, is being taken up again by the government of Luiz Inácio Lula da Silva (PT) to try to intervene in the market and regulate prices of agricultural commodities, with the aim of combating inflation, putting cheap food on the tables of Brazilians and help small producers. Of the three justifications, only the last would have a chance of partially materializing, and even so, involving a very small universe of producers and at a high cost for the public coffers.

The National Supply Company (Conab) chose corn to mark the return of the Federal Government Acquisitions (AGFs) and will buy 500 thousand tons of the grain at a cost of R$ 400 million in six Brazilian states. These grains will remain in Conab’s own or accredited warehouses, as carry-over stock, waiting for further price fluctuations, being able to “help” poultry, pork and cattle breeders in the event of a rise in prices.

Could Conab’s action regulate prices in the corn market, a commodity quoted in dollars on the international market?

“Joke”, “wrong focus”, “obsolete measure”, “out of context” and “it won’t even tickle” are some of the reactions of analysts and agricultural policy specialists heard by the People’s Gazette.

In macro terms, government purchases will have a negligible effect

In a quick calculation, it is immediately clear that the 500 thousand tons of corn to be acquired by the government will have zero or negligible effect on market regulation. The country is harvesting a second corn crop, also known as safrinha, of 100 million tons.

“These 500 thousand tons are a joke. If you look, it’s half a percent of the off-season. Our internal consumption alone demands 6.5 million tons per month. What the government is going to buy is not enough for a week, four days of national consumption alone. It is too little to say that it will help balance prices in a time of crisis”, says agronomist and market analyst Vlamir Brandalizze. For him, the money would have a better destination if it were used to finance storage lines or improve the logistics of shipments for export.

The government’s action has little potential to affect the market both in times of surplus supply and in times of scarcity. “If we have a crop failure next year, for example, in which we cannot harvest 100 million tons, but only 70 million, and there is a need for a lot of corn, this stock would also be useless. It is a backward policy, they are taking the history of the past, when it would be necessary to plan for the future. And the future will see ever-increasing harvests”, emphasizes the agronomist.

Risk of public coffers paying twice as much for the same corn

Learning from the past, in this case, should not involve re-editing physical intervention measures in the grain market, but understanding that agriculture has modernized, as well as the methods of helping producers and the population. During the government of former President Jair Bolsonaro (PL), 27 Conab units were closed and 124 warehouses and warehouses qualified for privatization, given the underutilization of these spaces and the high cost for public coffers.

“If we look at Conab’s performance in the past, it bought a basic basket and paid a lot to distribute it, it ended up costing more than twice as much in supermarkets. Today, with Auxílio Brasil, which became Bolsa Família with a boost, you provide conditions for people to buy, they don’t need to receive the basic food basket”, says Brandalizze.

Regarding Conab acquisitions, he adds: “It is corn that the government will not be able to buy cheaply, it will have to pay an amount that the producer is willing to sell, which has to be above the export value. And then you will have to put it in public stock or pay for private storage. Then you will have to load the stock, which will cost more than 1%, 1.5% per month. It has the cost of Conab, of inspecting and keeping this stock under control. In the future, when this corn is sold, it may be old, with low quality. We’re going to pay twice, it’s corn that’s going to be very expensive for the treasury”.

Conab admits: intervention and regulation did not work in Brazil

It is a consensus among analysts that the supposed market regulatory effect of Conab’s purchases does not exist. “These 500,000 tons are not even ticklish for a 100 million-ton harvest. For market purposes, the result is zero”, points out Paulo Molinari, from the agency Safras e Market.

In practice, there is confusion in the speech of the president and PT managers at the head of Conab. While Lula stated during the electoral campaign that he intended to “build stocks to control the price”, and has insisted that government intervention can reduce inflation, the president of Conab, Edegar Pretto, declared that he wanted to “do away with the words intervention and regulation, which refer to another time of a Brazil that did not work”. At other times, however, Pretto has endorsed the understanding that Conab has the power to influence food inflation.

Even if it spends tens of millions of reais, however, Conab will not be able to regulate the commodities market – unless it causes imbalance in the micro-regions in which it intervenes. “If it were possible to create a stock to regulate the international price of corn, China would have done so. Even China couldn’t do it, we’re not the ones who are going to do this magic”, ponders Felippe Serigati, professor at the São Paulo School of Economics at the Getúlio Vargas Foundation (FGV).

Misunderstanding of how the market works

The government would lack understanding of basic, and cyclical, market functioning mechanisms. “How many times have we seen tomato inflation, bean inflation? The price goes up and in the next cycle there will be more producers wanting to produce beans. The staff expands the area, puts more technology into production, and as a consequence increases the quantity supplied, causing the price to return to its long-term equilibrium path. We just need to allow the market to work, with rules so that there is more competition, but we have to let the market work”, says Serigati. “We cannot forget that the producer is an entrepreneur. He will plant what offers the greatest return for him”, she emphasizes.

This does not mean that there are not effective ways to implement the Minimum Price Guarantee Policy, which is in the Brazilian legislation. For Serigati, this policy can help to avoid more serious consequences for a producer who, when planting corn, for example, operated in an environment of R$ 80 a bag and, when he harvests and goes to sell the production, finds this same corn operating at BRL 30 a bag.

“It’s a beautiful stroke. Probably this producer will be undercapitalized. And then it will either reduce the area, or it will try to produce using inferior technology, which naturally leads to a lower production value. So, to provide a little more stability for this producer who is in a much tighter situation, there is the public policy instrument of minimum prices that has to be implemented ”, he points out.

Formation of public stocks would be the worst option available

Among the various options to intervene and help the small producer, however, the government would be choosing exactly the worst. “This design of the government buying the grain, guaranteeing the storage and quality of the product, if it guarantees it at all, is old, outdated and has not been done for a long time. I didn’t because we spent a long time with prices at very high levels, and also because this instrument, in fact, is more obsolete”, says the coordinator of the professional master’s degree in agribusiness at FGV.

Examples of more efficient government action instruments in the market, when prices are below production costs, such as corn now, would be the Equalizer Premium Paid to the Rural Producer (Pepro) and the Product Dispatch Premium (Pep). Through these tools, instead of forming physical stocks, the government helps with the cost of freight to take food from one region to another. Or, alternatively, it can pay a subsidy, completing what is missing from the market price to the minimum price.

In the opinion of Cleiton Gauer, superintendent of the Mato Grosso Institute of Agricultural Economics (Imea), linked to the Mato Grosso Agriculture Federation (Famato), Conab interventions can help to balance the market, mitigating extreme situations, in which the price of corn is either very high, like last year, or below costs, like this year. He admits that the 500,000 tons have little effect as a carry-over stock, but they can work as a one-off help. “The point is that when something very drastic happens, like a crop failure last year, or excess production, these tools need to be implemented”, he says.

Measure has support from part of the agricultural sector

In the same vein argues Jeffrey Albers, coordinator of the Economic Department of the Federation of Agriculture of Paraná (Faep), when assessing the return of public stocks at Conab. “Despite being timid, it is a sign that the government is keeping an eye on what is happening to the market, and is not simply letting it happen. In the medium to long term, having a buffer stock can be beneficial for the sector. We came from a situation (last year) where prices were very high and livestock was penalized. At that time, if there was a buffer stock, it could supply poultry and pork breeders”, he assures.

Even though it has support from part of the agricultural sector, an interventionist policy of building stocks does more harm than good, in the opinion of Guilherme Bastos, who was Secretary of Agricultural Policy at the Ministry of Finance during the Bolsonaro government. “The whole point is that 30 years ago the size of the Brazilian crop was much smaller than it is today. So, using this tool as a price regulation instrument is out of context. So I ask: how much will taxpayers be willing to pay for a strategy like that?” asks Bastos.

For him, safrinha corn in Brazil only reached 100 million tons because of the evolution of the production chain and the dynamics of its commercialization. “There is a very strong role for tradings, making advance purchase contracts. This gives security in planting. The animal protein sector also has to become more professional and make use of advance contracts for the acquisition of the main input for their production”, he says.

As a more effective way for Conab to act, Bastos also points to premium auctions for production flow (freight costing) and the equalization of the market price difference with the minimum price, instead of forming physical stocks.

High cost and risk of grain deterioration

On the other hand, the surge in the use of corn to produce ethanol in the country and DDG (animal feed), in addition to the growth in exports, has helped balance prices in times of super harvest, like now. By forming its own “mountain” of stocks, the government is repeating a strategy that has already seen thousands of tons of grain deteriorate in public warehouses in previous years.

What is the cost of holding these physical inventories? “The cost of this is Conab’s cost. Just look at the Union Budget expenditure with Conab. This is the cost”, underlines Bastos. In 2023, the Lula government earmarked BRL 1.83 billion for Conab in the budget, of which BRL 787 million has already been spent, according to the Transparency Portal.

Contacted by People’s Gazette to comment on the government’s resumption of physical stocks, Conab forwarded a piece of news on its website, in which the measure is defended by Pretto: “We are going to encourage farmers to plant and we are going to guarantee a minimum price for production. We have a forecast of a record corn crop, but prices are falling. Then we will start buying corn. With this Conab action, we fight food inflation, aiming to bring food to the table of all Brazilian men and women”.