South America Calling
Alastair Stewart South America Correspondent

Tuesday 08/06/13

Brazilian Farming's Biggest Problem

Everybody knows the biggest problems facing Brazilian agribusiness. It's logistics.

When the cost of transporting soybeans from the fields in central Mato Grosso to a China-bound ship reach 40% of the commodity's value, you have a serious problem.

Brazil more or less stopped heavy infrastructure investment in the 1970s. So when grain production began to ramp in the center-west, in areas thousands of miles from the sea, during the 1990s and 2000s, the roads, rail and port facilities eventually became overrun

The situation gradually deteriorated before descending into chaos over the last year.

The freight cost from Sorriso (center-north Mato Grosso) to Paranagua port rose 50% this season, reaching $3.19 per bushel at the peak of the soybean harvest, while ships were waiting for up to 70 days to load beans at Paranagua. With demurrage costs (basically ship rental) at $15,000 to $20,000, that wait can be very expensive.

"While we don't resolve the logistics questions, we are inviting other players to enter into the game," said Julio Toledo Piza, chief executive at BrasilAgro, a corporate farm, at an industry conference to discuss logistics in Sao Paulo Monday.

Brazil is the only major grain producer with substantial arable land available to exploit and so is in a great position to feed a growing world population over the next thirty years, as long as it works out a cheap way of delivering the grain, feed and meat. If not, alternative producers in South America, Africa and Asia will grow.

"This is a huge opportunity that we can't let slip through our grasp," said Jorge Karl, director of OCEPAR, the farm coops association in Parana state.

Governors have belatedly woken up to the logistical chaos that surrounds them and the federal government has recently given greater priority to infrastructure development.

As a result, a series of plans to improve infrastructure have started moving forward and progress has been made on key grain corridors, such as the North-South railway, which will eventually connect the new eastern Cerrado soybean fields to ports in the North.

"The situation is vastly improved ... We hope that in six to seven years we can clear the logistics deficit," said Bernardo Figueiredo, head of EPL, the government's new infrastructure plan overseer.

But while more attention is now being paid to the infrastructural shortcomings, farmer leaders point out that chronic delays are still the norm.

For example, farmers have been waiting for asphalt along the BR163 highway, which connects central Mato Grosso with northern Amazon ports, for a decade. Work has progressed over the last two years, leading many to believe the Transport Ministry forecast that it will be ready in 2014. However, just this week the Ministry admitted that the asphalt may only be completed in 2015, or after.

Similarly, an East-West railway that will connect the soy and cotton fields of western Bahia to the sea is due to be complete in 2015, but work is yet to start on many stretches and, realistically, beans will flow along this route in 2018 at the earliest.

Many other projects have been similarly delayed or suspended due to problems with implementation.

Faced with spiraling freight costs, the patience of farm leaders has been wearing thin for a while.

"We are told that things are improving but we can't wait. The inability of the government to deliver projects on time is unacceptable," according to Carlos Favaro, president of the Brazilian Soybean and Corn Growers Association (APROSOJA-MT).

None of the major new grain infrastructure projects will be ready for upcoming 2013-14 season, and with soybean area set to grow by 5% or more, the logistical chaos could deepen next year.

"We are going to have to muddle through next season," said Luis Carlos Correa Carvalho, president of the Brazilian Agribusiness Association (ABAG).

"Realistically, the situation is only likely to improve in 2016-17," he added.

The high logistics costs will likely slow growth in Brazilian grain production over the next couple of years, but there remains so much pent up demand for logistics in Brazil that any new export corridor will be inundated as soon as it opens.

Speakers at the conference agreed that the fault for the current situation lies with government incompetence, as there are ample funds to invest.

"Credit is everywhere. The money isn't the problem. The government has to allow it to be invested," said Ingo Ploger, president of the Business Council of Latin America (CEAL).

So why is government so sluggish?

For years, the problem was a lack of political will. Simply, farm infrastructure was not a vote winner.

More recently, the realization that Brazil needs farm revenues to underpin the foreign accounts led President Dilma Rousseff to prioritize infrastructure.

However, after 30 years of neglect, the know-how and systems to implement big rail, road and port projects just aren't there, explained EPL's Figueiredo.

"We suffer because plans drawn up are often of poor quality and environmental and other authorities don't have expertise in assess them in a timely manner. That's a big reason why processes are delayed," he explained to the conference.

Meanwhile, corruption remains rife in Brazil's construction industry. As a result, suspicion of graft is widespread. That means government auditors are quick to suspend projects when suspicions arise.

Until these problems are solved, Brazil will continue to have production costs 10% above its competitors in the U.S. and Argentina, noted CEAL's Ploger.


Posted at 5:12PM CDT 08/06/13 by Alastair Stewart
Comments (1)
sounds to me that production costs are a lot more then 10% higher? how do you add $3.10 to the cost of production in corn (hauling) and figure that only adds 10%??
Posted by Unknown at 8:58AM CDT 08/09/13
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