South America Calling
Alastair Stewart South America Correspondent

Thursday 08/28/14

Brazil's Rising Soy Costs

If you have seen a presentation on Brazilian soybean production over the past two decades, more likely than not you would have heard the mantra that the South American giant is very competitive inside the farm gate, but poor logistics hamper growth.

This observation remains broadly true today, but hides a troubling trend of rising production costs.

"The constant creation of costs is one of Brazilian grain's big challenges," noted Anderson Galvao, CEO at Celeres, a Brazilian grain consultancy.

Back in 2002, Brazilian farmers paid approximately a third more to produce soybeans than their U.S. counterparts, discounting land costs, principally because Cerrado soils are poor and need heavy fertilizing.

But over the last five years, Brazil costs have been more than double those in the U.S. Using the average of the past 12 years, direct costs in Brazil were $254 per acre compared with $120 per acre in the U.S., according to figures presented by Celeres.

And the difference would be greater if Brazil hadn't registered slightly higher yields in the period, noted Galvao.

The jump in costs is due to the government policy of maintaining the Brazilian real strength, growing chemical use to meet the threats of diseases such as Asian rust and pests such as the Helicoverpa caterpillar and a surge in labor and environmental costs.

We often talk about the first two issues but don't talk about the last.

In 2005, a Brazilian farm worker cost 40% of the equivalent worker in the U.S. In 2014, the same Brazilian worker earned 75% of that of his American counterpart due to a shortage of rural labor trained to operate today's more sophisticated machinery.

When you take into account that Brazilian productivity is lower and the onerous costs of employing staff here -- a full canteen on the farm, for example -- labor costs are higher than in the U.S.

"The shortage and cost of labor in rural areas is a serious issue," said Galvao.

Meanwhile, Brazilian environmental demands are also much more onerous than in the U.S. For example, Brazil's new forestry code demands that at least 20% of a farm, plus regions around rivers and hilltops, are not cultivated. That essentially creates dead investment.

"We are creating costs for ourselves that are affecting our competitiveness," said Galvao.


The mantra that Brazil's farms are competitive remains true only because of lower land costs

That's important as they need to offset the exorbitant cost of transporting soybeans to market.

It costs $164.20 to transport a metric ton of soybeans from the farmgate to Hamburg hold compared with $95 from Iowa, according to Celeres.

The problem is starting to be addressed with the construction of new export corridors through the north.

But you have to remember that better logistics will also cause land prices to rise, limiting the competitive gains on offer.


For the last 20 years, analysts have been saying that Brazil, as the only major producer with room for expansion, will inexorably expand output to eventually eclipse the U.S. as the dominant force in the soybean market.

But if Brazil doesn't control costs and starts demanding prices of $15 per bushel and above to produce extra acres, other competitors in Africa and Asia are going to get very interested, said Galvao.

"There is this erroneous idea that there only exists land in Brazil," Galvao told a conference in Sao Paulo.


Posted at 3:44PM CDT 08/28/14
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