Soy Frontier at Middle Age-1 05/15 16:49
How Brazil's Pioneers Rode the Soybean Boom
Optimists nicknamed Brazil's frontier "Soylandia" at the turn of the
millenium, describing a country that would suddenly triple its soybean
production in the next 15 years and rival the U.S. as world's largest soy
producer and exporter. The country's unparalleled farming boom made paper
millionaires out of many of Mato Grosso's pioneers. DTN's Marcia Zarley Taylor
and Alastair Stewart reexamine the boom years and what's ahead for Brazil's
soybean growth as the frontier marks middle age.
By Marcia Zarley Taylor
DTN Executive Editor
SORRISO, MATO GROSSO, BRAZIL (DTN) -- Farmers landlocked on the planet's
most remote soybean production region have a secret to share. Things aren't as
grim as the threat of Chicago's $8.50 soybeans or sub-$4 corn would lead you to
believe. They've survived worse.
Just ask Brazil pioneer Darci Getulio Ferrarin, an athletic-looking
70-year-old, with a movie star's smile. "We're going through a messy market
situation now, but we'll get out of it," Ferrarin told American farmers when
they visited earlier this year. By mid-April, his northern Mato Grosso's cash
bids there were running $8.43 per bushel, about half the price of 2012's glory
days. But because the dollar has appreciated 50% against the Brazilian real
since then, those U.S. dollars buy more in local currency. The windfall means
Ferrarin is insulated from much of the pain North Americans feel, at least for
the 2015 crop.
Ferrarin's own rags-to-riches story parallels the fate of Mato Grosso during
Brazil's biggest soybean boom years. It's testimony to the fortitude of farmers
and agribusiness here who face transportation and economic obstacles few U.S.
farmers would envy.
"Five-dollar soybeans didn't stop them in the early 2000s," said Bob
Tetrault, a Foreign Agricultural Service crop analyst who has monitored
Brazil's soy expansion by satellite and ground visits for decades. With trends
toward irrigation and double- or triple-cropping, "Brazil will surpass the U.S.
as the world's top soy producer and just keep going," he said, leaving North
Americans to concentrate on corn in the future. In May, USDA forecast the next
crop Brazilians will plant could reach a record 97 million metric tons in
2015/16 -- up nearly threefold from its 37.5 mmt crop at the turn of the
"It will be hard for Brazil to grow as fast as it has from 2000 again, but
in five years they could easily be producing a soybean crop another 20% bigger
than today's," Tetrault forecast.
CIVILIZATION FLASH FORWARD
Northern Mato Grosso was largely jungle until the 1980s, with land clearing
and thick smoke still choking the air around Ferrarin's hometown of Sorriso
when he settled only 15 years ago. Except for some early warnings from FAS crop
forecasters like Tetrault and others in the late 1990s, few U.S. farm
organizations or policymakers seriously considered that Brazil would end
America's 50-year dominance of world soybean markets any time soon. Now Mato
Grosso alone produces 30% of the country's soybeans and nearly 9% of the
world's production. Officially, USDA expects Brazil as a whole will export
about 46 million metric tons of soybeans this year, just slightly below 48.7
mmt for the U.S.
Meanwhile, the frontier that Ferrarin and his family settled is no Wild West
today. Environmentalists and bankers monitor satellites to make sure growers
stay within their permits and don't illegally log native forests. Sorriso
remains the richest agricultural district in all Brazil, a sort of plateau
wilderness turned into Champaign County, Illinois, or Webster County, Iowa,
just in a man's lifetime. The farm town's population now tops 70,000 and boasts
exclusive California-sized gated communities, along with a shopping mall, Best
Western-style motels, a Cineplex and state highway BR-163 crowded with
agribusiness giants like Cargill, ADM, Bunge, Syngenta, Deere, Pioneer and
Monsanto. In August, the farm town will even open its first commercial airport,
linking it to the state capital, Cuiaba, as well as international hubs like Sao
Paulo. Sinop, the town an hour north by BR-163, now offers five commercial
flights a day and passengers are likely to include U.S. farm tours, National
Geographic photographers and fund managers from New York, looking to invest in
Ferrarin had grown up with 11 siblings on a 60-acre farm in southern Brazil.
It was a family so poor, he remembers his father owning just two sets of
clothes. With the farm too small to split among them, his parents prodded their
children to leave home, saying "the world was waiting for them."
By 1998 Ferrarin had sold a business, then recruited his son Darci Junior,
19 years old at the time, to help him reinvest the profits in 60,000 acres of
real estate on the edge of the Amazon Rain Forest near Sorriso. The subprime
land -- about 70% degraded pasture -- averaged a mere $160 per acre. But the
farm was stuck in the middle of the continent, as remote from an ocean port as
Minot, North Dakota, is from Seattle. There were no railroads anywhere in the
state and no paved roads for miles. A trip to Sorriso -- 12 miles away --
required a ferry crossing on a major river. Trucking soybeans 1,200 miles south
to the Port of Santos took a week or more.
Even today, this dependence on trucking to port means it cost about $91 per
ton to ship soybeans from Sorriso to export terminals in Santos. A trip from
Davenport, Iowa, via the Mississippi River to New Orleans ran only $60 per ton
in late 2014, the U.S. Soy Transportation Coalition estimates, an edge that
makes soybeans more profitable in North America.
Fighting lack of infrastructure was one thing, but then dark years hit the
soybean frontier, draining reserves of many farm owners without deep pockets.
Chicago soybean prices temporarily plunged to $4.15 per bushel in 2002. A few
years later, an epidemic of soybean rust hit. Renowned plant breeder Norman
Borlaug compared the fungus' destruction to North America's 1970 southern corn
blight. Meanwhile, the collapse of the U.S. dollar against foreign currencies
further slashed soy revenues and made it hard to repay debts -- especially farm
machinery pegged to U.S. dollars.
"Soybeans are priced in dollars, so it took more and more Brazilian reals to
repay their high-interest debts," recalled Kory Melby, a Minnesota farmer who
relocated to Brazil in the early 2000s and now consults for U.S. farm business
investors. "For Brazilian farmers, all this was the perfect storm."
THE CHINA GAME
After China reversed its policy of soybean self-sufficiency in 1995 and
built the world's largest soy crushing capacity, global soy demand surged.
Chinese soy imports rose from virtually nothing in the early 1990s to 70 mmt in
2014, more than half all soybeans traded in global markets. That surge drew new
lands into planting worldwide: Brazil led all other countries by adding 27.7
million new acres of major crop production between 2005/06 and 2014/15,
according to Purdue University economist Chris Hurt. A mature country like the
U.S. could only muster 9.8 million new acres.
Eventually, soybean wealth trickled back to Brazil's cerrado, including the
youngest frontier regions. By 2015, the Ferrarins had parlayed their investment
into a $150 million agricultural showplace, including another 40,000 rented
acres, an elite breeding herd of Nelore cattle and 140 employees. Cropland they
purchased for $160 per acre and sweat equity now commands about $6,900 per
There's more room for real estate values to grow. Finishing a northern
export corridor -- including the final paving of a soybean highway known as
BR-163 with a direct link to Amazon export facilities -- gives land investors
along the soybean highway reason for hope. As capacity in four major ports
grows over the next five years, freight rates could drop $50 to $60 per ton,
Mato Grosso's corn and soybean association Aprosoja estimates. That could boost
local soybean bids by $2 per bushel, eventually lifting land markets just like
ethanol plants boosted Iowa farmland values in the 2000s.
SURVIVAL OF THE FITTEST
For the moment, however, Mato Grosso soybean growers are forced to master
low-cost farming. To generate more income, growers now double crop four out of
every 10 acres, the highest percentage in Brazil. To squeeze a second crop out
of their rainy season, they direct seed 120-day corn immediately behind 17%
moisture soybeans in January, beating the clock before rains stop in March and
the winter's dry season begins. Although many growers embraced biotech stacked
traits, especially RR2 Intacta, some switched back to 100% conventional seed
this year to save on royalties. They skip expensive frills like precision
farming, preferring speed over spoon feeding.
"My dad's a big fan of [soybean yield champion] Kip Cullers," Darci Junior
said, noting Cullers has visited the farm and shared his advice. "But I tell
him we can't farm like that. It would bankrupt us."
Most producers in Mato Grosso will break even on the 2014/15 crop just
harvested at $9.50 per bushel, and more than half the crop was pre-sold above
$10.50, according to Aprosoja, the state's corn and soy grower association. So
no one is predicting catastrophe here, yet. But big farms demand big operating
budgets, and interest rates are on the rise. For example, a sugar mill paid up
to 15.25% interest on a Brazilian real-based loan in February, up from 10.25%
two years earlier, thanks largely to Brazil's deteriorating economy and
Melby cringes when he looks at forecasts of Mato Grosso farm budgets for
2016, with seed up 23%, fertilizer up 32% and chemicals up 42%. By his
calculations, it will take about 51 sacks of soybeans per hectare (46 bushels
per acre) to breakeven without land cost rent, depreciation or labor, if IMEA's
budgets are correct. The state's average yields run only 52 or 53 sacks per
hectare, not much margin for error, Melby said.
Buffering the damage is that the boom in commodity prices between 2006-2014
helped average Mato Grosso operators earn impressive profits, exceeding 30%
gross margins each of the past eight years, according to Rabobank. While some
large farm operators already are unable to acquire the credit they will need to
plant the crop next September, Darci Junior said their family will manage
largely because they resisted the urge to expand when soybean prices reached
the peak of the cycle.
"It's a game of survival of the fittest, of those who can manage debt,"
agreed Andy Duff, a food and agri-research team leader for Rabobank in Sao
Paulo. "Farmers who live through the process will be good at what they do."
A COMPETITOR EMERGES
In the past, the wave of profits vaulted Brazil into a neck-and-neck race
with the U.S. as the world's largest soybean producer and exporter in just 15
years: By the latest estimates, Brazil harvested a record 94.5 mmt of soybeans
this year, nearly triple its 1999/00-crop production and not far behind the
U.S. 2014 harvest of 108 mmt. (In 2013, the U.S. produced only 91 mmt). But the
country's upward trajectory as an ag producer could slow.
Even natives complain about the "Brazilian cost" -- a buzzword for transport
inefficiencies, excess bureaucracy and government graft. When a farmer hires an
employee, he pays $1,000 in government taxes for every $1,000 in salary, Darci
Junior said, discouraging employment. Agribusinesses that operate in Brazil say
their tax departments run five to 10 times bigger here than back home in the
U.S. It takes creditors 10 years to recover collateral if loans go bad, so many
conventional banks hesitate to make mortgage loans and most land purchases
remain seller financed. Dreamers like the Ferrarins criticize Brazil's
corruption and would trade for a U.S. system any day of the week, but have
managed to adapt.
In fact, Darci Junior, the family farm's president and financial chief, may
try his hand pioneering again. The now 35-year-old says he has his eye on
acquiring another 37,000 acres of pasture 240 miles north of Sorriso, closer to
the Amazon, and currently selling for about $2,500 per acre. "You need three
years to convert degraded pasture to cropland," he said. "If you keep going
north you still have cheap land, but you have to invest and improve it. Plus,
it's like farming in the middle of Yellowstone." Of course, he's done that
EDITOR'S NOTE: Marcia Zarley Taylor returned to Brazil for her sixth trip to
the soy frontier since 1998 in February, accompanying a Rabo AgriFinance
You can see more of her observations in her blog "What's New on Brazil's Old
Frontier", along with satellite imagery of how the region has transformed.
Check out http://bit.ly/1d3DBNu
For more background on the soybean frontier at middle age, see special
series written by DTN's South America Correspondent Alastair Stewart in the
DTN/The Progressive Farmer In-Depth site, including:
-- Brazil's Port Problem at http://bit.ly/1cC49Ey
-- Brazil Invests in Ag at http://bit.ly/1Pmz8X4
-- Backwater to Breadbasket at http://bit.ly/1d0aPxf
-- Amazon Deforestation at http://bit.ly/1IE8rro
Also, you can follow Stewart's Blog, "South America Calling" for on-the-spot
coverage from http://bit.ly/1L4RpCj
To see the Reporter's Notebook video with Taylor talking about changes in
Brazil, see http://bit.ly/1FhpRJr
Marcia Zarley Taylor can be reached at email@example.com
Follow Marcia Taylor on Twitter@MarciaZTaylor
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