Minding Ag's Business

Brazil's Transport Handicap

The American Society of Civil Engineers perennially grades the nation's transport systems as deficient and in need of major investments. What we can be thankful about is that some of our competitors work with even more neglected networks.

Fifteen years ago I lead a group of 14 U.S. farmers to what was then the northern edge of Brazil's soybean frontier. Sorriso, Mato Grosso, was a town of 35,000 as remote from the Atlantic port terminals as North Dakota is from our Pacific Northwest ports. Ironically, my farmers thought it looked like a new Decatur, Ill. Bunge was building Latin America's largest soybean processing plant there complete with a rail siding, although no railroad existed in the entire state at the time. Whole beans had to be hauled 1,250 miles by truck to southern ports on the Atlantic, sometimes an eight or nine-day trip. This meant Sorriso's local cash soybean prices remained some of the lowest in the world.

Amazingly, constant smoke plumes revealed jungle clearing was happening in all directions. Land values ran $250/acre and up, triple the prices of five years earlier. Speculators believed that the state's promise to pave BR 163, a northern export route to the Amazon River, would boost their soybean prices at least $1/bu. They wanted in on the profits early, even though Chicago corn prices were running a mere $4/bu.

Fast forward to 2014. Very little has changed Sorriso's transportation handicap, despite promises of new ports on the Amazon. Paving BR 163 north is more than a decade behind completion. Transporting soybeans by truck still accounts for 70% of Brazil's freight cost to get to the final export destination. That means it cost about $175/mt to ship Sorriso's soybeans to Shanghai, China between 2009-13, versus $78/mt for beans from Davenport, Iowa.

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"The big problem is Brazil's road system is not sufficient to move beans from Mato Grosso to ports in the south, or to Amazon ports and barge systems headed north," says Bill Devens, managing director of HighQuest Consulting, a firm that recently finished a global study of export competitiveness for the U.S. Soybean Export Council and the Soy Transportation Coalition. "Basically they are getting blocked off and it's leading to huge transportation difficulties."
With ocean port facilities also subject to huge harvest delays, "nobody knows when beans coming out of Brazil will actually arrive," Devens adds.

Based on HighQuest surveys for calendar 2009-2013, soybean shipments from Brazil averaged 15 day delays from their expected arrival date. Argentina averaged delays of 7 days and the U.S. averaged three day delays.

Punctuality matters, particularly in China where soybean processors rely on just-in-time delivery, Devens says. When a 3 million mt soybean purchase from Brazil was late reaching the Sunrise Group, a large soybean trading company based in Shandong province, the processor was forced to buy beans on the open market. It not only lost considerable revenue, it was late filling customer orders. In 2014, it announced it was in serious danger of exiting the market.

Despite current U.S. advantages, a river system and world class railroads remain critical to keeping U.S. farm exports competitive. Over the past two years, the Pacific Northwest route has experienced a 15% decrease in train speeds, which has led to slower turn times for shuttle trains and capacity reduction for grains moving to the PNW, the HighQuest report says. That means turn times on shuttle trains have declined from three per month to two, meaning less soybeans are available for export.

Throughout much of 2014, shippers in North Dakota and western Canada have complained that scheduled trains are running months late. Some of those freight snarls have backed up traffic on the Mississippi, sending bids for barges soaring.
Devens, a former director of research for Bunge, admits that the U.S. freight system is beginning to show cracks, both in timely service and in the decaying facilities along the Mississippi.

"There's been more and more concern about demurrage, especially with co-ops in the western Corn Belt who are concerned about moving grain at a competitive price," he says.

Still, rail regulators in the U.S. have authority to impose freight priorities, something they did with grain and fertilizer earlier this year. In Brazil, railroads are largely monopolies dominated by iron ore companies. Without effective regulation or choice of service, captive shippers remain vulnerable to high costs.

"This still provides an advantage to the U.S. It's not going to change for the foreseeable future," Devens says.
To read the full HighQuest report, go to http://www.soytransportation.org/…


Follow me on Twitter@MarciaZTaylor

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