Soy Frontier at Middle Age - 2
As Mato Grosso Soy Expands, Industry Can't Keep Up
SAO PAULO (DTN) -- Mato Grosso has transformed from a backwater deep at the heart of the South American continent into one of the world's premier grain-producing regions over the last 15 years.
That transformation has brought prosperity. Lucas do Rio Verde, one of the state's main soybean district in the north, ranks in the top 250 of Brazil towns for development, according to the United Nation's human development index. That's not bad for somewhere without grid electricity until the late 1990s.
But growing soybeans and corn in the middle of the continent brings great logistical challenges. Most of Mato Grosso's soy is trucked 1,000 miles or more to port, which eats into basis prices. Brazil is working to improve the soy routes, but one of the easiest solutions is to consume more soybeans in the state itself.
Driving out of Lucas do Rio Verde to the northwest, you quickly come across an industrial complex almost the size of the town center you just left. It's the BRF poultry and pork processing plant, the largest in Latin America and the center-point of the region's agri-industrial hub.
Ten years ago, Lucas' town fathers drew up a plant to aggregate value from northern Mato Grosso's massive grain crop. The town has blossomed as a result. Along with the BRF plant, it boasts South America's largest feed mill and will soon count on a $140 million corn ethanol plant, backed by Iowa-based Summit Farms and other investors. Altogether the town has benefited from $2 billion in agribusiness investment, said Kory Melby, a Brazilian farm business consultant.
PORK AND POULTRY GROWS QUICKLY
This story has been repeated on a smaller scale across the state, leading, for example, chicken populations to quadruple over the last 10 years, according to the Mato Grosso Poulty Association (AMAV). The region has some of Brazil's largest and most efficient plants.
But still only a relatively small portion of local grain production is consumed in-state. Local meat companies consume approximately 4 million metric tons of Mato Grosso's 15 mmt corn output, for example.
"Meat production has grown, but simply not at the same rate as grain output and it is likely that this will continue to be the case going forward," said Otavio Celidonio, superintendent at the Mato Grosso Agricultural Economy Institute (IMEA).
Mato Grosso has seen how U.S. regions more remote from river and rail logistics have focused on developing ag and bioprocessing industries to add value.
"We want to emulate the U.S. where industry demand boosts prices in regions with worse logistics," said Celidonio.
But there are impediments to turning Lucas do Rio Verde, Mato Grosso into a protein and energy capital like Cedar Rapids, Iowa.
Brazil has a massive poultry and pork industry. It is the world's biggest exporter and No. 3 producer, firmly based in the traditional agricultural heartlands in the south.
Corn prices are typically much cheaper in Mato Grosso than in Santa Catarina, where the biggest production centers are based. At present, the price difference is nearly 50%. But big companies aren't likely to transfer operations to the center-west any time soon for a couple of reasons.
First of all, giants such as BRF and Aurora have state-of-the-art export corridors set up to meet foreign demand. Secondly, Santa Catarina and the south have better sanitary classifications that make it easier to access foreign markets.
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"BRF has much greater problems selling Mato Grosso pork to Russia," noted Celidonio. More generally, Brazil is finding resistance in opening new pork and poultry markets, while on a local level per capita consumption has rather leveled.
At present, Mato Grosso is responsible for 5% of chicken production, while the southern state of Parana in the south is responsible for 31%.
"Mato Grosso meat production will grow quickly over the next 10 years, but the portion of grain consumed in the state won't grow significantly," said Anderson Galvao, head of Celeres, a local farm consultancy. "Mato Grosso will meet new meat demand, but processing plants won't be transferred from the south."
FEEDLOTS TO GROW
Some of the additional grain produced in Mato Grosso will be used by feedlots, as confinement becomes more normal in Brazil.
At present, only 10% of Brazil's beef production is produced on feedlots, but the figure is expected to jump from 1.0 mmt to 2.5 mmt in 2023 as pressure grows on pasture from agriculture, according to Rabobank.
A large portion of that growth will occur in Mato Grosso, where pressure on pasture is greatest and grain is cheapest.
"We are seeing confinement projects pop up across the state," said Richardt Tegnher, who manages 56,000 acres and runs a 40,000 head-a-year feedlot project in Lucas do Rio Verde.
Another option is ethanol production from corn. Brazil generally produces ethanol from sugarcane, but three existing distilleries in Mato Grosso currently convert corn in the sugarcane off-season. Mato Grosso's plants currently consume 500,000 metric tons of grain and there are a number of other large projects being touted, including a large mini-distillery venture that involves CHS, the U.S. farm cooperative.
However, there are limitations, most notably the limited size of the Mato Grosso and northern Brazil market, which the plants would serve.
The state still has ample pasture that can be converted to agriculture. Soy area currently totals 36 million acres and there is another 36 million acres of pasture that can be switched, according to IMEA estimates.
TAX MAKES EXPORTS MORE ATTRACTIVE
But most of that additional soybean output will continue to be exported as that is what the Brazilian tax system encourages.
For the last 18 years, soybean exports have been exempt from tax levied on sales for crushing. In theory, beans bought for meal and oil exports are also exempt, but then you can get involved in complicated inter-state tax credit situations.
It's simply much easier and economical for trading companies to export the beans.
"The rules simply mean there is no incentive to increase crushing capacity beyond expected growth in domestic demand," said Celeres' Galvao.
The impact of the tax regime can be seen clearly in the crush numbers. In 1997, Brazil exported 30% of its soybeans. That figure will rise to a projected 52% in 2015.
FARMERS DIVERSIFY
So ag industry may not explode, but farmers are certainly keen to diversify. That's because the traditional avenue of expansion is getting expensive.
Traditionally, Mato Grosso farmers plowed profits into more land, building the massive farms for which the region is known.
But land is no longer cheap. Acres that would have cost $160 in 1998 will now cost as much as $7,000 in Sorriso, northern Mato Grosso.
Instead, ambitious farmers are looking for different ways to expand and growing vertically appears to be the best option.
The blueprint is operations like those of Carlos Capeletti in Tapurah, northern Mato Grosso.
After expanding fast in the first half of the last decade, Capeletti moved into pork and poultry, supplying the nearby BRF plant.
Today, Capeletti produces over 2 million chickens a year and an enormous pork operation in addition.
This kind of initiative is vital to protect farmers from low price cycles. High transport costs have meant that farmers in northern Mato Grosso have lost money on each of the last two second-corn crops. With meat prices on an upswing in Brazil, those who diversified have fared much better.
EDITOR'S NOTE:
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:
-- Brazil's Port Problem at http://bit.ly/…
-- Brazil Invests in Ag at http://bit.ly/…
-- Backwater to Breadbasket at http://bit.ly/…
-- Amazon Deforestation at http://bit.ly/…
Also, you can follow Stewart's Blog, "South America Calling" for on-the-spot coverage from http://bit.ly/…
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