Focus on Brazil

After years of remarkable expansion in the agricultural sector, South America’s largest country is encountering numerous problems that are hindering growth.

Brazil is an agricultural powerhouse. Its net food trade surplus of U.S.$29 billion in 2005 — the greatest of any country — is sufficient testimony to that.

In the past 20 to 30 years of rapid development, the country’s agricultural and food processing sectors have gone from strong to stronger. While orange juice and coffee were the original basis for its export successes decades ago, oilseed and feed-based industries have more recently shown the most dynamic growth.

Brazil’s total soy complex (beans, meal and oil) exports have now surpassed the U.S., thanks to rising soybean shipments in 2005. It is also the top exporter of poultry meat with volume projected to reach 3 million tonnes this year. Brazil is second in pork and among the top five in beef exports.

Overall, Brazil’s agricultural exports have increased remarkably from U.S.$13 billion in 1990 to U.S.$32 billion last year. But after years of heady expansion, there is now a building sense of crisis brought on by a convergence of challenges: a strong currency; repeated droughts; plant diseases; inadequate transport infrastructure; environmental conflicts; food safety issues; low international commodity prices and farmers that are heavily in debt.

The international competitiveness of Brazil’s economy itself presents a major problem to agricultural enterprises. In just two years, the Brazilian Real has appreciated from about 3-to-1 to 2-to-1 against the U.S. dollar. This has removed much of the profitability from Brazilian farming by lowering the local currency price that producers receive for exported products.

OILSEEDS

The aforementioned problems have had the greatest impact on soybeans, the unrivaled king of Brazilian farming. The soy complex accounted over one third of agricultural exports and 12% of all Brazilian exports in 2004. But record global soybean production in 2005-06 exceeds demand by about 10 million tonnes, and is causing a buildup in stocks and lower prices. Consequently, the area planted to soybeans in Brazil will shrink for the second year in a row in the 2006-07 growing season to about 21 million hectares.

Costs of basic inputs such as fertilizers and fuel, which are mostly imported, have gone up much more than the Brazilan Real, and are further squeezing profits.

Most of the expansion of soybeans has been in the frontier region of Mato Grosso, which has poor soil that requires heavy use of fertilizers.

Cheap land and labor, good technology and economies of scale make Brazil the world’s lowest-cost producer of soybeans, but much of this advantage is lost after factoring in the expense of getting beans first to ocean ports and then to major international markets.

New cultivation in Brazil is as far as 2000 kilometers (km) from seaports, compared to a maximum of 300 km for most Argentine production. Three quarters of U.S. soybean production reaches export ports via river barges, but in Brazil the same proportion is moved by truck over congested, often pot-holed and unpaved two lane highways. Transport costs in the delivered value of Brazilian soybeans to major markets like Europe or China are a multiple of U.S. beans.

The fragmentation and dispersed location of the Brazilian soybean crushing industry has caused it to lose ground against arch-rival Argentina, whose huge port-based plants, some with capacities of more than 12,000 tonnes per day, have enabled it to increase its share of oil and meal exports at the expense of Brazil.

Brazil has about 80 operating oilseed plants scattered around the country that are owned by around 50 companies. The largest is about 4,000 tonnes per day, which is only medium-sized by today’s standards. More than a dozen plants have been shut down in the past few years, and total daily crushing capacity, at about 137,000 tonnes, is now less than Argentina’s, which has greatly expanded capacity at ports.

A 12% tax on beans transported among Brazil’s 27 states for processing also work against economies of scale and consolidation in the crushing industry, and further skews production toward exports, which do not face this extra tax. Thus, soybean exports have steadily increased as a share of soy complex exports.

FEED

The rapidly expanding Brazilian feed industry presents a much brighter picture than oilseeds. Indeed, it is an example of a move upward on the value chain by producers confronted by low margins in basic commodities. Compound feed production in Brazil should reach 47 million tonnes in 2006, up from less than 20 million tonnes in 1994. This makes the South American giant the third-largest producer after the U.S. (145 million tonnes) and China (96 million tonnes).

In addition to abundant soybean meal, the feed industry benefits from Brazil’s self-sufficiency in maize. Annual production has rebounded to 41 million tonnes, of which 30 million is used in industrial feed. Brazil had been a net maize importer for many years, but it now exports more maize to Europe than it imports from Argentina in most years.

Poultry consumes 57% of feed production. The Avian flu has yet to reach Brazil and has been a boon for Brazilian frozen chicken and turkey exports, particularly to Japan, at the expense of Thailand and Europe.

The biggest national swine and poultry producers and exporters are Perdigao, Sadia, and Seara Alimentos, which is owned by Cargill. However, several large agricultural cooperatives in the state of Parana have made major investments in modern, integrated poultry production, in order to capture added value from their members’ maize and soybeans and to benefit from proximity to container ports. Parana now accounts for 25% of Brazilian poultry.

WHEAT FLOUR

Wheat for flour milling is the biggest line item on the negative side of the food trade balance. Indeed, the country ranks among the world’s major wheat importers. Brazil’s 206 mills, owned by 150 companies, grind almost 10 million tonnes of wheat per year. Wheat production in the southern states of Santa Catarina, Parana and Rio Grande do Sul supplies up to half of the demand in a year with good rainfall, but on average about 6 million tonnes get imported, mostly from nearby Argentina. Due to the Mercosur free trade zone, there is no import duty on wheat from the southern neighbor, but all other wheat faces a 10% duty.

Annual per capita wheat consumption in recent years has been steady at about 50 kg versus 38 kg for rice. During the last decade, wheat consumption has risen and rice has fallen.

Bunge, with a 100-year history in Brazil, is the largest milling company in the country. Cargill has had operations in Brazil for more than 40 years but entered the wheat flour market only a few years ago with the acquisition of a couple of mills.

GOVERNMENT INTERVENTION

It could be argued that the global competitiveness of Brazil’s agriculture and food processing sector has been due in large part to the abandonment of subsidies, intervention programs and high external tariffs by the government in the 1980s, requiring producers to respond to international market signals.

Government payments were only 3% of Brazil’s farm receipts in 2005, according to OECD figures, versus 18% and 34% for the U.S. and E.U.

Brazil was a member of the group of the six key countries in the now suspended WTO Doha round, and it stood firmly for the freeing up of agricultural trade through the elimination of subsidies and tariffs in rich economies like the U.S. and Europe.

But faced with a farm crisis at home, the Brazilian state has begun to intervene on a scale not seen in recent decades with purchases, payments and guarantees to help insolvent farmers.

Will the failure of the Doha round and huge farm losses in grain and soybeans cause Brazil to give up its relatively laissez-faire agriculture? That seems unlikely given the many successes generated by Brazil’s agricultural model.

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