Brazil Invests in Ag - 1

By Alastair Stewart
South America Correspondent

SAO PAULO, Brazil (DTN) — When Brazil first exploded on the international grain markets in the 1980s and 1990s, it was the potential for expansion across the country’s vast Cerrado savannas that grabbed the world’s attention.

In the intervening years, vast sums have been invested in adapting millions of acres of the acidic, sandy and generally infertile acres to soybean, corn and cotton production across Mato Grosso, Goias, Bahia and surrounding states.

The expansion continues — Brazilian soybean acreage rose 9% last year and will grow around 5% in 2014-15 — but new investments in logistics and technology are now overshadowing the outlay on clearing land.

"Investment is now much more concentrated on transporting produce to market and producing efficiently than clearance," said Anderson Galvao, CEO of Celeres, a local farm consultancy.

The largest one-off sums are being spent by international trading companies, building new port facilities in the north and on barge, road and rail facilities to supply them.

Ports such as Santarem, Miritituba, Belem and Sao Luis are closer to the Cerrado, but also to Europe and China, and allow exporters to completely bypass the overstretched infrastructure of Brazil’s southeast.

These routes are absolutely vital to the continued growth of Brazilian grain production, which is expected to double during the next 10 to 20 years. They also promise to reduce the cost of freighting beans and corn from the Cerrado, which is deep in Brazil’s vast interior. That’s significant as Brazilian transport costs can be as much as four times greater than those in the U.S.

"These new routes are the future of the grain industry in Brazil," said Renato Pavan of Macrologistica, a local infrastructure consultancy.

But while Bunge, Cargill, ADM and others spend heavily to build port terminals, barges and roads, comparatively little goes into processing capacity.

On the face of it, that is perverse as processing and consuming grains in farming states adds value to the product and dilutes the heavy cost of freight to port.

The explanation for this situation lies in Brazil’s byzantine tax system, which makes it infinitely easier, and cheaper, to export soybeans, corn and other basic products rather than meals, oils and meats.

"The system is basically anti-industry. It invites companies to process Brazilian grains in other countries," said Fabio Trigueirinho, secretary general at the Brazilian Vegetable Oils Industry Association (ABIOVE).

TECHNOLOGY AND CONSOLIDATION

When it comes to farming, the new focus of investment is technology and consolidation.

Up until fairly recently, land was very cheap in Mato Grosso and surrounding states. Most of farmer resources went into clearing land, adapting soils and establishing production.

But that situation has changed during the past five years. With an acre of prime land now going for nearly $4,000 in Mato Grosso, real estate has become an expensive asset and farmers instead look to maximize productivity on the tracts they own.

This has led to heavy investments in machinery and precision farming techniques, as well as storage facilities.

Such investments are necessary to compete with Brazil’s large corporate farms, which have the scale to use state-of-the-art technology.

"If you aren’t producing efficiently, then it is better to get out of the game. The world of grain production is brutal nowadays," noted Claudio Jose Escariote, who farms 8,400 acres in Sapezal, western Mato Grosso.

The impact of the trend to invest in technology is also felt in the local land market. In general, prices have stopped rising during the last year after massive gains during the previous five. Corporate farms have pulled back from the market as, with producers generally well capitalized, there are few bargains to be had.

But sustaining prices are small-scale deals, with farmers snapping up neighbors’ land in a bid to create large enough properties to justify using the most modern soy and corn producing techniques.

Alastair Stewart can be reached at Alastair.stewart@dtn.com

(GH/ES/AG)