FEED Business Worldwide - July 2012
South America tests the limits of its agribusiness abundance
Meat exports top out but can it supply the world's demand for feed crops?
by Eric J. BROOKS
South America's importance to feed, livestock and the world food supply chain cannot be underestimated. The meat apetite of East Asian and Middle Eastern countries long ago outran their lands' abilities to grow feed. With America's own agricultural land maxed out, since the mid 1990s, it has been South America that has kept the world well fed.
Twenty-five years ago, America provided 90% of the world's soya bean exports. Today, South America does more than supply 60% of the world's soya bean exports: From 1994, when China became a net soy importer to 2011, South America's soy imports jumped a whopping 635%, from 7.4 milion tonnes to 54.3 million tonnes. You might notice that the amount of soy that Brazil and Argentina export almost equals China's import volume, or that this sum accounts for 60% of world exports. Putting it another way, from 1994 to 2011, South America provided 47 million tonnes of the 59 million tonne increase in world soy exports. Clearly, without Brazil or Argentina providing all that extra soy, there would either be no meat on our dinner plate tonight, or it would cost considerably more money than it does.
In the early 2000s when America diverted a lot of its corn harvest to making ethanol, it was again Latin American corn that kept prices from rising –at least until the late 2000s, when bad South American weather made it fall behind corn demand and feed grain price inflation ensued.
South America also kept all of us well-fed in a more direct manner. From 1998 to 2008, Brazil's exports of beef, and pork skyrocketed by roughly 495%, chicken by 445%. Together, Brazil and Argentina now provide 18.7% of the world's exported beef, 37% of its exported chicken and 9% of its pork exports. Twenty years ago, Brazil's share of these exports was usually not even large enough to warrant mentioning in USDA world livestock reports. Clearly, with both its feed and meat, South America has come out of nowhere to become a critical component of Europe and Asia's meat supply chain.
But this is not a sunny, optimistic tale with a happy ending. By almost every measure, since 2008, South America's feed and livestock production and export growth has experienced a profound decleration -and this slowdown is shaking up the world food supply. After doubling from the mid 1990s to the mid 2000s, since 2005, Argentine corn export numbers have barely increased. Brazil has been more successful at increasing its soy production, but has done so in a very costly, highly inefficient manner that strains the world market.
A post 2008 growth top off is even more evident in South American meat lines. While global red meat exports continue to grow, Brazil is exporting substantially less beef and pork than it was five years ago. Argentine beef was once the crown jewel of steaks but is now falling into obscurity. Similarly, after dethroning America as top world poultry exporter and trouncing bird flu afflicted Thailand in East Asia, Brazilian chicken exports are barely 2.25% higher this year than they were in 2008.
Some of these problems were inevitable: After you win large shares of the world market for meat, you cannot grow faster than world poultry demand. The marketing advantage gained from Thailand's bird flu and America's mad cow disease outbreaks could not last forever. Moreover, rising feed crop prices have played a role in crimping South America's red meat production. The weather gods have also been against South America. In 2008, a 30 year cycle favouring cold ocean currents off South America started. This first crimped Argentina's ability to export corn and more recently, caused 2011/12's drop in Latin American soy output to be the biggest ever recorded.
But other factors are indeed in the hands of Latin American policymakers. In the pages to come, we will learn how Brazil's obssession with football and Argentina's fixation on keeping meat prices cheap have warped world markets for soya beans and the quality of juicy steaks in equal measure. And Brazil does itself no favours by raising cows that yield only half as much red meat as their American rivals.
In sum, South American agribusiness is shifting into a mature growth phase but its influence on global agribusiness has never been greater. In the pages to follow, we examine how the microeconomic details of Latin American agribusiness impact the macroeconomic world stage for meat and feed crops.
Brazilian transport woes jack up the world soy market
Disconnected frontier regions distort farm expansion decisions and give importers logistical headaches.
by Eric J. BROOKS
Brazil supplies not just half of the world soya bean exports but also puts a floor under their prices. Land and labour costs substantially lower than that of the United States are more than counterbalanced by high transportation costs. According to Freddy Pranteda, director of grains and oilseeds at Buenos Aires, Argentina based Cosur S.A., soy for export travels 500km to reach port in the United States, 220km in Argentina and a whopping 1,000km in Brazil.
A non-linear disadvantage to US transport costs
But Brazil's transport woes are not merely a linear relationship between distance travelled and cost. While Brazilian soy exports travel to port twice as far as US soy, actual transport costs are up to four times higher. The real price premium comes from the country's appallingly disconnected transport network. The problem has become worse in recent years, as data from the National Association of Railroad Transporters indicates that over the last twenty years, rail expansion has failed to keep up with crop production
Whereas North America's bread basket is criss-crossed with countless highways and railways, Brazil's virgin farmland hardly has a railway, paved road or river barge port in sight. This keeps much land out of production, while frontier territories with crude infrastructure suffer from bloated transport costs and damaging delays.
As a result, feed crops that can be transported for US$40/tonne from the US Midwest to port require US$150/tonne to be delivered from farms in Mato Grosso state to port. This state is bigger than some European or Asian countries but contains only one, single 150km railway - and Mato Grosso is not even a frontier region compared to new, soy cultivating areas in Brazil's north. In such remote regions, the transportation costs - and difficulties - are even higher.
And the bottlenecks appear in transport endpoints as much as they do in the remote countryside: For example, a 20km to 30km queues of trucks carrying soya beans queue up to wait for their turn to unload at Curita city's port of Paranaguá. Nor are these logistical woes over when the trucks reach port: For example, at Paranguá, it normally takes 36 hours to fully load a standard Panamax size vessel. However, due to a lack of shelter cover for docked ships, during rainy weather, the holds of the ships must be closed if there is a chance of rain. The loading time for one ship can be as long as five days.
Such delays frequently force major importers like China to source soy from the United States even during the second and third quarters, when America's pre-harvest inventories are very low, thereby jacking up the world price of soy.
Acquisition more profitable than acreage expansion
By distorting Brazilian farm investment decisions, these deficiencies keep the world price of soya beans artificially elevated. Generally soya bean growing farmland costs BR18,000/hectare to BR20,000/hectare in developed areas, versus only BR2,000/hectare for fertile, undeveloped plots in remote areas inadequately served by road and rail transport.
Despite the huge price gap, a study by US brokerage Sterne Agee noted that, "Despite the premium rent that is being paid by some famers, in their opinion and ours, it is better at the moment to realise some return on [developed] land rather than potentially investing, with marginal or zero returns, in undeveloped land." This means that rather that soy growing acreage cannot expand fast enough to meet rising world demand.
Speaking at a the Global Grains 2012 conference in Singapore, Abah Ofon, Standard Chartered Bank's director of agriculture research estimated that transport deficiencies, high energy costs and a rising currency had boosted Brazil's average break-even point for soy farming from US$7.50/bushel to US$9.50/bushel over the last five years. With Brazil supplying the only meaningful addition to global soy growing arable land, its high transport costs and the world price of soy are becoming increasingly inter-linked.
The price floor created by a dearth of linkages between new crop growing areas and ports made Australia's Macquarie bank comment that, "Brazil's transportation inefficiencies are the reason that prices need to trade higher". It added this, "is the structural rationale that has, and will, lead prices of grains to outperform as they try to incentivize production." Macquarie concluded that for feed, livestock and meat prices to return to normal levels, "one of the biggest issues to face and solve will be this one of infrastructure in Brazil."
Eating most of the extra soy, high prices needed
The premium required to bring extra Brazilian acres into production is very high, yet the world has no choice, even though inefficiencies abound. A study by Australian government agency ABARES estimates that between now and 2015, Brazil will bring an additional 3 million uncultivated acres into production by 2015. That however, would raise Brazil's soy production by some 4 million tonnes.
Unfortunately, according Cosur's Pranteda, from 2010 to 2020, 65% of the increase in Brazil's soy crop will be domestically consumed –both by domestic consumers and meat-for-export production. That means that even with crop yields rising, the world would be lucky to get an additional 2.0 million tonnes of soy from those extra three million planted acres that are projected to be planted by 2015.
Going forward, there are very few infrastructure projects in the works and they have a history of coming in late, over budget and being plagued by corruption. The country's politicians are presently distracted by their hosting of 2014 World Cup, which resulted in many road and rail projects being deferred in favour of stadiums and urban facilities.
Hence, while Brazil's soy crop expansion saved the world from food shortages, unless policymakers undertake some bold new initiatives, its uncultivated farmland will only come under the plough at soy prices substantially higher than today's near-record levels.
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