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Brazil's bad infrastructure getting worse

Some farmers in Brazil have to drive each truckload of soybeans a distance equivalent to the route from Des Moines, Iowa, to New Orleans, Louisiana. This is oftentimes over roads that are nowhere near anything U.S. farmers would consider passable in a vehicle loaded with hundreds of bushels of grain.

Then, once they get to the port, they may sit in line with hundreds or thousands of other trucks awaiting their chance to dump the grain and start the long journey back to the field. Then, the barges on which the grain is loaded may have to wait weeks or months before departing the congested port.

It's a common scenario in Brazil, where crop production is far outpacing the development of the nation's infrastructure -- road, rail and port -- to support it. And now, a report released by Rabobank's Food & Agribusiness Research and Advisory team shows the problem will only get worse in the coming year, and for a number of reasons.

"Despite the projects that are under construction to improve the country's capacity to transport and export major agricultural commodities, there is virtually nothing that can be done to alleviate the current pressure on the system in the short-term, or to prevent this pressure from intensifying in the near-term," says Rabobank analyst Andy Duff in the bank's report released this week.

The report outlines both a trio of causes for the logistical nightmare in Brazil, as well as the ways those factors are affecting different sectors of the nation's economy.

"2013 is shaping up to be a very difficult year for agribusiness logistics in Brazil. Three factors have combined to drive transport costs for major commodities, such as soybeans, sugar, and corn, sharply higher. The first factor is new legislation impacting the number of hours that truck drivers are permitted to drive per day," Duff says. "The second is increases in the price of diesel fuel (5.4% in January 2013 and 5% in March 2013). The third factor relates to bumper crops and the expectations of large export shipments for soybeans, sugar, and corn."

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Worsening traffic jams

The vast majority of Brazil's ag commodities travel from the field to the terminal by truck, making major any change in laws regulating trucking. Changes like the recent ruling limiting truckers' hours on the road -- though "no one is disputing that the aims of the new law are worthy," Duff says -- pour salt on the wound of both high freight costs and an already overloaded road system.

"Since road freight is the dominant method for transporting major commodities to the ports, the cost of road freight tends to dictate the freight rates for all modes of transport. For this reason, the new legislation on truck drivers' working hours has had a substantial impact on grain transport costs," Duff says. "The new law stipulates that drivers must take a half-hour break after every four hours of driving and also that drivers must take a minimum of 11 hours rest for every 24 hours worked."

And that's not just going to tax the nation's transportation infrastructure. It's going to be another cost for anyone tied to the trucking industry, an especially difficult addition to an already tough cost structure for the business driven recently by a spike in the price of diesel fuel.

"The challenge for transport companies is maintaining the flow without having to acquire many more vehicles and find many more drivers (this at a time when the level of unemployment in the country is at an all-time low)," Duff says. "It has been estimated that the country needs to hire nearly 50,000 new truck drivers in order to maintain transport capacity under the new regulation. Transport companies have been faced with major implementation costs, compounded by a rise in the price of diesel of more than 10% in the space of three months."

Then there's the growing expectation for Brazilian farmers to raise more and more grain, especially as more land comes into production and ag technology advances, allowing yields to bloom to levels more competitive with their North American peers. In other words, there's going to be more corn, soybeans, and sugar to transport on the nation's aging roads. And Mother Nature's helping make that an especially tough road-logistics pill to swallow in the coming year.

"Based on higher production forecasts, Brazil's exports of soybeans, corn, and potentially sugar are all expected to rise in 2013. Typically, the seasonal pattern is that soybean exports peak in [the second quarter], while corn and sugar exports are concentrated in [the third and fourth quarters]," Duff says. "The combination of delays triggered by a lack of rain at the beginning of the soybean planting season plus excessive rains during harvest is likely to shift the peak period of soybean exports in 2013 toward June this year. Any significant delay in the export program for soybeans could result in a further heightening of competition for road freight as exports of corn and sugar take off in [the third quarter]."

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Impacts on farmers, traders

Aside from the basic difficulty this creates in the time and labor required to get their grain to delivery points, the biggest way these infrastructure issues will affect farmers is in additional cost. Just two months ago, the cost to transport 1 tonne of soybeans from Mato Grosso to the Port of Paranagua in Parana was 54% higher than it was in April of 2012. Just within Parana, the cost to get grain from around the city of Maringa (approximately 300 kilometers from Sao Paolo) rose by 68% in the same time period.

Those mammoth cost swings won't affect farmers as severely at first, if they have already forward-contracted their grain. But for the traders with whom farmers are entering into those contracts, it could adversely affect how apt they are to continue conducting business the same way in the future.

"For the current crop year, the most affected players will be grain traders, as their forward-pricing arrangements with growers for the current harvest are likely to have underestimated the possibility of such a sharp increase in freight costs," Duff says. "As a consequence, they may be less willing to enter into forward pricing agreements with farmers for the 2013/14 harvest. Naturally, the degree of impact for each player depends on how much of their freight needs was locked in advance."

Grain traders and brokers are feeling the pinch from the other side of the spectrum, too. Because it takes so long for the crop to reach terminal ports, there's a building line-up scenario in which barges can't leave the port. Right now, those barges are still awaiting last year's corn crop before they can leave to enter the global export supply chain. It's causing the supply of barges -- and the basic physical space for them within the port -- to tighten, hiking costs to brokers arranging the delivery of grain.

"Grain traders are also being significantly affected by higher expenses associated with demurrages as a result of the backlog of ships at the ports. As a result, the line-up of ships waiting to load grain has also risen, pushing demurrage costs up," Duff says. "The level of uncertainty regarding the line-up is a major factor behind the ongoing slowness of offerings made by traders to producers in order to secure export supply from the second corn crop as are the expectations of lower corn prices in the second half of 2013 due to the larger American crop, which is also contributing to the slow pace of offerings.

How much of an effect this logjam has on farmers depends on how far out they've contracted grain. If they've already forward-contracted and have supplies ready to enter the pipeline, their costs won't rise as much as if they've retained ownership, Duff says. It's also likely that the larger the farmer, the less of an impact he or she will feel.

"The degree of impact varies according to the proportion of the summer output that has already been marketed. Those growers who still have to sell a significant part of their production on the spot market could be out of pocket, as buyers will pass back the higher transportation costs to farmgate prices," he says. "As of February 8, 52% of the total Brazilian soybean crop had been marketed, whereas in the state of Mato Grosso this percentage was up to 76%. Our view is that larger producers have already sold a sizeable part of their estimated crop."

Finally, for those who still have corn or soybeans left to market, the prices those grains will fetch them will ultimately decline based on the infrastructure struggles. Since it's so difficult for it to leave the country on the export market, those grains will likely cause a glut of supply within Brazil, leading prices lower.

"This chaotic logistics scenario is also threatening Brazil's ability to export the expected record-setting second corn crop and is consequently pushing down farmgate prices," Duff says. "Indeed, as the flow of soybeans and soymeal exports will be prolonged and will demand full capacity at the ports, the space left for corn in ports will likely be constrained, increasing the domestic availability of the product and pressuring farmgate prices. Soybean exports in February and March 2013, when new-year soybeans usually begin to flow out of the country, were down 23% year-over-year despite the 22% forecast increase in production."

One bright spot of these logistical constraints right now is in how that grain's used. Though farmers may not net the prices for their grain they would if delivery terminals were more readily available, livestock producers may benefit from lower-cost feed, Duff says. "It could result in lower raw material prices for pig and poultry operations in major grain-producing regions," he adds.

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Solving the logistical nightmare

The next year or so is going to see the grain transportation logjams continue. Beyond that time period, solutions may be on the way. Both the private and public sectors are taking action to improve infrastructure, though it's a slow, difficult process. A few major grain companies are working to build ports in different parts of coastal Brazil so that farmers aren't tied to the nation's existing large ports for delivery. Once completed, these ports could make it quicker and easier for farmers in regions farther away from existing ports to get their grain to market.

"The greatest challenge will be to diminish the dependence on the two main ports of Santos in Sao Paulo state and Paranagua in Parana state, and to overcome the bottleneck of reaching the ports," Duff says. "Private companies such as Cargill, Bunge, and ADM are making substantial investments in port facilities in the north and northeast regions of the country in order to minimize this reliance on the two main ports in the south."

The other big part of the equation -- roads -- is being taken on by the Brazilian government. The BR-163 road in northern Mato Grosso, which is slated for completion in late 2013 or early 2014, will make it easier for farmers in that region to get grain to the ports.

While trucks have been the primary carrier of grain to Brazilian ports, a rail line is also being constructed, though Duff says it's tough to gauge how much help it will be once in operation.

"A partial completion of the North-South railway line is also anticipated for the end of 2013. However, as the stretch to be finished links Palmas (Tocantins) to Anapolis (Goias), no positive effect can be expected for grain transportation costs since there are no networks linking the latter city to ports," he says. "The central Atlantic railway that will connect Anapolis to the port of Santos (a distance of 1,000 kilometers) is currently only 53% completed."

Editor's note: Photos by Jonathan Campos & Christian Rizzi, Gazeta do Povo.

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