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Texas Agriculture Archive
April 21, 2006
A land of untapped potential–
Brazil
Editor's Note: Four Texas Farm Bureau board members including Gary McGehee, District 6; Lewis Lehman, District 7; Tom Paben, District 11; and Arthur Bluntzer, District 12; and two Commodity Advisory Committee chairmen including Kody Carson, Cotton; and Dr. Bud Alldredge, Animal Health; traveled to Argentina and Brazil recently on a fact finding mission. Their objectives were: 1) Study the competitiveness of Brazil and Argentina production to U.S. agriculture commodities; 2) Compare the progress made by Brazil since the last Texas Farm Bureau exploratory trip in 2002; 3) Study the infrastructure of each country and determine how soon this could have a major effect on U.S. agriculture; and 4) Learn about the production cost, marketing structure and potential for future growth.
Second of two parts
By Mike Barnett
Editor
Santarem is a microcosm of all that's good and bad about Brazilian agriculture. Located in the Amazon region at the juncture of the Tapajos and Amazon rivers, this port city shows both enormous potential and the many problems facing agricultural producers in the biggest of the South American countries.
Santarem is the "new frontier," of Brazilian agriculture. An isolated outpost of 1 million people, located some 400 miles from the Atlantic Ocean, locals refer to it as an "island," surrounded by tropical rain forest, reached only by river boat and airplane...unless of course, you want to take Brazil's infamous interior highways, few in number, long in the building, but short on reliability.
Yet Brazilian farmers are flocking to this new farming area, moving from farms they sell elsewhere in the country at high prices and expanding production capability on newly purchased, lower-priced lands.
Such is the rhythm of Brazilian agriculture, where like in Santarem, farmers are moving in to take over land largely cleared over the last 50 years by subsistence farmers. Elsewhere in this country—about the size of the United States—they see the potential of turning vast grazing lands, home to the world's largest cattle herd, into productive farm land. Either way, they are feeding a frenzy that's rapidly turning Brazil into an agricultural powerhouse.
•••
Cargill (the same Cargill as in the U.S.) saw the potential of Santarem and started work on a modern port facility here in 2003, according to operations manager Ricardo Cerqueira.
That first year, some 7,000 hectares in the Santarem area were farmed. That jumped to 21,000 hectares in 2004 and in 2005, some 26,000 hectares were farmed.
"We believe in the short term forecast, 100,000 hectares of land will be opened," Cerqueira said.
The big prize for Cargill, however, lies up Highway 163 in the highly productive Mato Grosso area. A TFB mission in 2002 found fertile soils and a great climate combined to make the Mato Grosso an intensely productive and developed crop region in Brazil. The problem remains the same as in 2002, however. Over 700 miles of the road, which stretches from the northern part of the Mato Grosso region up to Santarem, is dirt; or rather, a sea of mud in the rainy season.
According to Cerqueira, Highway 163 is an eternal project of the Brazilian government. Currently, producers in the Mato Grosso, located southwest of Santarem, must truck their beans several hundred kilometers directly west to Porto Vehlo on the Madiera and Amazon rivers, then barge downstream some 1,500 kilometers to Santarem or on to the Atlantic Ocean. A round trip from the Mato Grosso to Santarem on a barge takes nine days.
Highway 163—if paved the entire length—would provide a shortcut for Mato Grosso growers to get their commodities to port, saving both time and money, and would mean a lot of new product coming through the Cargill facility in Santarem.
"Only God knows," Cerqueira said of a timetable for Road 163 completion. "This is reality. The last three presidents promised the road would be permanent...including the last one."
Meanwhile, Cargill is focusing on the growing number of farmers near the port facility. Those farmers, Cerqueira said, have a tremendous advantage because they can truck directly to Cargill, bypassing the lengthy process most other Brazilian farmers must endure to sell their product.
Farmers near Santarem receive $15 per ton more for their soybeans—the main crop here—than their cohorts in the Mato Grosso, simply because of the tremendous freight differential.
Seeing this advantage, Cargill is encouraging farmers to the Santarem area by contracting their crops, and by providing financing and technical assistance.
But problems remain.
•••
Cargill crop consultant Gilmar Tirapelle says land around Santarem was first cleared by subsistence farmers and ranchers nearly 50 years ago. However, the rain forest is unforgiving, and takes back quickly what isn't worked.
When putting land into production, farmers will first clear a field of trees and brush, then burn down weeds with a herbicide. The field is leveled and rice is usually planted the first year. Then, the land usually goes to no-till soybeans. Sometimes a second crop of millet or sorghum is planted to protect the soil. Then the next year it is sprayed and planted back to soybeans.
The typical farm here is 300 hectares and the main crop here is soybeans, followed by rice. Brazil grows only enough rice to feed its population.
"This land has great potential," Tirapelle said. "The climate and soil are good, and it's close to port."
Getting that land into production, however, brings in a whole new set of problems. The environmental movement is strong in Brazil. And they have the government's ear.
"Everyone likes barbecue, soy and milk," Cerqueira said. "But they toss a lot of bull."
The government—spurred by environmental groups—is able to limit agriculture expansion by making it difficult for farmers to gain a good, clean title to the land.
"We have an environmental problem here," Cerqueira said. "Environmental groups work like the government—giving medicine and food to the poor. And the people say this is good and support them. But it's not making a difference, the people are still in poverty."
Also, in this region, farmers must set a huge amount of land for preservation for every hectare farmed. For example, if a farmer manages to purchase 100 hectares, he must set aside 80 hectares for preservation. However, he can purchase that cheaper land to set aside in the heart of the Amazon's rain forest.
Adding further challenge is the increased value of the Real, the Brazilian currency, against the dollar. Two years ago the Real was pegged 3.5 to the dollar. It's now valued at around 2 Real to the dollar.
"We sell soybeans for dollars and pay our debts in Reals," Cerqueira said. "And taxes have increased in the last two years. When the government needs money they simply increase the taxes. So people who are working in exporting are having problems."
•••
Investment in Brazilian agriculture is currently stagnant, according to Morgan Perkins, director of USDA's Agricultural Trade Office in Sao Paulo, because of the dollar/Real exchange rate. In just the last year, the Real gained 25 percent over the dollar.
"Soybean export contracts are in dollars," Perkins said. "Even if the price is the same, the farmers' income dropped 25 percent."
Add high interest rates to the equation.
"If the farmer borrows from a commercial bank, they pay 18 to 19 percent interest," Perkins added. "When you pay 18 to 19 percent interest, there's not a lot of commercial interest in agriculture at the moment."
Still, agriculture plays a huge role in the Brazilian economy, accounting for 13 percent of the gross domestic product (29 percent if you include all related businesses). Agriculture employs 20 percent of the labor force and accounts for over 40 percent of the total Brazilian exports, contributing to an overall positive trade balance of $28 billion in 2004.
In 2004, Brazil was the world's top producer in sugar, oranges and coffee and second in soybeans and beef. Other major players include corn, poultry and a growing cotton industry.
About the size of the United States, Brazil—with 44 million acres in cropland—currently only has 5 percent of its land in crop production, compared with 19 percent in the U.S.
However, Brazil has 180 million hectares in pasture land, much of it suitable for crop production.
"Look at the limits on infrastructure and there's easily room for another 50 percent increase in field crops," Perkins said. "Improve the infrastructure and even more land is available for production."
Still, as in the Mato Grosso, the biggest problem confronting Brazilian agriculture remains the infrastructure. Getting crops to market is a difficult and high cost proposition.
For example, Perkins said total rail track has not grown in Brazil in the past 80 years. Current government investment in roads is only 0.1 percent of the gross domestic product, compared to 1.8 percent in the late 1970s.
In addition, grain storage has increased only 10 percent that of grain production over the last several years, resulting in a grain storage deficit of around 35 percent. And, the transport cost to port for a ton of soybeans is 50 percent greater than in the United States.
"Soy provides a good example of recent developments," Perkins said. "Production growth has been enormous, but logistics hamper further growth and profitability."
•••
Travel north from Sao Palo to Ribeirao Preto and you see a different side of Brazilian agriculture.
Sugarcane, waving gently in the tropical breezes, lines the modern four lane highway as far as the eye can see. And sugarcane not only drives the Brazilian sweet tooth, it's fueling the country's automobile fleet as well.
Latest production figures show Brazil as the world's largest sugar producer with 20 percent of the world's total. Brazil is also the number one sugar exporter, with 41 percent of the world's market. And the country accomplishes this using only half of its sugarcane crop. The other half is used to make Brazil self-sufficient in energy production.
Producers started growing sugarcane in this region—which now contains some 60 percent of the country's crop—in the mid-1960s. The first sugarcane boom came in 1974, after the first Middle East oil crisis. With oil at $40 a barrel, the Brazilian government created an ethanol program, and encouraged industry to produce cars that would run on 100 percent ethanol.
When sugar supplies decreased sharply in 1989, mill owners quit producing ethanol and started chasing the sugar market, taking advantage of profits generated by the high price of sugar.
Brazilian consumers were left holding the bag, and developed a huge distrust in ethanol that lasted through the 1990s.
In 1990, the Brazilian government, which had previously controlled the sugar industry, freed the market. As a result, private investment flowed into sugar production and acreage expanded dramatically.
Then, the "flex fuel" motor was introduced in 2003 by Volkswagon. Flex fuel gave consumers the option of buying the cheapest fuel—pure ethanol or a ethanol/gasoline mix—and the ethanol industry boomed again.
Three short years later, more than 70 percent of the automobiles sold in Brazil have flex-fuel engines.
As a result, most of Brazil's ethanol production is used internally, with 15 percent going to export, according to Leandro Sansoldo, alcohol trading manager for Crystalsev, a sugar cooperative in Ribeirao Preto.
"Ethanol exports are growing and internal demand is high," Sansoldo said. "Domestic demand is growing so much that we must focus on keeping ethanol here."
He sees a huge demand for both sugar and ethanol, driving sugarcane acreage much higher than its current 5 million hectares.
"New plants will focus more on ethanol than sugar," Sansoldo said, explaining it's much cheaper to build an ethanol plant than a sugar mill. "Brazil will have to double its sugarcane crop in the next 12 years. That will be a huge effort."
•••
Texas Farm Bureau leaders saw the potential of Brazil's agriculture, but admitted the Brazilians have a way to go with their infrastructure problems.
"If they ever get things straightened out they could be a real competitor," said Gary McGehee, "but I don't know how many years it's been that they've been trying to build roads, and they're no further along now than they were 15 years ago."
Lewis Lehman was especially impressed with Brazil's ethanol program.
"I believe we're a little ways behind on ethanol," he said. "The Brazilians really have it down. They've been working on it for years."
Arthur Bluntzer was impressed with the HACCP (Hazzard Awareness Critical Control Point) process of monitoring and controlling their port operations.
"This puts them in a very competitive situation because it's similar to the United States," he said.
Dr. Bud Alldredge said Brazil is a "magnificent" country with untold potential: "If the demand continues for food, and we continue with our population growth worldwide, this is a source of food, protein and fiber for the masses of the world. There is a lot of potential here for agriculture."
Recognizing the potential, Cargill built a port facility at Santarem that receives and ships soybeans from farmers upriver and exports the locally grown soybeans.
The key to opening up Brazil's vast interior is Highway 163, which has seen little to no improvements since TFB's last trip to Brazil in 2002.
The port city of Santarem, located at the juncture of the Tapajos and Amazon rivers. Note the distinction of the muddy Amazon and the clear Tapajos River where they meet (above).
Tour participants included (front row, left to right): Gene Richardson, Arthur Bluntzer, Cargill's Gilmar Tirapelle, Glen Jones and Gary McGehee. Also (back row, left to right): Dr. Bud Alldredge, Lewis Lehman, Tom Paben, Kody Carson and Jon Johnson.
Cargill's Crop Consultant Gilmar Tirapelle (left) and Tom Paben examine a soybean field near Santarem, Brazil's new agriculture frontier.
Lewis Lehman gives perspective to the height of Brazilian sugarcane (above)while Kody Carson tastes some fresh cane (below).
Dr. Bud Alldredge shows Arthur Bluntzer and Tom Paben something he picked up on the banks of the Tapajos River in Brazil.
Sugarcane is a profitable crop for the Brazilians and serves a dual-purpose: sugar for human consumption and as a raw source for ethanol production.
