AN analysis of agribusiness logistics in Brazil published in a new Rabobank advisory report suggests that the country's transportation and export system is in serious trouble in 2013.
The report, "Agribusiness Logistics in Brazil — The Road to Ruin?," released by the bank's Food & Agribusiness Research & Advisory team June 4, outlines a series of pressures that could lead to significant increases in Brazil's internal freight rates.
Brazil's infrastructure has long been known as the Achilles' heel of its agriculture industry, with crumbling roads and an internal freight system seemingly decades behind the U.S. system of inland waterways and railways.
Rabobank's analysis predicts that, despite projects currently under construction to improve the country's grain transport and export capacity, "there is virtually nothing that can be done to alleviate the current pressure on the system in the short term."
Over the course of the next three to four months, the report suggests, factors will apply considerable upward pressure on internal freight rates due largely to considerable volumes of soybeans, corn and sugar all moving toward Brazil's export channels. Among the most pressing factors identified are policies affecting trucking, diesel fuel prices and the sizable harvest of the country's three major field crops.
As such, recent legislation in Brazil stipulating that truck drivers must limit their driving hours and take more frequent breaks for rest has had a substantial effect on trucking costs. Rabobank analyst Andy Duff said the biggest challenge for trucking firms is maintaining the flow of transit without having to acquire cost-prohibitive numbers of additional vehicles and drivers.
The new law dictates that truckers must take a 30-minute break after every four hours of driving time and must rest a minimum of 11 hours for every 24 hours worked.
Rabobank's analysis acknowledges the "worthy" aims of the new law but points out that estimates call for as many as 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," Duff said. "As the dominant method for transporting major commodities to the ports, the cost of road freight tends to dictate the freight rates of all modes of transport."
With much of Brazil's corn and soybean production occurring in regions fairly distant from its major ports (Map), carriers face significant challenges in getting near-record crops from these regions to the export channels. According to the report, the cost of moving one metric ton of soybeans from Brazil's Mato Grosso to the Port of Paranagua increased 54% from April 2012 to the same period in 2013.
Major delays in loading corn and soybeans at Brazil's ports have also contributed heavily to increased costs for grain trade out of the country. The "chaotic logistics scenario" posed by these delays is threatening the country's basic ability to export what is anticipated to be a record second corn crop over the next two months.
"Grain transportation will continue to be difficult for the next crop year," the report concludes. "The greatest challenges 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."
Companies such as Cargill, Archer Daniels Midland and Bunge are already making their own investments in northern and northeastern port facilities to minimize their reliance on Brazil's two main ports in the south. For example, public and private investment is expected to make the port of Itaqui in Maranhao the third-largest grain-exporting facility in Brazil within the next five years.
Even with these investments and similar efforts in improving both the road and rail transportation of agricultural commodities from field to port, little can be done to lighten the stress on the system in the short run.
Rabobank's analysis concludes that trading companies will likely have to absorb much of the increase in transit costs this year, but farm-gate prices for corn and soybeans in the country will likely suffer moving forward.