Brazil’s Production Soars – Can Infrastructure Keep Pace?

February 19, 2014 02:17 AM
Brazil’s Production Soars – Can Infrastructure Keep Pace?

Record crops still have to make it from field to port to make an impact on the market.

Brazil is looking at a "good news, bad news" scenario for its 2014 crops. The good news? The country is expecting record production of several crops, including soybeans and sugarcane (weather permitting). The not-so-good news? Brazil continues to struggle with infrastructure and logistics, according to Rabobank.

"Due to slowing economic growth and high inflation in Brazil, the domestic market will have limited scope to drive growth in sales in 2014," says Rabobank analyst Andy Duff. "It is possible that some growth may come from exports, but with declining global commodity prices, revenue growth would have to come from an increase in export volumes, or a declining exchange rate, or both."

Soybean exports are expected to be up 7% from 2013, Duff says. If trend line yields play out, Brazil could anticipate a harvest of 91 million tons for the 2013/14 crop year, versus 81 million tons in 2012/13. Further, the decline in the value of Brazil’s currency over the last year has also boosted the industry’s export competitiveness, and a further gradual decline in the BRL/USD exchange rate over 2014 is expected to sustain this competitive advantage.

However, this competitiveness has been tempered by rising costs, particularly in services and logistics. For example, diesel prices have risen three times since the beginning of 2013, with the most recent hike of 8% at the end of last November. Given the long distances between major crop production regions and the country’s ports, sustained major investments in infrastructure over the coming years is critical for Brazil’s continued expansion of production and export volumes while remaining competitive.

"Although Brazil is slowly addressing its bottlenecks, this will take years," Duff says. "For 2014, with higher fuel costs and another large grain harvest, logistics costs for Brazilian agribusiness are unlikely to decline."

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