Record crops must reach ports before impacting markets
Brazil is looking at a "good news, bad news" scenario for its 2014 crops. The good news? The country’s farmers are 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 Andy Duff, a Rabobank analyst. "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."
Brazil’s soybean exports are expected to increase 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 during the past year has also boosted the industry’s export competitiveness. A further gradual decline in the Brazilian real and the U.S. dollar exchange rate during 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 in Brazil have risen three times since the beginning of 2013, with the most recent hike of 8% at the end of November. Given the long distances between major crop production regions and the country’s ports, it is critical that major investments in infrastructure are sustained in the coming years. Brazil’s continued expansion needs infrastructure investments to remain 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."