Rabobank report finds transportation costs create problems in Brazil

By Agri-Pulse staff

© Copyright Agri-Pulse Communications, Inc.



ST. LOUIS, June 4, 2013- This year will likely be very difficult for agribusiness logistics in Brazil due to increasing transportation costs, according to a report from Rabobank.

The report, “Road to Ruin: Brazil's Agribusiness Logistics in 2013,” finds transportation costs in the country have risen significantly due to three factors: new legislation impacting the working hours of truck drivers, a sharp increase in diesel prices, and rising export volumes for major commodities.

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The report notes in the next three to four months, the upward pressure on internal freight rates will be intense, owing to the expected large export volumes of soybeans, corn and sugar. Despite current construction projects to improve Brazil's transport and exporting capacity, virtually nothing can be done to alleviate the current pressure on the system in the short term, or to prevent it from intensifying, the report explained.

 “Transport companies have been faced with major implementation costs, compounded by a rise in the price of diesel of more than 10 percent in the space of three months,” said Andy Duff, Rabobank analyst. “As 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.”

Duff said new legislation on truck drivers' working hours that stipulates drivers must take more frequent breaks has a substantial impact on commodity transport costs. “The challenge for transport companies is maintaining the flow without having to acquire many more vehicles and find many more drivers,” he added.

Compounding the challenge, Brazil's exports of soybeans, corn and potentially sugar are all expected to rise in 2013, based on higher production forecasts. Favorable margins for soybeans and corn have been the key drivers behind expansion of production of both crops in Brazil. Sugar production is expected to rise modestly this year as a result of a recovery in cane yields after two difficult years.

According to Rabobank, soybean trading companies will have to absorb much of the increase in transport costs this year. However, the expectation of higher costs next season is likely to be passed back to farmgate prices via the prices that trading companies offer for contract soybean purchases from farmers. While this would impact margins for soybean producers (and the same is likely to be the case for corn), it could also ultimately result in lower raw material prices for pig and poultry operations in major grain-producing regions.

In the cane and sugar industry, as the vast majority of sugar is sold free on board (FOB), the increase in freight costs has to be absorbed by millers, a situation that is particularly unwelcome in a year where international sugar prices are already low as a result of a significant global surplus of sugar.

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