Brazil's losing game

It's the devil's bargain of industrial agriculture: A farmer uses debt and high-dollar inputs to jack up production, and then hopes for a bonanza on international commodities markets.

It worked in Brazil, for a time. This NYT article from December, unfortunately only available for a fee, describes the country's meteoric rise as an agricultural export power:

"Brazil's advantages start with the availability of large amounts of cheap land, especially here in this region of well-drained tropical savanna known as the cerrado. Larger than the American grain belt but dismissed as useless for farming until barely a quarter of a century ago, the cerrado cuts across the heart of Brazil, and its vastness permits economies of scale that are the envy of producers elsewhere."

It goes on to say that the farmers there have embraced soybeans as the crop on which to hang their fortunes: "Until recently, for example, soybeans were not thought to flourish in tropical soils and climates. But researchers at Embrapa and similar private or state institutes have developed more than 40 varieties of soy specially adapted for the cerrado. Soybeans now account for nearly half of Brazil's farm exports and are the main crop in this region" (emphasis added).

The agribusiness giants have swooped in, the article goes on:

"The Brazilian bonanza has been eagerly welcomed by the main international agricultural trading companies, which have been quick to seize new opportunities. In this town of 30,000 [Lucas do Rio Verde, in the heart of the cerrado], Archer Daniels Midland, Bunge and Cargill not only have built huge warehouses and silos along the main highway, but have also provided credit to farmers on a scale far beyond the means of the Brazilian government."

This is interesting. These companies are the middlemen of the international agricultural commodities markets. They buy vast amounts of soybeans, corn, cotton, etc., and sell them to the big processors. Their trading operations make their money off the "spread," or the difference between what the pay for the goods and what they sell them for. They're willing to finance the farmers because more production means lower prices for the goods.

The Times article is generally celebratory--the author is Larry Rohter, longtime NYT Latin American correspondent, notorious in the '80s for his apologia for Reagan's policies in Central America. The article doesn't mention, as this recent Dow Jones article does, that one quarter of Brazil's soybean output comes from genetically modified seeds, nearly all of them Monsanto's Round-Up Ready variety.

And it mentions only in passing the severe drop in soybean prices, caused by that scourge of farmers locked into the industrial system, overproduction.

Leave it to the good old Financial Times to set the record straight. This outstanding article should be read by any farmer who's considering scaling up into the big leagues as a business model.

"Another bumper soya crop is being harvested [in Brazil]," the article states. Nevertheless:

"The collapse of international soyabean prices and a big rise in production costs caught Mato Grosso's highly indebted farmers off guard, plunging many into deep losses after years of big profits." The economics are brutal. It costs Brazil's farmers $10.30 to produce a bag of soybeans, among the lowest in the world. Last year, when strong demand from China pushed the market price to $16 per bag, the farmers thrived. But overproduction has sinced halved the price, meaning that the farmers are selling their goods for $2 per bag less than production costs.

Remember those trading houses mentioned above by the NYT's Rohter? Get this:

"Some farmers complain that consolidation in the agriculture business has made them dependent on a handful of trading houses, which provide financing for seeds and fertiliser, storage and purchase agreements. But last year, when prices started falling, trading companies did not offer purchase contracts, the farmers say. 'They financed us but didn't buy our product - now it's worth half of what it was,' says Rodrigo Stechow, head of the rural association in Campo Verde."

See how it works? If the big trading houses get together and stop buying, then prices tumble, and the farmer is left with interest obligations that perhaps can't be met by the falling cost of his/her goods.

The article states that the farmers are forming cooperatives that would give them more pricing power to stand up to the big trading houses, which is a step in the right direction. But they're playing a losing game.

A Brazilian ag official told the FT that: ""It was easy to make money at $16 a bag [of soybeans] but we may never see that again. Now it is time to prove Brazil can still produce the best and cheapest farm products in the world." Somewhere, a Cargill exec is rubbing his hands together and grinning.

Note to readers:: I try to be as concise as possible in this blog. If I there’s ever an economic concept I don’t sufficiently explain, please let me know, and I’ll take another crack at it. One of the factors that maintains the global political-economic order is the vast obfuscation that surrounds it. I’m here to cut through the obfuscation, not contribute to it.