Opportunity of soybean in Brazil in comparison to other major

player in

Soybean market

Submitted to Submitted by: GROUP3

Prof V R Gaikwad
Bhupalini K Kodati
RetdProfIIMA Mayureshsing Patil
Sandeep Rakholia
Sandip Kumar
Shamanth K
National institute of agricultural marketing, jaipur Talwar Sachin
World oilseed trade consists of many closely substitutable commodities, such as
soybeans, rapeseed, sunflower seed, and cottonseed. Countries also trade oils and meals
obtained from crushing oilseeds. Foreign import demand depends on the difference
between countries' domestic oilseed output and consumption. Divergent demand for
protein meal and vegetable oil, as well as limits on domestic processing capacity,
determines the ratio of oilseeds to oilseed products that countries import. The volume and
source of foreign imports depends on seasonal availability and relative prices, credit and
delivery terms, local preferences, and quality. Country policies, such as tariffs, also can
affect prices and the availability of competing products. USDA's Foreign Agricultural
Service (FAS) monthly report Oilseeds: World Markets and Trade present forecasts and
historical data by country for the major oilseeds and their products, covering production,
domestic consumption, and international trade.
Introduction

Brazil’s potential to become a major agricultural player in the international trade

market is seen by their untapped fertile land and advanced farming techniques. Brazil’s

historic economic decisions have shown it to be aggressive in pushing economic reform

to boost output. Through its biotechnology research and untapped resources, Brazil is

looking to continue its agricultural output with particular emphasis on the soybean, as it

is currently only second to the United States as the leading producers and exporters of

soybean. This paper explores the history agriculture in Brazil, its use of genetically

modified crops and the untapped potential that exists within Brazil to continue growth as

a large soybean producer.

Brazil’s historical agricultural policies have placed an emphasis on

agribusinesses. These farming operations are large-scale business operations embracing

the production, processing, and distribution of agricultural products and the manufacture

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of farm machinery, equipment, and supplies. This enabled the agriculture output to

increase dramatically with the advent of new technologies to allow for increased

efficiencies.

Brazil’s position in international agricultural trade and its position in

biotechnology places it an interesting crossroads with regards to genetically modified

crops. As one of the last GM-free producers of soybean, it provides an alternative to

other producers using GM seeds. But on the other hand its strong biotechnology research

into genetically modified crops gives it an edge for GM crop usage. Furthermore the pull

toward the use of genetically modified soybean seeds by farmers and the lobbying by

private firms investing in research.

The future of Brazil’s agricultural role is dependent on utilizing their untapped

resources. Transportation infrastructure is particularly important to Brazil because of the

large amount of under-utilized land in central savannah. These lands are poised to be

converted into fertile plots through the use of different farming techniques and irrigation.

Further accent on increased efficiency and mechanization could continue to bolster the

agricultural output.

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History of Agriculture of Brazil

Brazil began as an agricultural player post World War II. And in two time

periods, Brazil has managed to grow from simply a player to that of an agricultural force

to be reckoned with. There was first the horizontal expansion from 1949 to 1969 and

then the conservative modernization from 1970 to today. Right after World War II,

Brazil’s president was overthrown and democratic rule was established. But “the

overvalued foreign-exchange rate, established in 1945, remained fixed until 1953. This,

combined with persistent inflation and a repressed demand, meant sharp increases in

imports and a sluggish performance of exports.” (Country Studies – “Brazil”) The new

government became worried about the future of their exports and this would potentially

have a negative impact on inflation. So as a result, the new government adopted an

import-substitution industrialization strategy to increase economic growth. Heavy export

taxes were levied on export commodities, and as a result, Brazil’s economy began

growing at a tremendous pace.

This required that the agricultural sector generate most of the economy’s foreign

exchange and as a result, agricultural GDP increased 4.2 percent each year between 1949

and 1969. This was seen as a direct consequence of “horizontal expansion,” which was

the incorporation of new land, especially along the agricultural frontier, with the advent

of aggressive road construction. Moreover, the disincentives of the import-substitution

industrialization policies were avoided by providing access to land at concessionary

terms for the landowning elite and for commercial farmers.

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 In the late 1960s, it was seen that the horizontal agricultural growth was reaching

its limits. The government implemented a “conservative modernization strategy” which

provided incentives for the formation of agribusiness complexes. At this point the

government began investing in the adaptation and development of green-revolution

technologies. This had an important side-effect for mechanization and chemical inputs.

The government provided strong incentives for the creation and expansion of processing

industries and for the development and modernization of agricultural input industries.

These agribusiness complexes received subsidized credit, guaranteed prices, and tax

exemptions and subsidies when exported. Traditional, unprocessed, agricultural

products, however, were subjected to heavy taxation and to price and other controls.

Brazil’s government thus pushed the growth of agribusinesses. Their production

methods underwent considerable technical change, and their production and yields

increased markedly. Crop production between 1970 and 1990 showed that the

components of the modern segment grew considerably, both in production and in yield,

while those of the traditional segment stagnated or declined. The growth in export crops

allowed Brazil to become one of the world's largest soybean producers and to earn

needed foreign exchange. (Country Studies – “Brazil”)

The promotion of soybeans by the Brazilian

government was for much more than simply saving

and increasing foreign exchange. The government

wanted to not only increase soybean exports, but to

also decrease soybean oil imports. The government

subsidized and provided production credit to farmers

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growing soybeans. They recognized soybeans as important to capture a new market in

exports, to enhance public health and spur the economy. The government even used

soybeans to indirectly increase animal protein consumption. This was done by increasing

animal production which expanded soy meal demand. And according to the Economic

Research Service and the USDA, soybean production was even a matter of national

security when the government began noticing the increasing strength of neighboring

nations, the GOB felt compelled to better integrate western States into the national

economy by opening this area to agricultural production. (ERS/USDA – “Agriculture in

Brazil and Argentina”)

Recent Agricultural Policies

To curb inflation, in the mid 1990s, Brazil launched an economic stabilization

program called the “Real Plan” named after the country’s new stable currency, the real.

The plan stresses more market orientation, privatization of government-owned industries,

lower tariffs, tight credit, “de-indexation” of prices, and a new, stable currency. The

Central Bank of Brazil estimates that the agricultural sector grew by 5 percent in 1997 to

$102 billion. Although the downside of the plan is that there exists a smaller pool of

available credit for producers. While interest rates for the agricultural sector are in

general lower, overall banks have become more selective when making new loans.

(ERS/USDA – “Future of Brazil’s Agricultural Sector”) Before the Real Plan, the

government was a major buyer and distributor of the agricultural commodities. But with

this plan, the government is removing itself from direct management of markets.

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 The Real Plan also eliminates the state sales tax on primary and semi-

manufactured exports. Soybean crushers and those that exported soybean oil and meal

had a tax advantage over those who exported unprocessed soybeans. So this change

caused a steep increase in soybean exports, reaching a record 8.3 million tons in 1997.

And since then, agricultural exports have worked to increasing Brazil’s trade deficit. The

government also has increased the availability of credit for exports by providing interest

rate guarantees to commercial banks that finance export sales, ensuring access to

financing at rates equivalent to those available internationally.

In the recent years Brazil’s agricultural sector has played a key role in Brazil’s

recent economic recovery. In 2004 Brazil was the world’s largest exporter of beef,

chicken, soybeans, sugar, orange juice and coffee, registering a record trade surplus in

agricultural products of $34 billion US dollars. The potential for expansion in the

agricultural sector is immense, with

the ERS/USDA estimating Brazil

could expand its land area in

production by up to 170 million

hectares without further

deforestation of the Amazon. Brazil

also has 12% of the world’s fresh

water supply. Only a relatively small proportion of Brazil’s agricultural production is

exported – evidence of the size and dominance of the domestic market. Further

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expansion in agricultural production will require significant advances in market access

for exports and significant investment in transportation infrastructure, both of which are

high priorities on the government’s agenda.

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Brazil’s Agricultural Potentials

Brazil is setting the stage to become an agricultural powerhouse within the next

two decades. This can be seen in the increasing economic and agricultural growth

referenced in the previous section. With greater efficiency and untapped lands, Brazil is

gearing up to spend more on the transportation infrastructure to help lower costs for

current producers and open up access to more land for expanding plantations.

Efficiency is the theme utilized by farmers in Brazil. Higher yields have resulted

from improved seed and pest control management and increased use of fertilizer and

irrigation. A trend toward greater mechanization has reduced labor needs. Statistics

have shown that the share of the labor force in agriculture has in fact dropped from 37%

in 1980 to 25% in 1996. These improvements have allowed Brazilian farmers to deal

with the competitive pressures caused by real exchange rate appreciation, the opening of

markets to international or regional competitions and rising real wages. (ERS/USDA –

“Agricultural Outlook”)

In the central region of Brazil, it is a savannah climate that could be further

developed for agricultural expansion. Currently it is already home to sparse plantations

of field crops, including soybeans, but only 10% of the 180 million hectares are utilized.

The flat land of the Cerrados with only grasses and brush make it easy to clear and

suitable for heavy machinery. Although the soil would need large amounts of fertilizers

and lime to reduce the acidity, the limited plots that are currently on this terrain have

already demonstrated the ability to produce soybean yields above the national average.

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Furthermore the rainfall during the soybean growing months is fairly consistent and the

land is currently fairly inexpensive.

However the current issue is the expansion in the transportation infrastructure that

would be necessary to reach the central savannah. This in itself would potentially

discourage the development of the Cerrados. In fact, some analysts have reported that

the area “could increase between 5 and 12 million hectares in the medium term (5 to 10

years) with long-term potential for expanding crops onto an additional 60 million

hectares—an area equivalent to the total land currently planted to corn and soybeans in

the U.S.” (ERS/USDA – “Agricultural Outlook”) As a result of the Real Plan a

stabilized economy and low inflation would stimulate investment in transportation

infrastructure.

Brazil's soy producers spend $34 a ton in freight costs, about twice the cost in the

U.S. and Argentina, Brazil's biggest rivals. The higher transport expenses add $864

million annually to the Brazilian soy industry's costs, a study of the Brazilian Association

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of Vegetable Oil Industries said. (Cortes – “Brazil Plans Road Projects”) To help

mitigate the costs, the Transportation Ministry of Brazil has set aside $570 million to

improve over 11,000 kilometers (nearly 6900 miles) of roads by the 2005/2006 harvest to

allow exporters to remain competitive with lower transportation costs. Projects already

underway are beginning to have an impact, particularly the Madeira-Amazon route

designed to move west-central Mato Grosso soybeans via a waterway from Porto Velho

to oceangoing vessels coming up the Amazon. (ERS/USDA – “Future Development”)

The current infrastructure is deteriorating and causing costs to increase even for

those plantations with readily available access to transportation. “With low international

prices, it’s much more difficult to keep affording high production costs,” said Sergio

Mendes, director of the National Grain Exporters Association, in an interview from Sao

Paulo. “Freight costs are so high in Brazil that farmers prefer not to increase their

planted area.” (Cortes – “Brazil Plans Road Projects”) Brazil’s soy industry counts on

roads for about 60 percent of its transportation needs, rails for 33 percent and waterways

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for 7 percent. This is compared to the United States who, as the world’s largest soybean

producer, uses roads for 16 percent of its soy transportation, railways for 23 percent, and

waterways for 61 percent. Argentina, the world's third largest, uses roads for 82 percent,

railways for 16 percent and waterways for 2 percent. (Cortes – “Brazil Plans Road

Projects”)

Conclusion

The Brazilian government’s historical support of soybean crops has given it an

advantage over other crops. Its importance to Brazil’s economy and international status

is unmatched amongst other crops. The government’s support of agricultural research

resulted in its developments and ultimately helped propel Brazil to being the second

largest producer of soybeans in the world. They have improved efficiency and output

through various methods.

Brazilian soybean producers have distinct

competitive advantages over the number one producer

of soybean, the United States. Though the United

States is a distinct competitor (see charts in appendix),

Brazil’s land cost is overall much lower than that of the

United States. And while the United States is

improving on technologies and methods, Brazil has an

extra dimension to expand; the advantage lies with the under-utilized territories available

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in the central and west of the country. These areas have demonstrated to provide high-

yield soybean crops. If this area were fully utilized, it would provide enough land area

than that of what the United States currently has dedicated to soybeans. According to the

Economic Research Service and the USDA, contrary to the United States and some other

producers, “Brazil has “expanded crop area and output substantially in the past 5 to 10

years at unsubsidized prices and without the benefit of loan deficiency payments,

subsidized crop insurance, production flexibility contract payments, or emergency

supplemental income payments.” (ERS/USDA – Future Developments)

The approval granted by the Brazilian government to allow for the planting of

genetically modified soybean seeds gives Brazilian producers a dual advantage. On one

hand they can now lower costs of production to remain competitive on the open market.

And on the other hand, with new checks being implemented by companies such as

Monsanto to verify planting of genetically modified soybeans, Brazil can still continue to

assure that portions of its crop are GM-free. This will allow them to still cater toward

both the market that demands GM-free crops and the other market that does not mind.

But Brazil’s standing as one of the top-ranked soybean exporters faces the

greatest threat within itself. With the increasing age of the transportation infrastructure

starting to show, costs for farmers to ship their products are increasing. Furthermore, the

longer that it takes to develop an efficient transportation system from the west central to

the shipping ports, Brazil slowly loses its competitive advantage to other leading soybean

producers.

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 The Brazil’s government is definitely heading toward the right direction with

current and scheduled improvements to the transportation infrastructure. These forward-

looking plans combined with positive economic growth and continued agriculture

research will work together to allow Brazil to continue its growth as a major player in

international agricultural trade of soybeans.

Brazil Soybean Production Statistics

Year
(Marketing)
Yield Area Harvested Production
mT/ha (1000 HA) (1000 MT)

1993 2.16 11440 24700

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 1994 2.22 11680 25900
1995 2.21 10950 24150
1996 2.31 11800 27300
1997 2.50 13000 32500

1998 2.43 12900 31300

1999 2.55 13600 34700

2000 2.83 13934 39500

2001 2.66 16350 43500
2002 2.82 18448 52000
1998 to 2.66 15,046 40,200
2002
Averag
e

Soybean conversion factor is 36.74 bushels per metric ton.

Official USDA production statistics are subject to change.

U.S. Exports and Imports

The United States is the world's largest producer and exporter of soybeans. Oilseed and oilseed

product exports, particularly soybeans, represent a significant source of demand for U.S.

producers and make a large net contribution to the U.S. agricultural trade balance. Among all

U.S. agricultural products, only grains and feeds outrank the oilseed sector in total export value

and volume. In the early 2000s, the value of U.S. oilseed and product exports averaged over $9

billion, nearly half the farm-level value of production. By the late 2000s, the value of oilseed

and product exports doubled to over $20 billion. Trade provides the latest information on U.S.

farm exports, by commodity and region, as well as the trade outlook. Current U.S. export

sales of soybeans, soybean meal, and soybean oil are tracked by destination on a weekly basis.

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Main export destinations for U.S. oilseeds, oilseed meal, and vegetable oil include China, the

European Union (EU), Japan, Mexico, and Taiwan. Other important markets include

Indonesia, South Korea, and Thailand. Canada, Mexico, the Philippines, and several Latin

American countries also import significant quantities of U.S. oilseed meals. U.S. vegetable oil

exports are more dispersed and are heavily influenced by concessional food aid to developing

nations through such programs as P.L. 480.

U.S. imports of oilseeds and oilseed products were worth $3-4 billion in the late 2000s, and are

mainly rapeseed and rapeseed products (e.g., canola oil) from Canada, olive oil from Western

Europe, and tropical oils from the Philippines, Indonesia, and Malaysia. FAS' Global

Agricultural Trade System (GATS) can be used to search for statistics on U.S. exports and

imports of oilseeds and oilseed products by country or region.

Despite substantial growth in oilseed and oilseed product output in the past 25 years and recent

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gains in export volume, the U.S. share of global exports has steadily diminished. In the mid- to

late 1970s, the United States dominated world trade in unprocessed oilseeds, with a global

market share of more than 70 percent. Recently, this figure has fallen below 50 percent. From a

smaller percentage base, the United States has seen its share of oilseed meal and vegetable oil

exports decline even more sharply, particularly before 1990.

While soybean exports from the United States have grown over the past 25 years, the share of

U.S. exports in global oilseeds trade has declined. A key development has been the

phenomenal growth of foreign soybean output and exports, particularly by Brazil and

Argentina. Foreign soybean output now exceeds that of the United States, and Brazil and

Argentina currently share more than half of the soybean export market, up from less than 15

percent before 1980. With increased soybean production and rapid growth in crushing

capacity, Brazil and Argentina have each surpassed the United States in soy meal and soy oil

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exports. Another factor is the recent expansion of U.S. meat exports, which stimulates

domestic meal use rather than exports of soybeans or soybean meal. Brazilian and Argentine

soybean and meal exports are projected to continue capturing market share from the United

States in the next decade.

Major Foreign Soybean Exporters and Importers

Since the early 1970s, soybean production in South America has expanded rapidly. Brazil now

trails only the United States in soybean production. Brazilian soybean growing regions used to

be concentrated in the south, relatively near the major ports. In recent years, soybeans have

expanded into the vast farmland of the center-west states, as infrastructure improvements have

cut internal transportation costs. Brazil's vast reserves of farmland could permit a continued

significant expansion in soybean area, though expansion is currently limited due to insufficient

transportation infrastructure. Argentina's soybean growing regions and crushers are located

close to port facilities, where the countries highly developed crushing industry and relatively

small domestic market makes it the world's largest exporter of soybean meal and oil. A lower

export tax on processed commodities than on unprocessed commodities also favors the export

of soybean oil and meal from Argentina. Recent increases in production by Argentine and

Brazilian grain and oilseed producers could foreshadow continued gains on the strength of

abundant undeveloped agricultural resources, more stable economies, and expanding trade

liberalization

China is the world's fourth-largest producer of soybeans. The major Chinese soybean growing

regions are in the northeast part of China. Yet, rapid growth of China's economy has spurred

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food consumption, turning the country into the world's leading soybean importer. Changes in

China's agricultural and trade policies have greatly influenced world oilseed markets. China's

WTO accession has reduced import tariffs and quantitative restrictions to its oilseed market.

The major Indian soybean growing region is in the central state of Madhya Pradesh. Indian

production of soybeans and other traditionally grown oilseeds—such as peanuts, rapeseed, and

cottonseed—has increased in the last decade, although yields are among the worlds poorest.

India often imposes prohibitive barriers on oilseed imports, so its domestic crushing industry

relies on domestic oilseed supplies. Domestically produced oilseeds are highly valued sources

of vegetable oil, but domestic consumption has risen faster than domestic production so that

India is now among the world's largest vegetable oil importers (see India's Edible Oil Sector:

Imports Fill Rising Demand). India is a smaller (but growing) consumer of soybean meal, and

exports its surplus to other Asian countries.

The European Union is self-sufficient in vegetable oil production, but its protein deficit still

makes it the world's largest importer of soybean meal and second-largest importer of soybeans.

Since the 1960s, EU imports of soybeans swelled because of rapid growth in livestock

production and duty-free concessions signed in trade agreements. In the 1970s and 1980s,

soybean consumption slowed as EU agricultural policies subsidized a large expansion in

domestically produced rapeseed and sunflower seed, eroding the market for oilseed imports.

The U.S. Government challenged these subsidies and, in 1992, the EU committed to a number

of reforms of its Common Agricultural Policy (CAP), including area limits on the planting of

oilseeds. Further CAP reforms reduced per-hectare direct payments to oilseed producers to

those received by grains producers. Until 2005, reforms encouraged EU farmers to scale back

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oilseeds planting. However, recent EU biodiesel policies have encouraged EU farmers to

dramatically increase oilseeds area, especially rapeseed.

In coming years, EU enlargement and CAP reform are projected to swell internal grain

supplies and allow EU grain prices to fall even more. Despite relatively low protein-meal

prices, the comparatively larger reduction in the cost of feeding grains to livestock should curb

EU soybean meal consumption and imports. Historically, high import tariffs on cereals have

boosted EU consumption of soybean meal, which has been favored by duty-free access for

soybeans. Over the last decade, lower grain prices and several animal disease epidemics

resulted in significant increases in the feeding of grains and oilseed meals and a reduction in

the feeding of nongrain feed ingredients, such as meat and bone meal (see Livestock Feeding

and Feed Imports in the European Union—A Decade of Change).

Under the North American Free Trade Agreement (NAFTA), Mexico phased out its tariff on

soybeans and canola by 2003. With reforms in Mexico's domestic crop support programs,

imports have virtually displaced domestic soybean production, with nearly all imports coming

from the United States. U.S. soybean exports to Mexico have more than doubled since 1993.

Strong income growth among Mexican consumers has boosted consumption of meat and

vegetable oils and increased demand for soybeans. Improvements in Mexico's rail links at the

border have also expedited trade in oilseeds. Imports by Mexico are primarily seed, which are

crushed domestically.

Trade Policies

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Compared with trade in other agricultural commodities, trade in whole oilseeds, particularly

soybeans, is relatively unrestricted by tariffs and other border measures. But oilseed meals, and

particularly vegetable oils, typically have higher tariffs. Agricultural tariff schedules for World

Trade Organization (WTO) member countries report the current maximum permissible duties.

In addition to tariffs, both exporters and importers have used other trade-distorting policies,

such as differential export taxes in Argentina and in Brazil (prior to 1996), production

subsidies in the EU, and phytosanitary barriers in India. These policies create incentives to

boost domestic oilseed production or encourage exports of processed products, which tend to

displace U.S. oilseed exports and shift the composition of U.S. exports towards whole oilseeds

and away from higher value-added oilseed meals and vegetable oils.

The Doha round of WTO negotiations began in 2001 and is still ongoing. Among other issues,

negotiations are focusing on issues previously addressed by the Uruguay Round Agreement on

Agriculture (URAA), such as limits on tariff and nontariff barriers to trade, export subsidies,

and the type and level of spending by countries on domestic agricultural support programs.

These provisions limit member countries' use of trade-distorting policies. U.S. objectives

for future negotiations include further reducing tariffs and improving market access,

eliminating the use of export subsidies, and further limiting trade-distorting domestic

programs. Analyses of U.S. Tariff-Rate Quotas for Peanuts have also shown their significant

influence on U.S. peanut imports, particularly prior to the elimination of the peanut marketing

quota system in 2002.

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 Area harvested Yield per harvested Production
acre
1,000 Acres Bushels 1,000 Bushels
1993 57,307 32.6 1,869,718
1994 60,809 41.4 2,514,869
1995 61,544 35.3 2,174,254
1996 63,349 37.6 2,380,274
1997 69,110 38.9 2,688,750
1998 70,441 38.9 2,741,014
1999 72,446 36.6 2,653,758
2000 72,408 38.1 2,757,810
2001 72,975 39.6 2,890,682
2002 72,160 37.8 2,729,709

Source:
U.S.Department of Agriculture, 2009 Agricultural Statistics, Table 3-36, and previous annual editions,
http://www.nass.usda.gov/Publications/Ag_Statistics/2003/03_ch3.pdf

Tables of reference:

United States
Item 2008 2009

Gross value of production

Primary product: Soybeans 446.45 438.96
Total, gross value of production 446.45 438.96

Operating costs:
Seed 44.35 55.26
Fertilizer 2/ 25.12 23.65
Chemicals 15.73 17.38
Custom operations 6.56 7.17
Fuel, lube, and electricity 20.20 13.48
Repairs 12.91 13.22
Purchased irrigation water 0.12 0.14

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 Interest on operating capital 2.80 0.19
Total, operating costs 127.79 130.48

Allocated overhead:
Hired labor 2.07 2.14
Opportunity cost of unpaid labor 16.77 17.19
Capital recovery of machinery and equipment 70.98 75.54
Opportunity cost of land(rental rate) 94.58 108.98
Taxes and insurance 9.64 10.84
General farm overhead 14.29 14.57
Total, allocated overhead 208.35 229.26

Total costs listed 336.13 359.74

Value of production less total costs listed 110.32 79.22

Value of production less operating costs 318.66 308.48

Supporting information:
Yield (bushels per planted acre) 43 47
Price (dollars per bushel at harvest) 10.48 9.30
Enterprise size (planted acres) 1/ 303 303
Production practices: 1/
Irrigated (percent) 9 9
Dryland (percent) 91 91

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