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April 23, 2014

Grain Transport Costs in Brazil are 4-5 Times higher than in U.S.

Even as the new Rail Terminal in Rondonopolis, Mato Grosso ramps up its operations, the farmers in Mato Grosso are seeing very little benefit from the increased use of rail transportation to move their grain to export markets. The Rondonopolis grain terminal, which was inaugurated in 2013, is the largest in Latin America and it is operated by America Latina Logistica (ALL). ALL is the only railroad operating within the state of Mato Grosso, which is Brazil's largest grain producing state.

The Rondonopolis terminal is the fourth terminal on the Ferronorte Railroad and by far the largest. More than 40,000 tons of grain arrive at the terminal and are shipped out by rail on a daily basis. In 2013 more than 13 million tons of grain left the terminal via the Ferronorte Railroad destined for the Port of Santos 1,600 kilometers away in southeastern Brazil. The total amount of grain shipped out in 2014 is expected to increase as the terminal expands its operations.

While one railroad is better than no railroad, the problem is that the Ferronorte Railroad is the only railroad in the state and the lack of competition allows ALL to charge freight rates basically equal to truck transportation. It costs approximately R$ 200 to ship a ton of soybeans from Rondonopolis via truck to the Port of Santos and ALL charges basically the same amount for rail transport. The anticipated lower cost of transportation promised when the terminal was envisioned has not materialized, at least not yet.

There are projects in the works to build additional railroads in the state that could transport grain to other ports in eastern and northern Brazil, but any actual construction of these railroads is still years away. Without any meaningful competition, ALL can basically charge the same rate as it costs to move grain by truck to Brazil's ports.

As a result, Brazilian producers lose a significant part of the value of their crop just to pay for transportation, which puts them at a competitive disadvantage compared to their two main competitors - United States and Argentina. In the United States it costs $16.18 to barge a ton of soybeans produced in Illinois to ports on the Gulf of Mexico and in Argentina, the costs is just slightly higher. In contrast, in Brazil it costs 70 to 80 dollars to move a ton of soybeans the same distance (about 4 to 5 times more).

In other words, producers in the United States and Argentina receive approximately 95% and 94% of the value of their grain respectively, while in Brazil they receive 78%. For every five years a farmer in Brazil works to produce soybeans or corn, he works one year just to pay for transportation costs.

The solution to this problem is improved modes of transportation and increased competition between transportation companies. The National Confederation of Industries (CNI) and the Agricultural and Livestock Federation of Brazil (CAN) have developed a plan to address this problem. In their plan, called the "Competitive Center-West", they have identified 106 projects that are needed to modernize and expand the transportation infrastructure of Mato Grosso, Mato Grosso do Sul, Goias and the Federal District (Brasilia). The estimated costs of these projects is R$ 16.4 billion.

Identifying the problem is the easy part, getting the financial resources to fix the problem is the difficult part. The Brazilian economy is slowing and the federal government has spent many billions of dollars on the World Cup which will be played in Brazil this summer. Two years after the World Cup, they will need to spend many billions more on the Rio Olympus. It remains to be seen if the government will have the wherewithal to make the needed investments in infrastructure to efficiency move grain to export markets.