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August 13, 2018

Brazil Companies may Purchase Trucks to avoid Higher Freight Cost

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The old saying "be careful what you wish for" may be playing out again in Brazil. Independent truck drivers in Brazil conducted an 11-day strike at the end of May demanding lower diesel prices and higher freight rates. Both of their demands were agreed to by the federal government in order to end the crippling strike.

As soon as the agreement was signed, the backlash started. Dozens of lawsuits were immediately filled claiming the new mandated freight rates were unconstitutional and these suites are currently moving through the Brazilian court system. Transportation companies ceased contracting independent drivers due to the higher costs. Now, many companies in Brazil are considering starting their own trucking companies to order to sidestep the higher freight costs.

Brazilian farmers are already at a disadvantage compared to their competitors in the United States and Argentina when it comes to the cost of transporting their grain production to export facilities. The director of the National Grain Exporters Association (Anec) stated that Brazilians are already spending $ 60 per ton more to ship their grain compared to the United States and the disparity could increase to $80 per ton with the new higher freight rates.

The logistics in the United States are much more efficient due to the widespread use of rail and barge transportation compared to Brazil that still depends on truck transport for the majority of their grain shipments.

Many companies relied solely on independent truckers for the shipping needs, but now, many of those companies are exploring ways to avoid the higher rates which will increase 20-40% and in some cases 100%. The best way to avoid the higher costs is to purchase their own trucks and start their own transportation company. They generally don't want to go that route, but they feel they are being forced to at least consider the possibility. In the case of corn production in central Brazil, the cost of the freight could end up being more than the price of the corn.

The truckers demanded higher freight rates because they claimed they could not make a living at the current rates. Companies for their part, said the freight rates were low due to an oversupply of trucks in the marketplace and it appears that the companies were correct.

Mercedes-Benz and Volvo are two of the major heavy truck manufactures in Brazil. Volvo recently reported that truck sales during the first six months of 2018 increased 50% to 32,000 units. Of the total, 14,000 were heavy trucks, or an increase of 87%. With that sort of an increase from just one company, it is understandable that there was an oversupply of trucks. Both Mercedes-Bens and Volvo are reporting a huge increase in interest on the part of companies thinking about starting their own trucking fleets.

Cargill reported in July that they are considering starting their own trucking company and they have expressed interest in purchasing 1,000 trucks. Ambev, which is a major beverage manufacture and distributer, has also expressed interest in starting their own transportation company, but they indicated that they will wait for the outcome of the legal challenges to the new freight rates. All the companies indicated that it is very hard to start a trucking company from scratch and it certainly does not happen from one day to the next. The trucks must be purchased, drivers must be hired, and trips must be planned. The companies never had to worry about any of this when they were contracting out their freight needs.

Many companies said they want to wait and see how the legal challenges unfold in the Brazilian Supreme Court. The challenge was brought by the Brazilian Association of Highway Transporters (ATR Brasil), which represents shipping companies, the National Confederation of Industries (CNI), and the Brazilian Agriculture and Livestock Confederation (CNA).

Supreme Court Justice Luiz Fux has already held two public hearing considering the constitutionally of the new rates. A third hearing is set for August 27th when he will get input from specialists concerning the issue. He will decide the issue sometime after August 27th. In the meantime, the higher rates will remain in place and company and farmers alike will look for ways to minimize the higher rates.