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December 14, 2018

Fines Reinstated for not Paying Minimum Freight Rates in Brazil

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

The Brazilian Supreme Court judge who last week suspended any fines for companies who did not pay the mandatory minimum freight rate, has now reversed himself and reinstated the fines for companies who do not adhere to the minimum rates.

After meeting with the Brazilian Attorney General, Judge Luiz Fux agreed with the government's argument that his decision just prior to the installation of a new administration on January 1st, made a confusing situation even worse. The new administration's transition team has stated that they have already met with representatives of the truck drivers and assured them that a minimum rate will remain in place in the new administration, but it will be different than the current rate.

A spokesperson for the new administration indicated that they are already in negotiation with the National Land Transportation Agency (ANTT) to hold public hearing in January with everyone involved to establish a new and fairer rate system.

Farmers complained that the mandatory minimum rates were established unilaterally by the government in order to end the truck driver strike in May without any input from producers or companies who purchase the freight. They contend that there were numerous errors in the legislation establishing the rates because it only considered one type of truck with a defined number of axils and only one type of cargo. They maintain that any new rate must take into consideration different size trucks with different cargos traveling different distances.

The spokesperson for the Bolsonaro administration indicated that they will consider the impact of new rates on the market while still taking into account the need for truckers to cover their costs and still be able to make a living wage.

This will not be an easy problem to fix. As part of the original agreement to end the strike, subsidities were established to lower the cost of diesel fuel, but those subsidies expire on December 31st and the incoming administration has indicated that there is no room in the budget to extend the subsidies. As a substitute, they are proposing a system in which the change in fuel prices can be more gradual instead of on a daily basis.

Members of the new economic team headed by Paulo Guedes, highlighted that the overarching problem in the transportation sector is that there is no equilibrium between supply and demand. The current problem of low freight rates stems from the fact that there are too many trucks on the highways of Brazil chasing too few cargos.

The root of the problem dates back a few years ago to when the Brazilian National Development Bank (BNDES) offered subsidized low interest loans to individuals wishing to purchase trucks as a way to stimulant the Brazilian manufacturing sector which was suffering from the worst economic slump in recent memory. The economic slump also resulted in reduced number of cargos on the highways of Brazil.

So now, the situation is that there is an overabundance of trucks resulting in low freight rates that drivers contend are below their cost of operation. The low rates coupled with an increase in fuel prices is what led to the crippling truck driver strike last May.