February 1, 2013

Brazilian Government Initiates Plan for More Grain Storage

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

The Brazilian government realizes that a lack of adequate storage space for the country's grain crops is a contributing factor to the very high transportation costs in the country. If there is a lack of storage space, the crop must be moved out of the production regions to processors or exporters in a more concentrated time period, thus driving up the demand for freight and the costs. If adequate storage space was available, the cost of storing the grain would be more than compensated for by shipping the grain in the off-season when freight rates are much lower.

In order to address this issue, the government has instituted the National Plan for Storage (PNA) which calls for annual public investments of R$ 250 million to build more storage as well as more liberal credit policies for private investments. The goal of the program is to have enough storage space in Brazil by the year 2015 to accommodate all of Brazil's grain production.

The 2012/13 grain production in Brazil is estimated at 180 million tons, but the total storage capacity in Brazil currently stands at 145 million tons or 80.5% of the production. Fortunately, the grain harvest in Brazil is spread out over many months allowing for a turnover of storage units during the harvest period.

The biggest problem for storage is in areas where a large safrinha corn crop is produced. The safrinha corn, which is planted after the soybeans are harvested, is generally harvested while the silos are still full of the previous soybean crop. This happens frequently in the state of Mato Grosso forcing grain elevators to store the corn in the open air. This type of storage is OK during the dry season, but it certainly is not OK during the rainy season. The PNA plan will target these areas of safrinha corn production as well as the agricultural frontier regions of northern Brazil where the shortage of storage space is the greatest.

An additional goal of the plan is to increase the amount of storage space owned and operated by the federal government. Of the 17,500 grain storage units in Brazil, the federal government owns only 3%. This limited capacity restricts the amount of grain the government may purchase, store, and resell as a way to reduce price volatility.

Even though the 2012/13 soybean harvest is just in its initial stages, freight rates have already started to soar. In 2012, the freight rate between the city of Sorriso in central Mato Grosso and the Ports of Santos and Paranagua in southern Brazil averaged R$ 220 per ton (approximately US$ 110 per ton). Rates for March are currently at R$ 240 per ton and for May they are R$ 253 per ton (approximately US$ 120 and US$ 127 respectively). These rates may go even higher in the weeks ahead.

The recent heavy rains in Mato Grosso have caused additional problems for trucking companies beginning to haul soybeans from Mato Grosso to the ports. Highway BR-163 is the only major highway connecting Mato Grosso with southern Brazil and heavy rains last Saturday washed out 30 meters of roadway leaving a trench that was 10 meters deep. In order to bypass the washout, passenger cars and trucks tried to made their way slowly through nearby fields with the aid of farm tractors for those that got stuck. The state highway department instructed cars to take a 130 kilometer detour over dirt roads. Trucks and heavy vehicles were instructed to take a 200 kilometer detour over asphalted roads! It's another illustration of how the lack of infrastructure drives up transportation costs in Brazil.