July 23, 2015

Soaring Electricity Costs Impacting Brazilian Agriculture

Low water levels in Brazil's hydroelectric reservoirs have prompted the Brazilian government to greatly increase electrical rates in a series of increases in 2015 in an effort to reduce demand. In 2015, the cost of electricity has increased approximately 60% for ag-related industries and 50% or more for rural residents including farmers.

Electricity has always been expensive in Brazil and now it is becoming a major cost of production for livestock producers and farmers who use electrical pumps to operate their irrigation equipment. According to the Federation of Agriculture in the State of Parana (Faep), electricity accounted for 5.5% of the cost of raising chickens in December of 2014 and that has now increased to 9.5% in mid-2015.

For poultry processing facilities, the situation is even worse. According to the Syndicate of Poultry Industries in the State of Parana (Sindavipar), electricity is one of their highest costs of operation. In some facilities, electricity now accounts for 35% of their operating costs up from 12% in early 2014.

Electricity rates are especially high during the peak demand hours of 6 pm to 10 pm. As a result, some facilities are turning on their emergency backup diesel generators during those hours because it is cheaper to generate electricity using the generators than it is to buy it from the local utility.

Poultry producers are also in bind because their equipment must operate 24-hours a day and their electricity costs have soared as well.

Farmers who uses irrigation to grow their crops are also facing much higher costs to operate their electrical pumps and irrigation equipment. Nationwide there are 5.8 million hectares of irrigated crops in Brazil or 8% of the total crop area. The crops with the most irrigated acres are sugarcane, rice, soybeans, corn, and dry beans. The two crops that could be impacted the most from the soaring electricity rates are rice and dry beans.

The state of Rio Grande do Sul produces 70% of the rice produced in Brazil and it is entirely grown under irrigation. For some rice producers, their irrigation costs have increased 100%, while at the same time, the price of rice has declined. As a result, the president of the Federation of Rice Producers in Rio Grande do Sul (anticipates that the rice acreage in the state will decline by 5% in 2015/16.

Another crop that could be impacted by the high cost of irrigation is dry beans. There are three crops of dry beans grown in Brazil during the year with the third crop produced under irrigation during the dry season (May to September). This third crop is planted in April and May and harvested in August and September and the production is dependent on irrigation. It is estimated that the acreage of the third crop of dry beans could decline by 11% due to the high cost of irrigation.

Fruit and vegetable producers are also feeling the pinch of higher energy costs. For some orange producers in the state of Sao Paulo, their electricity rates have increased 100% in one year so they could cut their irrigation usage in half and still spend the same amount on electricity.

The current strong El Nino in the Pacific Ocean is expected to bring heavier than normal rainfall to southern Brazil over the next months. Brazilians can only hope that the anticipated heavy rains will help to refill the hydroelectric reservoirs thus easing the emergency measures to reduce electrical demand.