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June 23, 2015

New Infrastructure Program in Brazil hoping for Better Results

The second phase of the Program for Investment in Logistics (PIL) 2015-2016 that was announced two weeks ago in Brazil by President Rousseff has the potential to change the way grain is exported out of Brazil. Even if all the proposed projects don't get built, the program could be a significant boost for Brazilian agriculture because much of the R$ 198 billion program is directed toward projects on the northern agricultural frontier.

Currently, 61% of the grain in Brazil is transported by truck compared to 13% in the United States. Soybeans produced in Sorriso, which is located in central Mato Grosso, reaches China at a total transportation cost of US$ 190 per ton with a cost of US$ 145 per ton just to get the soybeans from Sorriso to the Port of Santos in southeastern Brazil. By comparison, the cost of transporting soybeans produced in Illinois to China is US$ 71 per ton.

The center-north states in Brazil are responsible for producing 58% of the grain in Brazil and the most cost effective way to export the grain would be through ports on the Amazon River and in northeastern Brazil, but currently only 15% of the grain produced in those states is exported through the "North Arc" of ports.

Directing more exports through the northern ports and closing that gap in transportation costs between Brazil and the U.S. is the primary goal of the 2015-2016 PIL program in Brazil with R$ 86 billion allocated for railroads and R$ 66 billion allocated for highways. These projects are public/private partnerships where the winning bidder is given the right to build and operate one of these projects for a set period of time in exchange for collecting the fees or tolls. In addition to railroads and highways, the 2015-2016 PIL program is proposing dozens of improvement and expansion projects at Brazil's ports.

Railroads are receiving the most investments in the 2015-2016 PIL program especially in the North and Center-West region. One of the most anticipated projects is a railroad linking Lucas do Rio Verde in central Mato Grosso with Miritituba on the Tapajos River in the state of Para where grain companies are building barging operations. The 1,140 kilometer railroad has a price tag of R$ 10 billion and it would carry soybeans north from Mato Grosso instead of southward to ports in southeastern Brazil.

A second important railroad project would be an extension of the North-South railroad from Acailandia, Maranhao to the Amazon River port being expanded at Barcarena, Para, which is located at the mouth of the Amazon River. This railroad would carry soybeans northward from the expanding agricultural areas in the states of Maranhao and Piaui in northeastern Brazil.

These proposed railroads along with other highway infrastructure projects in northern Brazil, would result in the majority of the grain exported out of Mato Grosso going north to ports on the Amazon River and in northeastern Brazil instead of south to the Ports of Santos and Paranagua in southern Brazil.

If these projects are actually completed, it could reduce the cost of transporting grain in Brazil by as much as 30% and help to relieve the chronic congestion at Brazil's southern ports in addition to making Brazil more competitive in world markets. According to the vice president of the Agriculture and Livestock Confederation of Brazil (CAN), Jose Mario Schreiner, every five years the cost of transporting the grain equals the receipts of the entire grain crop in Brazil.

These projects are still proposals and there is no guarantee that they will actually be built. The first phase of the PIL program occurred in 2012 and it was supposed to invest R$ 200 billion in infrastructure projects. None of the railroad or port projects proposed in the first PIL were actually built and the highway portion suffered various cuts.

Companies who submitted bids on the first PIL projects stated that the fees and tolls proposed by the government were too low to justify the cost of building and operating the projects. Many of these same company officials now feel that the proper adjustments have been made in the 2015-2016 PIL program to justify their participation in the bidding process. Even if the second phase works better than the first phase, it will take years for these projects to be built and become operational.