November 16, 2012

33% of Brazilian Soybean Processing Capacity not Utilized

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

Soybean processors in Brazil continue to be concerned about the overcapacity in the industry caused by government tax policies. According to the Brazilian Association of Vegetable Oil Industries (Abiove), the daily crush capacity of active participants in the industry in 2012 is 158,000 tons per day, but only 67% of that is utilized, leaving the industry with 33% of its capacity unused. Brazil was the second leading soybean producer in the world in 2012 and yet it was only the fourth leading processor of soybeans.

Tax policies in Brazil promote the export of soybeans to the detriment of the value added products of soybean meal and soybean oil. In 2012, Brazil will export approximately 31.5 million tons of soybeans and the domestic industry will process 35.1 million tons of soybeans. Brazil is the only major soybean producing country that gives incentives to export the grain instead of the value added products of soybean meal and soybean oil.

This tax disincentive is the result of a domestic tax on any industrial product that moves across state lines within Brazil. Processed soybean meal and soybean oil that move across state lines on their way to export markets are subject to the tax, whereas soybean grain that moves across state line on the way to export markets is not subject to the tax. As a result, processors themselves sometimes would rather export soybeans instead of the products.

Neighboring Argentina, which is the third largest soybean producer in the world, has adopted a much different approach. Argentina encourages soybean processing by levying lower export taxes on meal and oil as compared to soybeans. The lower tax on the products in a sense guarantees a margin for the processors. As a result, the processing industry in Argentina continues to expand.

In the mid-1990s when this tax differential was instituted in Argentina, some soybean processors in southern Brazil closed their doors and moved their operations across the border to Argentina. Large grain processors greatly expanded their crush capacity in Argentina while only maintaining their existing capacity in Brazil. Today, many major soybean processing facilities are scattered along the western banks of the Parana River in central Argentina only a short diving distance for the fertile fields of the Argentine Pampas. The city of Rosario has now become the center for Argentina'NPs agricultural exports.

The processing capacity in Brazil is expected to expand 4% In 1996 Argentina had only half the processing capacity of Brazil, and today it has a larger capacity than Brazil, 175,000 tons per day in Argentina compared to 169,000 tons per day in Brazil.