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October 1, 2012

New Law Results in Much Higher Freight Costs in Brazil

New regulations that reduce the time a Brazilian truck driver may be behind the wheel during a 24-hour period has already driven up freight costs for grain shippers in Brazil. Freight rates have risen 40% compared to a year ago and they are expected to increase another 20% by the time the soybean harvest is in full swing next February.

The new regulations, which took effect at the end of July, stipulate that a professional truck driver can only be behind the wheel for 10 hours per day with 30 minutes of rest every four hours of driving and he must stop 11 hours to rest at night. According to the Syndicate of Transportation and Logistical Companies (Setcergs), the new regulations will increase the transport time by 56% for the average haul. Due to the reduced time behind the wheel, there will be fewer trucks available to transport what is expected to be a record large soybean crop in 2012/13.

The law of supply and demand is already at work as freight rates have risen since the law took effect. The increase in freight costs due to the new law is estimated at 26% for short hauls of 400 kilometers, 28% for a medium haul of 800 kilometers, and 26% for long hauls of 6,000 kilometers. The new cost for short, medium, and long hauls is R$ 87, R$ 132, and R$ 722 per ton, respectively.

The increased freight rates are passed along to farmers of course in the form of lower prices paid for their grain. Fortunately, grain prices in Brazil are at near record levels, making the increased transportation cost a smaller percent of the overall price paid for grain. In the state of Parana, the historical cost of hauling soybeans is in the range of 8% to 10% the cost of the soybeans and for corn, it is in the range of 18% to 22%. With the higher commodity prices and the higher freight rates, the cost as a percent of the soybean price has declined to 5.6% and for corn it has declined to 15%. Commodity prices do not stay at record levels for very long, so the real pinch for Brazilian farmers will come when the commodity prices return to more historical levels.

The cost of transportation is cheaper in Parana because of its close proximity to the Port of Paranagua. The cost of transporting soybeans from Mato Grosso, which is the number one soybean producing state in Brazil, to the port is much high due to the great distance. From the city of Rondonopolis, which is located in southeastern Mato Grosso, it costs 20% to 25% the cost of the soybeans to transport the grain to the port and it's even more expensive from northern Mato Grosso which is another 700 kilometers further away.

The higher freight rates and subsequent lack of trucks is having an immediate impact on how much grain is being transported in Brazil. By the end of August, farmers in Mato Grosso had sold 70% of their safrinha corn production, but the major grain companies in the state are no longer buying corn from the farmers because their storage units are full and they can't contract enough trucks to move the corn. As a result, the price of corn had declined in the state.

What has everybody concerned in Brazil is the fact that this is the slow time of the year for grain transportation and if there are problems now, how big will the problem be when farmers start to harvest an expected record large soybean crop in early 2013?