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September 17, 2018

Freight Increases forcing some Companies to refuse new Business

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

The director of the Brazilian National Association of Grain Exporters (Anec) estimates that the higher mandated freight rates will cost the industry US$ 5 billion in additional freight charges on an annual basis. The industry operates on very small margins of approximately 1% and the increased freight rates will push many companies into the red.

As a result, some companies have refused to take on new business until the entire issue of the constitutionally of the new rates is decided by the Brazilian Supreme Court. The Supreme Court has held three hearing on this issue, but they have not indicated when a decision will be forthcoming. Speculation is that a decision will not be announced until sometime after a new president is chosen, probably in early November.

Before the new rates were enacted in June, the cost of transporting grain from the center-west region of Brazil to the Port of Santos was about R$ 170 per ton (approximately $1.20 per bushel). After the new rates was set, the cost increased to R$ 225 per ton (approximately $1.56 per bushel). Two weeks ago the rates was increased again to the current R$ 236 per ton (approximately $1.65 per bushel). These costs per bushel were calculated using an exchange rate of 4 Brazilian reals per U.S. dollar.

These prices are for hauling the grain to the port and they do not include the cost of the back-haul. The new law stipulates that the grain companies must also pay for the trucker's back-haul expenses even if the truck returns empty. The requirement to pay for the back-haul is what many companies claim is unconstitutional. In a sense, they are being forced to pay for something they did not purchase.

Brazil will export a record amount of soybeans this year due to the increased demand from China and the fact that most of the soybeans were contracted before the new freight rates took effect. That is not the case for corn exports.

Corn exports increase during the second half of the year, but Brazilian corn exports will probably not be as much as anticipated because of the higher freight rates and the fact that exporters are still focused on soybean exports. Anec had anticipated that Brazil would export 32 million tons of corn in 2018, but now some trade representatives anticipate that corn exports may be closer to 20 million tons.

The Ministry of Agriculture reported that Brazil exported 29.2 million tons of corn in 2017.