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September 29, 2016

Reduced Corn Production in Brazil resulting in Lower Freight Rates

The 2015/16 safrinha corn crop in central Brazil was extremely poor due to hot and dry conditions during most of the growing season. But while farmers in central Brazil suffered significant losses with their 2015/16 safrinha corn production, the reduced production has resulted in lower freight rates due to the reduced demand for trucks to transport the grain to export facilities.

For example, in the city of Sorriso, which is located in central Mato Grosso, the freight rate to haul gran the Port of Santos in southeastern Brazil is down 23% compared to last year. The current freight rate from Sorriso to the Port of Santos is R$ 228 per ton or approximately $ 1.90 per bushel.

If the grain produced in Sorriso went north instead of south, the transportation costs would be less. The cost of transporting grain north from Sorriso to the Port of Miritituba on the Tapajos River is down 15% compared to last year. The current freight rate from Sorriso to the river is R$ 154 per ton or approximately $ 1.30 per bushel.

Brazilian farmers have much higher transportation costs compared to the United States and Argentina, which are their two main competitors, because approximately 60% of the grain produced in Brazil is transported by truck to very distant ports. The distance from Sorriso to the Port of Santos is approximately 2,100 kilometers.

While a reduced freight rate is good news for farmers, it is not good news for transportation companies and unfortunately, the news recently got worse. The Brazilian Central Bank recently released a report forecasting a 5.4% reduction in transportation and storage activity in 2016 due to the shrinking Brazilian economy. The GDP in Brazil is expected to contract 3.3% in 2016 following a 3.8% contraction in 2015. Inflation in 2016 is forecasted at 7.3% marking the second year in a row surpassing the bank's inflation goal of 6.5%.

Therefore, transportation companies are being squeezed on both ends due to reduced demand for their services and higher costs due to inflation.