Aug 10, 2010
Brazilian Gov. Paying a High Price for Aggressive Approach to Ag
Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.
In recent years the Brazilian government has drastically changed its approach toward the agricultural sector. After steep increases in food and commodity prices in 2008, there was a concern on the part of the government that continued increases in food costs could led to unrest similar to what was observed in other countries. In response, the government decided to take a much more proactive approach in building commodity and food stocks in the country in order to avoid any potential shortages. The goal of the government was to guarantee an abundant and cheap food supply for its citizens.
In order to accomplish this goal, the government instituted minimum price guarantees for the producers and it also decided to become a major purchaser of commodities in order to increase the amount of publicly owned commodities. This more aggressive approach has worked better than anyone expected. Instead of food prices continuing to rise, record crop production around the world drove down commodity prices to below the minimum price guaranteed by the government.
As a result, farmers in Brazil started to hold off their products from the market preferring to sell their commodities to the government at prices significantly higher than what they could obtain in the private sector. In fact, farmers in Mato Grosso increased their safrinha corn acreage with the sole intent of selling their corn to the government. Today, Conab has under its control 5.5 million tons of corn, 1.2 million tons of wheat, 990,000 tons of rice, 181,000 tons of dry beans, and 100,000 tons of coffee.
This new aggressive approach has come at a very steep price tag. The Brazilian Treasury is expending much more resources to sustain this approach than anyone had ever predicted. Last year the government spent R$ 5.2 billion on its guaranteed minimum price program alone and this is just one of numerous programs the government started. In addition to the cost of buying the commodities directly from the farmer at inflated prices, the government has to pay storage costs, they have to pay transportation costs to move the commodities to other areas of the country where they are needed, and then the government has to sell the commodities at a loss because of an oversupply in the domestic market. Transportation costs alone to move corn from Mato Grosso to southern Brazil is greater than the actual price of corn sold in Mato Grosso. In other words, the government is spending money to buy the products, to move the products, and to sell the products. It has become a lose, lose, lose proposition for the government.
The director of the Brazilian Association of Cereal Industries (Acebra) Amey Frasson feels that these expensive and sometimes extravagant expenditures are the result of inadequate logistics and infrastructure on the agricultural frontier. When commodity prices are low like they have been for the last two years, these inefficiencies leave farmers in central Brazil at a distinct disadvantage compared to producers in other countries. The primary way to keep these producers solvent is to subsidize their production through these government programs.