December 2011

AGRICULTURE: The best and worst of times

SceneryThe abundance of certain crops in Brazil means there is nowhere to put it all. Andrew Short considers the investment opportunity in storage. The potential for Brazil to become an agricultural superpower has long had analysts salivating at the prospect it will surpass the US in soybean production and exports. It may be this year, 2013, those predictions come true. In June, the US Department of Agriculture recorded Brazil’s 2012/13 crop at 83.5 million metric tonnes (mmt) compared with the 82.1mmt in the US. They project Brazil’s exports to stand at around 38.4mmt compared with 36.6mmt in the US. Brazil’s government crop supply agency, Conab, also raised its forecast for the country’s record 2012/13 corn and soybean crops in July, citing problem-free harvesting as the reason for the bumper year. Corn exports have more than doubled compared with 2012, and soybean exports are expected to be 6mmt higher than last year, says Conab. However, even with the figures coming out in Brazil’s favour, the US still has the upper hand, and for the Latin American country there are two problems it must face: logistics and storage. These will hamper Brazil’s rise to becoming a global agribusiness superpower – they may even be starting to turn Brazil’s export boom into a nightmare. DELAYED HARVEST
It is not uncommon for 15-mile lines of trucks to be seen waiting to unload soybeans. Corn exports, normally completed in December, were still moving through the port system in late March. Meanwhile, a delayed soybean harvest is likely to compete with Brazil’s second mid-season corn harvest for space, further complicating the export scene. Eight out of 10 soybean shipments to China’s Shandong Chenxi Group failed over a two-month period, prompting Chenxi to consider redirecting orders to Argentina and cancelling some 2mmt in purchases from Brazil. Clarivi consulting Brazil director Leonardo Sologuren says the reason for the bottlenecks at the ports is that the logistics and storage haven’t kept pace with production. “It seems Brazil can’t cope with the growth in grain production.” Agriculture boxThere is also a new law that limits the number of hours a trucker can drive each day and this is reducing the flow of commodities from interior growing regions to export terminals. The effect of this  will be felt by grain traders and their forward pricing arrangements, according to Rabobank Brazil analyst Renato Rasmussen. “Growers for the current harvest are likely to have underestimated the possibility of such a sharp increase in freight costs,” he says. “This chaotic logistics scenario is threatening Brazil’s ability to export the record-setting corn crop,” he says. The Brazilian government is aware of these logistical problems, and has been targeting roads, railroads and new port developments with fresh investment over the past year. There has also been plenty of foreign capital looking to invest in these areas. However, there are other niches in the supply chain that need to be filled and are not fraught with the problems the above projects can face. For example, a 1,000-mile road from Cuiabá to Santarem, promised since the 1970s, still has 600 miles of dirt surface that can take 30 days to drive. Even with government promises and continued investment it seems certain projects will never become a reality. INSUFFICIENT STORAGE
For the overlooked investment ideas it is worth going back to the ports. The truck queues leading to them are because of overloading storage. The logistical problems reach back to the farm, where storage is not sufficient to allow farmers to stock until the post-harvest craziness subsides. Only a third of Mato Grosso farmers have their own silos and Brazil only has storage capacity for two-thirds of grain production. With bins already full, there are stories of Mato Grosso farmers letting soybeans rot in the fields for want of a place to put them. The overlooked area becoming appealing amid this logistical nightmare is warehousing. There is a lack of these facilities in many of the areas that produce corn and soybeans. SIMPLY WAREHOUSING
Stephen Pout, director at AgriBusiness Investimentos, says that most of the logistics chain is missing in Brazil and there is a host of problems that make it unappealing to long-term investors such as pension funds. “I could go and buy rail cars or trucks and lease them to Vale, but this is a costly operation because of maintenance and asset depreciation. It’s not something a German or a Dutch pension fund is going to be interested in doing,” he says. Pout adds that with investments into ports there is a lot of political interference and this causes problems for foreign investors. “Warehousing is very simple. We go to certain parts of Brazil where production is higher than storage capacity and we build warehouses,” says Pout. “We intend to operate these warehouses as a grain handler but not as a trading company, this is because most private equity and pension funds won’t be able to get their heads around trading.” The growing importance of storage was backed up by the announcement on July 11 that the Brazilian Development Bank (BNDES) will use 1 billion Brazilian reales ($440 million) to finance the construction and expansion of silos and storage facilities for grain producers. Pout believes this is a good start but there is still a long way to go to fill the void. “It appears today, we are seeing the big money being made by those who own the supply chain assets, and this is where we think investors should be betting on Brazil,” he says. ©2013 funds global latam

Sponsored Profiles

Sponsored feature: How is DLT changing the global securities services landscape?

Oct 17, 2019

By Jeslyn Tan, global head of product management, securities services, at Deutsche Bank

Sponsored feature: A new base for fund distribution

Oct 16, 2019

To get the most value out of the digitisation of investment fund distribution, a blockchain-based infrastructure is fundamental. By Olivier Portenseigne, Managing Director and Chief Commercial Officer, Fundsquare.

Sponsored profile: Bridging the gap

Mar 11, 2019

Private equity is a core part of the business for Caceis’ Hong Kong office, which looks after clients in China and Europe. David Li, chief executive officer, explains why private equity enjoys strong client demand and how it is being used to fund China’s international infrastructure ambitions.

SPONSORED FEATURE: Market knowledge key to fund distribution in Asia

Jan 11, 2019

The highly fragmented investment markets in the Asia-Pacific region require detailed knowledge of each market’s unique characteristics and framework. By Lou Kiesch, Partner, and Marc Noirhomme, Director, at Deloitte Luxembourg.

Executive Interviews

Executive interview: Timing the market

Oct 17, 2019

Amy Cho, Schroders’ Hong Kong chief executive and regional head of intermediary clients, tells Romil Patel about Hongkongers’ love of investing, staying nimble in a volatile market and following...

Interview: Asia’s sweet spots

Jul 05, 2019

As the US-China trade war ramps up with a hike in levies, Tai Hui, chief market strategist for Asia-Pacific at JP Morgan Asset Management, tells Romil Patel where he identifies investment value.


Singapore roundtable: A horizon to hold long-term assets

Jan 12, 2020

Panellists discuss the geopolitical fractures concerning asset owners, Singapore as a hub for fintech start-ups and why it makes sense to raise capital from a Variable Capital Company (VCC). Chaired by Romil Patel in Singapore.

Roundtable: Priming for Asia’s growth

Oct 17, 2019

Panellists discuss expanding product capability across Asia-Pacific, the opportunities and regulatory challenges around data and the prospects for ETFs in the region. Chaired by Romil Patel in Hong Kong.