Brazil: food supplier to the world now; biofuels supplier to the world next

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Over the past 30 years Brazil’s emergence as a global powerhouse in agricultural commodities has been astonishing. Green coffee production has more than doubled since 1990 and sugar cane production has grown about fivefold during the same time. Brazil has gone from barely an afterthought in global soybean production, producing less than 16 million tons, to the world’s largest producer, with nearly 155 million metric tons. This has come from ever-increasing trend yields and a substantial expansion of area under production.

The story for corn production is similar. In the 1990/91 crop year Brazilian corn production amounted to 24 million metric tons; today, Brazil will produce more than 130 million metric tons, nearly doubling corn area during this period. Brazil will overtake the US as the world’s largest exporter of corn this year. However, this year is not a result of a one-off supply shock in the US. Large Brazilian production is undercutting US corn in world markets. Brazil overtook the US as the world export leader in soybean ten years ago and has never looked back; we expect the same to happen with corn.

Brazil’s competitiveness is mostly related to its vast land availability and low cost of production. The large-scale farming and fast adoption of new technologies allowed it to increase planted area and yields simultaneously. Grain transportation costs in Brazil have been historically much higher than in the United States or Argentina but it has been improving infrastructure in transportation and ports which helped to narrow that difference.

All of the above is focused on the supply side. However, Brazil’s rise to prominence in the global oilseed and grain markets also came from filling expanding markets, particularly China’s growing demand. During the last 20 years, soybean exports from Brazil were largely supported by China imports. Strong economic growth, favorable demographics, and fast urbanization helped boost China’s growth and imports of raw commodities. In the animal-feeding sector, the compound annual growth rate of Chinese soybean imports was 7.9% in those 20 years. From 1990-2020, China’s consumption of animal protein grew nearly fivefold. It accounts for roughly half the world’s hogs and nearly 70% of aquaculture production.

However, while China’s economy will continue to grow, the rate is likely to be about half of the 10% growth in 1990-2013. Moreover, China’s population shrunk for the first time in 60 years this year, due to declining birth rates. It is hard to imagine these factors will not matter when it comes to food consumption and animal feedstuffs demand.

Most of the same supply-side factors that allowed Brazil to gain market share in ag commodity exports during the last three decades are likely to remain; but slower Chinese import growth is expected to result in substantial changes in the global ag trade.
While China’s demand growth for raw ag commodities slows, domestic processing will play a significant role during the coming years in Brazil to accommodate the growing supply. The Investment in domestic processing is expected to ramp up given the lower cost of soybeans and corn supplies, and profitable margins.

Biofuel demand is likely to continue to expand in Brazil and globally. In fact, the expansion of the renewable diesel industry in the US is exceeding the availability of feedstocks for the first time, and the US is turning a net short soybean oil importer.
Brazil is well positioned to address the tight supply and global vegetable oil trade re-allocations to gain market share in the food and fuel segments. This will facilitate increased exports of soy oil and biofuels. At the same time, the meal produced will be a tailwind for the country’s animal feeding sector and is likely to increase exports of meal. This trend will continue with Brazil eventually taking the lead in global soybean products exports. Concurrently, the door is open to pursue leadership in animal protein and biofuels exports.

In conclusion the short term economics of soybean and corn production will be challenged by the slowdown in Chinese demand. However, Brazil has significant potential to continue to expand its crop production. Brazil still has more than 100 million acres of pastureland available to expand agricultural production. Production increases provide a huge competitive advantage in any environment, especially if margins are squeezed - good things happen to the low-cost producer.
Brazil is currently the food supplier to the world, and if future demand drivers shift from China to biofuels, Brazil is well positioned to morph into the supplier to the world of biofuels. Given soy crushing for biofuels has a symbiotic relationship with animal feeding, this should increase Brazil’s competitiveness in global animal proteins.

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