Brazil is potentially an agricultural giant but its farmers are challenged by low competitiveness.

Ask anybody at the UN’s Food and Agriculture Organization, the IMF or even the CIA, and you will get the same answer: Brazil is the country with the highest agricultural potential in the world. At present, however, this potential is compromised by the sector’s high costs and low profitability.

Several factors explain this conundrum. First, Brazil’s largest agricultural areas, especially the areas with the highest growth potential, are more than 1,000kms away from existing ports. Railways transport a very small part of agricultural output, with most production reaching the ports or consumers by truck – and after challenging trips over terrible roads. In Argentina, agricultural fields are, on average, just 200kms away from a river port. In the United States, rivers and trains are used to transport around 80% of the agricultural production, so the distances between the Midwest and the ports are covered at relatively low costs.

Next comes the tricky issue of weather. The tropics accelerate the growth of crops, but also increase costs. Heat and humidity allow large parts of Brazil to plant twice a year on the same land, with no irrigation – almost 26mn metric tons of maize (corn) were harvested in the winter season in 2011 and the maize is planted after summer soybeans. However, this same weather creates ideal conditions for insects, fungus, and weeds that in turn require high expenses for pesticides, machinery, fuel, and an increased workforce. Also, soil fertility is not particularly good in the Cerrado, the biome where agriculture still has the potential to expand.

Third, Brazilian taxes on agriculture are high, which contributes to prices that challenge the competitiveness of its agricultural exports. Including in this math the Nordic tax burden charged in Brazil (around 35% of GDP), it is not absurd to say that great part of Brazilian agricultural potential is conditioned to the maintenance of above-average prices. These factors combine to create the paradox of a country with high agricultural potential but with more than a 100mn hectares of available land still not in production. Despite recent developments, Brazil is still a marginal player in all international agricultural markets except in sugar, coffee, orange juice, and poultry.

This means that Brazilian farmers would be the first ones to leave the market in the case of a retraction of global demand for food. But with prices currently high, even less competitive countries are now able to capture market opportunities. In spite of the economic slowdown, and even considering the cutback of Chinese growth targets, the demand for agricultural commodities will most likely remain elevated.

Global demand for commodities (excluding oil) is increasing because countries that now drive global growth are poor in natural resources. A similar scenario fueled the development of US, Canada, and Australia over the last two centuries, as these countries became the primary suppliers of food and minerals to prosperous Europe. But when the US surpassed Europe as a driver of growth, agricultural commodities lost part of their relevance as a development driver in the Third World.

The emphasis placed on manufacturing industries as drivers of development partially explains why some believe that agricultural commodities are not the answer to social and economic development in Brazil. From this point of view, there is no added value to soybeans or coffee beans and basic goods must pass through the processing industry to generate income and employment. This mentality may have made sense during the Cold War and during Portuguese Colonialism, but does not apply today.

Nevertheless, this “fear of the commodities” highlights why the development model that prevailed in Brazilian agribusiness remains questionable. High costs and low margins are not for amateurs; they demand scale, capital and risk tolerance. Over the last 60 years poor infrastructure and the challenges of nature have forced Brazilian farmers to rely on economies of scale. According to The Economist, a typical farm in Mato Grosso state (largest soya producer in Brazil) has 424 hectares. In Iowa, the average is 134 hectares and in France it is 54 hectares.

Relying, as it has, on economies of scale has turned Brazil into a prominent player in agricultural trade. But after five or six decades, Brazil still has not decided whether this is its best model. Over the last several months, some high-level authorities in President Dilma Rousseff’s government have begun timidly to suggest a new model of rural development. This new model will not be based on expropriation and subdivision of great landlord properties, as it was in the past. Rather, it will rely on cheaper credit and crop insurance for small-scale farmers; the insurance is aimed at sustaining small farmers when prices decline or in the case of weather catastrophes. That is what policymakers call it ‘anti-cyclic measures’, which will reduce the vulnerability of small farmers to punctual crisis. After all, those critical moments usually force farmers to sell their properties in order to pay debts.

Agricultural policies in Europe and the US rely much more heavily on price subsidies. According to the Organization for Economic Co-operation and Development (OECD), support to Brazilian farmers is equivalent to only 6% of agricultural income while in the EU, subsidies top 26% and in the US 16% of income. These subsidies are, of course, an income transfer from the rest of society to farmers in return for food security and the conservation of social structures.

At present, however, developed economies are having second thoughts about subsidies and most emerging countries are not considering the introduction of new subsidies. In Brazil, such a policy would not make much sense today, after so many years of land concentration and urbanization. Brazil is by far the most urban country among the BRICS (Brazil, Russia, India, China and South Africa). Rural areas are home to almost 70% of Indians, around 50% of Chinese, more than 35% of Russians, but only 16% of Brazilians.

The key is technology

The lack of subsidies in Brazil may be a disadvantage for farmers when compared to their competitors from developed nations. The advantage, however, is a growing internal market. Almost 40mn Brazilians have emerged from poverty and become part of a dynamic middle-class (by Brazilian standards, obviously) since 2003. These people demand more protein and more industrialized food – just as is happening in Asia.

But when comparing Brazil to other emerging countries, the real advantage comes from technology. Climate and geography loom large and make the comparisons with other BRICS nations unfair, but it is worth pointing out that China is the largest agriculture producer in the world, despite the frozen lands, poor soil, and water scarcity in large parts of its territory.

BRICS have made different choices regarding agricultural technology. China has adopted a closed model based on local, state-supported research and development, giving up on most foreign technologies. India is more open, but its land structure makes it difficult for its ‘microfarmers’ to access innovations – a sugarcane mill producing 1mn tons of sugarcane usually has one or two hundred cane suppliers in Brazil, but up to 1mn providers if in India. Russia’s climate limits its expansion of agriculture, but it remains an important wheat producer and has plans to become self-reliant in meat production.

Actually, when compared to other agricultural powers, such as Argentina or the US, Brazilian farms do not lag far behind in technology. If yields were the same as 30 years ago, Brazil would need more than double its agricultural area to reach its present production. But in the last 10 years, cattle ranchers have increased the productivity of meat per hectare by 40%.

The rapid adoption of new technology has been the key to Brazil’s surge in global agricultural trade. Over the last three decades, Brazil has shifted from a net food importer to become the largest net food exporter.

To this day, many of Brazil’s competitors still believe that this dramatic shift was due to the advance of agriculture over rainforest rather than technological breakthroughs. Deforestation really happens, but unsustainable activities are being legally countered and socially disapproved – which is of utmost importance in a society with a history of chronic corruption. Illegal deforestation, for instance, is being controlled by satellite. Legal deforestation depends on extensive bureaucratic processes and must abide by the limits of the law. Most of the forest is state owned, barely protected and constantly invaded. Nevertheless, much has been done in the last 10 or 15 years to reduce deforestation, both with surveillance and commercial impediments for farmers that chop down the forest.

Challenges at agricultural frontier

Brazil’s agricultural frontier is actually far from the Amazon, in the savannah areas called the Cerrado. Inside the ring formed by the borders of the states of Maranhao, Piaui, Tocantins and Bahia, soya and corn fields have spread rapidly in the last few years. The deforestation allowed in the Cerrado tops 80%, far above the 20% limit in the Amazon. At the same time, the arrival of huge agricultural companies in the ring brings social development. Formal employment was rare and now each farm hires hundreds or thousands every year.

Unfortunately, this is not enough to meet the region’s needs. The development model for such a complex region must not be compared to the ones that were successfully applied to Iowa in the US, or even to Mato Grosso in Brazil. In these cases, trailblazers reached unpopulated lands with their families and founded towns to support the work in the fields. Cities emerged from nothing because of agriculture. This is not the case with the new Brazilian agriculture belt, where poverty and hunger are already in place. Although income generation, infrastructure and economic activity were better than expected after the farming companies arrived, it has not been enough for poor local populations.

It is not enough because landlords don’t live nearby. They are in London, New York or Sao Paulo, so they don’t consume locally or make use of local schools and hospitals. In other words, part of the costs of agriculture stay local and push economics forward, but the profits fly away to never come back. A sad joke is that there is only one good hospital in this entire ring of 1,000kms: the nearest airport.

Another problem is that locals have not had enough education to operate a $400,000 harvester. The illiteracy rate in the rural adult population is over 27%, four times higher than in Brazilian cities. So agronomists and machinery operators that work in the frontier are newly graduated young boys from the south and south-west developed regions.

It is hard to believe that policy innovations will be able to change this scenario, but it may help in the traditional rural regions. Countries that are a few steps behind like Ukraine, Sudan and Congo still have the chance to make different decisions, in case they have enough investment capacity. Since urbanization is a one-way road, any policy changes in Brazil will only affect producers who have not given up after past crises. So the best way to keep them on the fields is to improve their competitiveness. They do not have to become more competitive than larger Brazilian farmers, but they must be able to compete with small farmers from the US, Europe, Argentina, and Ukraine.

Considering all the cost inefficiencies, Brazil can only resolve the paradoxes of “potential versus low competitiveness” and “production growth versus questionable income distribution” by investing in infrastructure, logistics, agricultural technology, and rural education. These are not easy tasks, but such policies can improve social development and income distribution, no matter what happens in global agricultural markets.

The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.