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22 May 2010
In recent days I have read
several media releases on the rapid growth in Brazil Ag land. There
are certain “Buzz” phrases many love to use about Brazil Ag. They
have become a pet peeve of mine through the years. I must preface my
comments by saying that I am very “PRO Brazil”. If I were not, I
would not be here. However, after TEN years researching Brazil, I
see the same distorted facts over and over again. Brazil is not
easy. There is potential here, but one must be so very, very
careful.
Brazil “Buzz”
phrase list
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Foreign company’s
operating large tracts of land. 1 million acres for example.
We must keep in mind much of this land is rented. Brazil has
become very xenophobic about its natural resources. The amount
of land that can be owned by a foreign entity is very much under
scrutiny.
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Brazil has added 35
million acres of row crops since 2001. One would get the
impression that these are all expansion areas? This is not the
case. From 2001 to 2005 there was expansion in area. Since then
planted area has plateaued. The increases have come from
intensified planting of 2nd crop. Thus, these areas are the same
acres being planted twice and in some cases three times in a 12
month period.
Planted area of Brazil
crops 2001 to 2009
From 2001 to 2005 Brazil did surge from 37.8 million hectares to
49 million hectares. (This included double cropping) An increase
of 30%.
Since 2005 Brazil has actually been planting less area.
Generally speaking those acres from the 2005 peak to today have
been planted to sugarcane.
In 2001, the amount of land planted to 2nd crop corn was 2.5
million ha. In 2010 the amount had increased to 5 million ha.
This is an increase of 100%. The point I am making is that
land is being used more efficiently.
If we subtract the added 2.5 million acres of double crop corn
from the 2009 planted area of 47.5 million ha we end up with 45
million ha. This would give us a 19% increase over the last 10
years. Since 2005 we have had an 7% drop in planted area using
this same logic. Sugarcane has expanded by 2.5 million hectares
during this same timeframe to 8 million hectares planted in
2010.
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Land in Tocantins and nearby
states in the region called MA, PI, TO, BA is much cheaper
than the overpriced land in Mato Grosso.
This is probably my biggest pet peeve when people are talking
about Brazil land.
-
Mato
Grosso has bad logistics. It costs too much to
ship to port.
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Mato
Grosso land costs too much. This is all
true.
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Land can
be bought in MA, PI, TO, BA for US$ 1250 per
acre. 50% of Mato Grosso.
This is
where so much confusion comes when people talk
about Brazil land. People love to talk about
Brazil’s Double and Triple cropping potential.
They love to use Mato Grosso as their baseline
for productivity.
Maybe there is a reason Mato
Grosso land is priced twice as high as surrounding areas?
Would it be due to climate, rainfall amounts, yearly rain patterns
and productivity? ALL the areas spoken of in the MA, PI, TO, BA
region are ONE crop per year regions, unless irrigation is added to
the dynamic. Irrigation can be costly and bureaucractic.
In my opinion Mato Grosso is worth 2X of these other areas because
of the climate. Thus, Mato Grosso land is worth US$ 2500 per
acre. The problem is that in certain Mato Grosso hotspots land
is selling at circa US$4000 dollars per acre. This is too high.
Tocantins land can seem like a bargain in comparison. US$ 1250 may
sound cheap. I liked Tocantins better 5 years ago when land
was 300 to 400 US$ per acre. One must keep in mind also that many of
these areas are 20 years behind other areas of Brazil.
New land takes a lot of money and resources to bring it online. With
tighter margins, producers are focusing on producing more on the
same acres. This is where growth will come from. I do not see Brazil
expanding area to any significant degree in the near future. When I
see charts like: (see above) that indicate 70 million hectares (or
some such number) can be brought into production, I shake my head.
I would say that 80% of that number will always be pasture. Soil
type, topography, remoteness, slope, environmentally sensitive,
rainfall variability, and clay content are all reasons that the land
is best suited for cattle. This land will never be soybeans even if
they are US$ 20 dollars per bushel in Chicago.
Returns by growing soybeans and corn in Brazil in 09/10 and 10/11
are nominal. Brazil seems to be the new carry trade.
Park money in Brazil with the idea that inflation will hold
one’s money together. This may very well be the case.
I get worried when I read articles about Brazil farmland and how it
will continue to go up in value. No one talks about
profitability of growing crop A, B or C. This has the look and
feel of a bubble. Don’t worry, its going higher.
Brazil has gotten expensive in recent years. The low dollar, renewed
inflation, aggressive government stimulus and growing consumer debt
are fueling this Brazil growth. How long will it last?
I repeat with the same phrase, with which I started:
"Brazil has its potential. But one must
be so very, very careful."
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