Brazilian farmers are spending like never before on farm equipment, fertilizer and other investments, a possible sea change in rural sentiment that could boost long-term output in a country that barely scratches the surface of its agricultural potential.
An unprecedented $122 billion is expected to flow into the farm sector this year, up 12 per cent from 2010, money that will be plowed back into the land.
Bucking a trend seen in many previous commodities booms in Brazil, farmers are being aggressive in reinvesting their profits this year, looking to improve productivity rather than merely expand acreage, data such as tractor sales indicates.
Their spending is due largely to the belief that agricultural prices will remain high even after recent declines – and, also, a hefty dose of confidence in Brazil’s hard-won economic stability.
“We see a new wave of optimism to invest,” said Jose Carlos Vaz, director of agribusiness at Brazil’s top agricultural lender, Banco do Brasil. “Everything indicates that the (price) level we will settle at will be higher in the coming years.”
The world’s No. 2 food producer after the United States has been particularly blessed by the commodities boom of recent years as prices for soy and sugar surged. Coffee and corn prices doubled since mid-2010, largely due to ferocious Chinese demand.
Previous agricultural booms often failed to translate into major investments because of economic mayhem in a country where hyperinflation reached
2,500 per cent in the early 1990s. As recently as 2003, Brazil’s financial system teetered on the brink of collapse as a leftist government took power.
Interest rates were so exorbitant during those years that farmers would take out loans to buy a tractor, for example, and still find themselves owing more than the face value of their investment three years after purchase, said Derli Dossa, the agriculture minister’s head of strategic management.
Today, thanks to sober fiscal management by successive leftist governments and the accrued benefits of the commodities boom, Brazil seems more financially stable than some developed economies in Europe and North America. While interest rates remain high at about 12 per cent, credit is set to expand another
10 to 15 per cent this year to another record high.
If the investment boom continues, Brazil’s Agriculture Ministry may eventually have to raise its long-term forecasts for output. It currently expects grain production to rise to 176 million tonnes by 2021, from around 143 million tonnes at present.
Several risks exist, from Brazil’s underinvestment in infrastructure to the possibility that recent declines in commodities prices will deepen. For now, though, producers are taking out loans and making bets that could revolutionize efficiency and bolster land under cultivation.
“People borrowing from the bank are no longer scared their loans will suffer variations making it risky,” Dossa said.
ROOM FOR IMPROVEMENT
There are several signs of the inves tment sweeping Brazil’s farm sector, including:
Equipment sales at Brazil’s largest annual farm machinery fair, held this month in Ribeirao Preto in Sao Paulo state, totalled a record 1.8 billion reais ($1.1 billion) – up 53 per cent from 2010.
Nationwide, sales of farm machinery including tractors and harvesters rose 16 per cent in the 12-month period through February, the latest data available from the Nat ional As sociat ion of Automotive Vehicle Manufacturers shows.
Fertilizer use is expected to rise six per cent to around 26 million tonnes this year, compared with typical annual growth of around four per cent, according to data produced for the National Association of Fertilizer Distributors.
The possibilities for payoff are immense.
The Farm Ministry has identified cattle rearing as a top priority for improvement. Even though Brazil is the world’s top beef producer, productivity on ranches remains low at about 1.2 head of cattle per hectare – about a third of what more efficient countries manage.
By improving productivity through investments in fencing and chemical inputs to recover spoiled pasture land, the ministry bel ieves that roughly 10 million hectares currently used for cattle could be planted with cash crops instead. That’s equivalent to a fifth of the area cultivating grains in Brazil today.
Brazil’s soil is generally nutrient poor, and while industrial farms tend to use fertilizer well, there is enormous room for improvement on the family plantations that produce nearly half the country’s corn, said soil and plant nutrition researcher Vinicius Benites.
FOCUS ON EFFICIENCY
Part of the gains can be achieved by cultivating more land. Agriculture Minister Wagner Rossi says Brazil has roughly 120 million spare hectares it could turn to – a land mass roughly the size of Iceland.
Nonetheless, Rossi and other officials say they want to focus more on boosting output on existing farmland, in part due to environmental concerns.
Brazil has already established a global reputation as a pioneer in cultivating nonnative crops and raising yields in a mostly tropical climate, largely thanks to the government’s agricultural research unit Embrapa with nearly 2,000 PhD researchers and a $1 billion annual budget.
Embrapa is currently exploring nanotechnology and advanced genetics projects that could boost yields further.
Yet the research unit adds that its existing technology would be enough to make yields soar if it were applied throughout Brazil’s agriculture sector. Education of producers and investment tend to the biggest barriers, it says.
Interestratesweresoexorbitantduringthose yearsthatfarmerswouldtakeoutloans tobuyatractor,forexample,andstillfind themselvesowingmorethanthefacevalueof theirinvestmentthreeyearsafterpurchase.