China Spurs Brazil Soy Boom
Brazil's soy exports to China are jumping, but profits are hampered by poor infrastructure.
BY RUTH MORRIS
Wednesday, July 20, 2011

SHANGHAI -- From where Ricardo Arioli stands, overlooking an expanse of leafy soybean plants tucked deep in Brazil’s heartland, China seems a world away.

But China’s breakneck economic growth is evident everywhere-- in the extra fertilizer he’s bought, in the shiny new harvesting machinery he now owns, and in the extra padding of his pocketbook.

“The farmers here are very happy,” says Arioli, who owns 3,000 hectares in Brazil’s Mato Grosso province, mostly dedicated to soybeans. “The demand in China is keeping the prices up, so we are seeing some profits… Prospects are good for farmers.”

China and Brazil have been firing up trade in what economists describe as a largely complementary relationship: China is resource hungry, Brazil is resource rich. And luckily for Arioli, China’s appetite for iron ore and soy is leading the way. As China’s middle class grows, so does its appetite for meat, which means higher demand for protein-packed soybeans to feed chickens and hogs.

Brazil’s 2010/2011 soy crop came in at 72 million metric tons, with roughly half shipped to China. Overall soy imports to the Middle Kingdom have already doubled since 2005, and are expected to grow steadily as China’s economy gallops forward.

On the downside, Brazil’s desperate need for infrastructure upgrades is cutting into profit margins, farmers say. And a recent push by China to buy up large tracks of farmland is making some Brazilians nervous.

Last year, as several Chinese companies pursued land deals, Brazil’s attorney general stepped in, reinterpreting a 40-year-old law to make it harder for foreigners to own large swaths of Brazilian land.

Arioli, who is a member of the Association of Mato Grosso Soybean Producers (Aprosoja), says Brazil needs a more managed approach. If Chinese investors will help finance badly needed infrastructure projects, he says, soy growers could pay them back with their product. The association will make its first official visit to China in August to explore options.

“We are trying to get to know each other,” he says.

SEEING GREEN IN SOY

Arioli bought his 3,000-hectare farm with his brother in 1987—both are

agronomists-- as growers were rushing into the central west of Brazil to take advantage of cheap land. Mato Grosso eventually became the country’s largest soy growing state, accounting for about a third of the country’s crop. But it couldn’t move the ocean closer, and neglected transportation routes have been an ongoing gripe.

Two years of good harvests and high international prices have boosted spirits, all the same. Arioli said he and other farmers have been able to pay off old debts and to re-invest in production.

“The prices have been good, so I’m planning more investment in machinery, which I haven’t done in a long time,” says Arioli. He also plans to sow a second crop of cotton on about 400 hectares. Cotton requires double the investment in fertilizer and expensive harvesting equipment, so farmers tend to shy away from it during lean years. But it also fetches higher prices.

Talk of cotton crops marks a dramatic shift from just six years ago, when currency fluctuations and a wave of fungal soybean rust landed many Brazilian soy farmers in bankruptcy. Others were forced to lease their land.

Most are still cautious, Arioli says. “We can afford to travel to the south of Brazil where my grandparents live, for Christmas. That's it! We are far away from a Ferrari.”

Another 600 hectares of Arioli’s land cannot be farmed at all under preservation laws that require Brazilian farmers to maintain at least 20 percent of their land in its natural forested state. He estimates this legal reserve is worth about $1.2 million, “invested by our family, in environmental preservation.”

He says he agrees with the protections, but adds, “This is more than all the assets my family have outside the farm, like houses, cars, etc.”

FROM HOT COMMODITY TO STRATEGTIC INTEREST

Charles Tang, president of the Brazil-China Chamber of Commerce, says Brazil’s farming industry is especially interesting because it has plenty of room to grow, despite environmental controls.

Brazil is already the world’s second largest soy producer after the United States. But Tang estimates Brazil has nearly 140 million hectares that can still be “inserted” into agricultural production-- about twice what it uses for farming now.

"Brazil's worldwide influence will continue to grow because it will be a major food producer in a world that is hungry for calories,” he says.

China, on the other hand, has a scarcity of water and much less land available for new cultivation. At the same time, huge strides in poverty reduction have meant richer meals for millions, with more and more soy-fed meat on the plate.

The United States Department of Agriculture estimates China’s soybean imports will surge by more than 50 percent over the next nine years.

For experts like Tang, that means soy has graduated from a hot commodity to a “strategic resource,” just like the iron ore that’s fueling China’s construction boom.

“China must invest in Brazil to have access to the sources of the strategic resources that it needs to fuel its sustained growth and to feed the Chinese people,” Tang says. “China must be strategic resource independent.”

JOINT VENTURES IN THE WORKS

Tang bristled at last year’s move to block large land purchases by foreign entities. “All that it is doing is to prevent investments into Brazil, job creation, wealth creation and export earnings,” he says.

But he was optimistic officials would alter the decision in light of lost investment opportunities. “Several proposals are already being considered,” he says.

China does not allow private ownership of farmland at home.

In a Mato Grosso farmer’s dream scenario, China might also invest in infrastructure upgrades. For now, Brazil moves the bulk of its soy by truck. In remote Mato Grosso, that translates into transportation costs four times higher than what a soy farmer in Iowa might pay to transport soy a similar distance by barge.

Cid Sanches, Aprosoja’s planning manager, said the government was investing in roads and railways to ease congestion on routes to southern ports, and to offer access to the north as well.

In the meantime, a few joint ventures between Brazilian officials and state-owned Chinese companies are moving ahead, but dropping land provisions.

In a deal reported by Soybean & Corn Advisor last month, China’s Chongqing Grain Group signed a “memorandum of understanding” in the Bahia state to build a soybean crushing plant. The move was part of a larger investment plan involving rail terminals, a private port and storage facilities valued at $4 billion, the report says.

“We think we’ll have more of this kind of investment in other states,” says Sanches, noting that Japanese, Korean and Australian investors have also been touring Brazil’s oilseed crops.

“They were exploring before, now there is real investment,” Sanches says..

Have any of them put money down in Mato Grosso? “Not yet,” he says, “but maybe next month…”