How do commodity logistics drive Brazil's competitiveness?
Commodity logistics plays a crucial role in Brazil, one of the world’s key food producers, and responsible for a significant portion of global grain production.
States in the country´s northern regions, such as Mato Grosso and Goiás, have significantly increased their production capacity in recent years. However, a sticky challenge arises as a substantial part of Brazil’s railways and ports are located in southern and southeastern regions. In response, both public and private investments are being made to address these transportation logistic obstacles.
In today’s text, we´ve invited two professionals to discuss these issues:
- Marcelo Lacerda, Head of Desk – Sales – Brazil Grains/Cotton at hEDGEpoint
- Pedro Schicchi, Market Intelligence Analyst for Grains and Oilseeds at hEDGEpoint.
Keep reading to learn more about the subject!
The North-South Division: How´s this related to commodity logistics?
Data from the National Observatory of Transportation and Logistics (ONTL) indicates the following distribution of cargo transportation in Brazil:
- Road: 67.61%
- Rail: 21.46%
- Cabotage: 7.96%
- Inland Waterway: 1.48%
- Pipeline: 1.42%.
Despite the low share of railways, over 45% of exported agricultural commodities are transported via this mode. The challenge becomes more evident when considering the disparities between the railway and road networks of northern states compared to those in the South:
“We have two very different logistic situations between these regions. Of all the grain export ports in Brazil, three of the top four, in terms of throughput capacity, are in the South,” Pedro Schicchi commented.
This challenge is highlighted when observing that production in the northern states has grown by about 96 million tons. However, exports have increased only about half of that number as shown in the graph below.
Although production has nearly tripled, the export of these grains still depends on ports in the South-Southeast such as Paranaguá and Santos.
“Exporting more from the North brings various changes to the market dynamics. so improving logistics in these northern states is crucial for producers to become more competitive,” Schicchi explained.
What investments in logistics are being made?
With this need emphasized by Schicchi, one of the goals outlined in the National Logistics Plan (PNL 2035) is to expand the number of railways. The aim is for railways to account for 40% of total cargo transportation by 2035.
“The railway network is more efficient and can significantly improve the flow of production from MATOPIBA states,” Marcelo Lacerda clarified.
One of the main initiatives is the completion of the North-South Railway. At almost 2,300 kilometers in length, the project connects four of the five main regions of the country (the Midwest, North, Southeast, and Northeast). Now, it will enable three landlocked states (Goiás, Tocantins, and Minas Gerais) to transport their grain production via the railway.
This results in cost reductions for commodity transportation as distances are shortened, leading to greater economies of scale. It’s worth noting that a single train car carries about 1000 tons of soy, a load that would require 30 trucks for road transport.
In 2023, rail-transported cargo is expected to reach 27 million tons, a significant increase compared to the total of 2 million tons ten years ago. The economic boost caused by both infrastructure and logistics is the North-South Railway’s greatest asset.
Regarding waterways, the Federal Government has announced almost R$50 million for drainage works in strategic rivers. From January to May of this year, the flow of cargo on vessels navigating rivers reached 51.2 million tons. This is the best result in the historical series for the first five months of the year, representing a 6.53% increase compared to 2022.
Challenges to Grain Transportation: The Amazon Drought and Southern Rains
Currently, these are the two issues causing most concern in Brazil’s commodity logistics. We elaborate on each of these situations below.
- The Drought in the Amazon
In the North, rivers play the same role as roads and railways in the rest of the country. Everything goes via waterways, which were responsible for the transportation of 32.1 million tons between January and May, 2023. This is an increase of about 10% compared to the same period in 2022.
The Amazon region accounts for almost two-thirds of all Brazilian river transportation. But severe drought has interrupted ship traffic near Manaus and increased costs for northern commercial routes. Risks to grain exports have risen due to atypical heat and drought, which is also responsible for mass deaths of fish and dolphins.
The low water levels particularly affect the transportation of corn. If El Niño intensifies in the Pacific Ocean, and there´s no cooling of the tropical waters in the North Atlantic, the drought may last until 2024.
- Rains in the South
Heavy rains that marked more than half of October impacted movements at Paranaguá, Port in Paraná. This is one of the main routes for the transportation of grains and fertilizers in the country. Solid bulk imports and exports were forced to pause during this period.
In Rio Grande do Sul, there was damage to production transportation due to an extra-tropical cyclone that hit the state in early September. It´s estimated that transportation issues affected 197 communities. Losses were significant for both corn and wheat, with large areas affected and a high volume of lost production.
How does improving commodity logistics increase competitiveness in external markets?
Surely you´ve noticed how complex commodity logistics are in our country, right?
With regional disparities, high grain production, and unstable climatic factors, it´s essential to diversify the transportation network. This is an urgent need for Brazil to be even more competitive in external markets.
“Investments in logistics in the North bring producers closer to the Gulf of Mexico, enhancing that market. Commodities could be exported directly from this area, increasing competitiveness, especially with the United States,” Pedro Schicchi pointed out.
To better grasp this reasoning, we need to analyze the last 10 years. During this period, through logistics investments, the difference in the cost of delivering Brazilian soy to China has narrowed compared to the United States. This is evident in the graph below.
“Today, we see a difference of almost US$100 per ton compared to the year 2010. In practice, this means that Brazilian soy and agribusiness gain competitiveness in international markets,” Marcelo Lacerda explained.
Improving commodity logistics is also critical to reduce losses from road transportation. It´s known that 1.17% of soy production and 1.27% of corn production are lost when shipped in trucks. A survey from Esalq/USP indicates that losses in these crops bring a total waste of almost R$ 5 billion. Unpaved and poorly maintained roads exacerbate such difficulties.
Improving logistics translates into gains for Brazilian producers. Due to investments in this area, they can charge more for their soy. After all, it becomes easier to transport the product.
[You can also read: The Internationalization of Brazilian agribusiness]
hEDGEpoint: Risk Management for a World in Transition
Monitoring all movements that can affect commodity markets makes a difference in this chain. With numerous events and scenarios to be analyzed, this is a most challenging task.
Having a partner like hEDGEpoint is vital. We´re constantly assessing the current context while projecting the future. How much does Brazil still have to gain from these improvements in commodity logistics? Certainly, there´s endless potential that we will closely monitor.
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