Responsible Investment in Large-Scale Agriculture in Emerging Countries: The Brazilian Experience with Soybeans

Transcription

1 Responsible Investment in Large-Scale Agriculture in Emerging Countries: The Brazilian Experience with Soybeans Peter Goldsmith Director Food and Agribusiness Management Program University of Illinois September 30, 2010

2 A fast overview of post modern farming: the case of Mato Grosso 15 minutes Address 14 questions posed to me 30 minutes Questions and Discussion Structure of my talk

3 Complex question we are discussing Certainly a business question But so importantly a social, environmental, and political question Post modern agriculture structurally different Take home An industrial marketing metasystem underlays post modern agriculture Agglomerations, clusters, value chains The buyer s problem But historically agriculture policy has focused on the sellers (farmer s) problem Significant development implications Take home message

4 Producing a low-valued good Industrial/commodity marketing not consumer marketing Low barriers to entry High degrees of substitutability A trade in attributes, not simply commodities Global K flows; Global trade Long value chains Economies of Scale Industrial vs. subsistence activities Key Economic theories Industrial Organization; Industrial Marketing Austrian Economics; Transaction Cost Theory, New Economic Geography Metasystem

5 The future of agriculture Agriculture in a natural state Can see the importance of infrastructure and capital Can see the role of the agro-industrial complex Can see the nexus of agribusiness and corporate social/environmental responsibility Key post-modern institutions and technologies Government Media NGOs Satellite mapping Significant insights for agricultural development world-wide Implications for agricultural investment Post-Modernism and the Mato Grosso Model

6 Soybeans World Wide

7 % Anuual Growth Rates Major Broad Hectare Crops: 1993 = base year Soybeans (+4.19%/yr.) 60% 40% 20% 0% Maize (+1.49%/yr.) Canola (+3.52%/yr.) Barley Maize Millet Rape/Canola Rice Cotton Sorghum Soybeans Wheat -20% -40%

8 Million Metric Tons The Four countries as a % of World Total Soybean Production Leaders 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Argentina Brazil China U.S. % of World 0 0% Year

9 % of World Total 80% Soybean Market Shares 70% 60% 50% 40% 30% 20% U.S. Brazil Arg. China India S.Amer. 10% 0% Year

10 Million Metric Tons 45 Soybean Meal Production: Four Leading Countries These four countries = 77% of world production Argentina Brazil China U.S. 5 0 Year

11 Million Metric Tons 30 Soybean Meal Exports: Four Leading Countries Argentina Brazil China U.S. 5 0 Year

12 Domestic Use / (Production + Imports) 120% Domestic Use: Soybean Meal 100% 80% 60% 40% Argentina Brazil China U.S. 20% 0% -20% Year

13 Domestic Use / (Production + Imports) 120% Domestic Use: Soybean Oil 100% 80% 60% 40% Argentina Brazil China U.S. 20% 0% -20% Year

14 The story began in the Mid-South in the United States in the 1960 s BZ always had a problem with its interior Extraction Now production Late 1970 s, so a 30-year phenomenon Goldsmith, P.D Soybean Production and Processing in Brazil. Chapter 21, Soybeans: Chemistry, Production, Processing and Utilization, AOCS Press, Champaign, Illinois Published in Portuguese Producao e processamento da soja no Brasil. Boletim de Pesquisa de Soja- Fundacao Mato Grosso 1. January: pp Soybeans Mato Grosso

15 Mato Grosso

16 500 mile ba

17 It s a Long Way

18

19

20

21

22

23 THE SOYBEAN PRODUCTS FLOW: Low value versus high value GRAIN MEAL SEEDS PRODUCTION PROCESSING OIL 17,761 9,086 (51%) 2,340 (13%) (THOUSAND OF TONS) 1, (62%) 361 (33%) 50 (4%) 5,985 (34%) Oil 1.8 (0.2%) 351 (2%) Industry 8.3 (0.8%) Crushed Oil, 18%, 34% other states, other states, 33% 16% OIL DESTINY SOY MEAL GRAIN DESTINY DESTINY CRUSHER EFICIENCY internal, 5% internal, 4% Seeds, other, 2% 4% Exported, 51% 4,642 Meal 3689 (79 %) 762 (16%) 1.8 (1.9%) 1.8 (2.2%) Other States, external, 62% 13% Meal, 78% external, 79% 1.8 (0.1%) oldsmith, P.D. R.L. Rasmussen, T. Masuda, and H.L.G. Gastaldi A Opportunidade para a Producao Barasileira de Soja pela Otica da Expansao da Cultura Americana d

24

25

26 Infrastructure Roads Rail Water

27

28

29

30

31

32

33

34 Interstate (BR) road quality: East Coast Bias

35 Alto Taquari

36 Far from markets Weak agglomerations (only ag is present) Not unlike the United States and my state of Illinois Infrastructure is key for industrial development Power, Communications, Transportation For the primary sector, Agriculture, transport infrastructure is most critical A physical product Heavy, and low value Balancing transportation asset-turns the crux of the problem ratio: Value of the good/capital cost of the infrastructure Public funding often necessary A Catch-22 Only low investment activities make sense because of poor infrastructure But can t attract high value goods investment because infrastructure is poor Once infrastructure in place then the bottleneck is broken A Center of the Continent Problem

37 Resource Availability Infrastructure Property Rights Transparency Enforcement Information quality and quantity rises Private capital flows Human capital develops Agro-Industrial Cluster Formation

38 Agroindustrial Development Growth Spiral 9) Advanced Agroindustrial investment 7) Supply effect 6) Ag production R&D 8) Real productivity growth and competitiveness 4) Agroindustrial investment 3) infrastructure* *(Public? vs. Private?) 5) Basis Improves 2) Agriculture production 1) Resource harvesting

39 -14% US Soybean Basis for 10/22/2009 Basis calculations from CBOT Nov futures price of $9.83 per bushel

40 US Corn Basis for 10/22/ % Basis calculations from CBOT Dec 2009 futures price of $3.88 per bushel

41 Soybeans: Iso-price lines for selected Brazilian regions -49% 22/10/ Basis calculates from CBOT Nov futures price of $9.83 pe bushel

42 Corn: Iso-price lines for selected Brazilian regions -73% Basis calculations from CBOT Dec 2009 futures price of $3.88 per bushel

43 $R/sac 20% Differences with Chicago Cash- Diamantino and Averages C.N.P. Daily Prices: Diam= -19% C.N.P. = -21% 10% 0% Range Minimum: Maximum: Spread: 2007= = = = = = = = = 36 5-jan-07 5-jan-08 5-jan-09 5-jan-10 Diamantino -10% Campo Novo -20% -30% -40% Day

44 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% Price Relationship among Diamantino Campo Novo and Rondonopolis: Monthly y = x R² = P-Value = y = x R² = P-Value.005 y = x R² = P-Value.04 Diam:C.N. Diam:Rondo C.N.: Rondo Linear (Diam:C.N.) Linear (Diam:Rondo) Linear (C.N.: Rondo) 1. Pricing improving for farms 2. Stable relationship between Diam. And C.N.

45 Illinois Agro-Industrial Cluster: Output Goldsmith, P.D. R.L. Rasmussen, T. Masuda, and H.L.G. Gastaldi A Opportunidade para a Producao Barasileira de Soja pela Otica da Expansao da Cultura Americ Boletim de Pesquisa de Soja- Fundacao Mato Grosso. January: pp Distribution-10,000 copies

46 Soybean Cluster Economic Output: Mato Grosso Illinois engages in 8x the agro-industrial activity than Goldsmith, P.D. R.L. Rasmussen, T. Masuda, and H.L.G. Gastaldi A Opportunidade para a Producao Barasileira de Soja pela Otica da Expansao da Cultura Amer Boletim de Pesquisa de Soja- Fundacao Mato Grosso. January: pp Distribution-10,000 copies

47 1. Is mechanized agriculture the only or best way to go, at least for soybeans? Yes 2. Why? Soy is an industrial product 3. Can grower and contract farming schemes be used to increase the distributional impacts? No, but cooperatives can play a role Questions

48 Index 1990 = Key Meat to Yield Growth Indicies: High Growth rate in soybean land expansion Extensification to meet demand /4 land 1/4 yield Poultry&Pork Meal Soybeans Hectares Yield Source: FAO and author s calculations Year

49 But What about Yield.. Increased soybean supply much more rapidly by adding land Quick Easy No new technology But an extensive solution, not an intensive solution Increasing Yield (ceteris paribus) Could address supply issue while simultaneously reducing pressure on land use All about factor productivity

50 Kilograms per Hecatre Annual % Change Average Soybean Yields: ,500 2,400 15% Average Annual Increase = 1.5% 2,300 10% 2,200 2,100 5% 2,000 1,900 1,800 0% Annual % Increase Series1 Log. (Annual % Increase) Log. (Series1) 1,700-5% 1,600 1,500-10% Source: FAO and author s calculations Year

51 mt tons/ha, 5-year average %/yr ( ) USA Brazil Argentina China India World Ave Soybean Yield Trends of the Leading Soybean Producing Countries Source: Masuda, T. and P.D. Goldsmith. World Soybean Production: Area Harvested Yield, and Long-Term Projections. Revised and Resubmitted. The International Food and Agribusiness Management Review. July, 2009.

52 Bushels/Acre Focus on Yield: U.S. Yield Plateau Annual Average Soybean Yield Improvement In Illinois By Decade: % 1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% Bushels Percentage Log. (Bushels) Log. (Percentage) Overall Average Bushels =.40/year Percentage = 1.32% 's 1960's 1970's 1980's 1990's 2000's Period 0.00% Source: National Agricultural Statistics Service and Authors Calculations

53 Ratio (Bushels/Acre) Focus on Yield: U.S. Yield Plateau Corn:Soybean Yield Ratio, 3-Year Rolling Average: Source: National Agricultural Statistics Service and Authors Calculations Year

54 Million Metric Tons 300 Where will the feed come from for 92 mmt? = 287 mmt = 195 mmt Pork Poultry Pork+Poultry 92 mm t Year Pork and Poultry Demand in the Year 2030 Source: Global Food in 3-D tm, dynamic visualization software for the food industry

55 Increased Meat Consumption Leads to Increased Grain Demand Increased Incomes means in the year 2030 we will need. (Current 2007) 92 mmt more Pork and Poultry +47% 59 mmt more SBM +40% 76 mmt more SB for feed +40% 33 Mil. hectares of land 195 mmt 148 mmt 189 mmt 94 Mil ha+35% Total US soybean production = 31 million ha

56 Pork Consumption Source: Global Food in 3-D tm, dynamic visualization software for the food industry

57 Million Hectares No Growth Ave. Yld. Remains at 2.3 mt/ha Adds 67m Soybean Ha Trend Growth Ave. Yld. Rises to 2.6 mt/ha Adds 47m Soybean Ha Scenario 1: Trend Growth Scenario 2: High Growth Scenario 3: No Growth High Growth Ave. Yld. Rises to 4.0 mt/ha Reduces 1m Soybean Ha. Future Soybean Hectares to Produce ~300* mmt in 2030 Under Three Yield Trend Scenarios *Soybean Production Forecast Source: Global Food in 3-D tm, dynamic visualization software for the food industry

58 Annual % Change Since % Percentage Change in Selected Agricultural Inputs and Outputs: United States % Labor +368% 300% Land 200% 100% Chemical Energy Output +166% 0% -100% +6% -27% -76% -200% Year

59 800% 700% Percentage Change in Selected Agricultural Inputs and Outputs: Mato Grosso, Brazil, * *Source: Martins and Goldsmith, Soybean Factor Productivity in Mato Grosso. IMEA and NSRL, July, % 600% 599% 500% 400% 300% 200% 100% 0% 488% 336% 339% 340% 320% 247% 232% 187% 167% 148% 157% 123% 133% 100% 77% 56% 72% 25% 22% 36% 24% 40% 17% -6% -6% 537% 466% 265% Output Land Labor Chemical Fertilizer Total Inputs -100%

60 4. What was/is the land tenure and use situation of the land in which soybeans developed so rapidly and extensively in Brazil? Government homesteading in the 1970 s 5. To what extent were existing owners or tenants displaced, and if so how and with what consequences? No owners in the modern sense, some displacement of native peoples Argentina similar but slightly different experience Questions

61 UTILIZATION AREA % Agriculture ,80 Cattle Raising ,18 Other Ocupations ,09 Conservation Areas ,31 Indian s Areas demarcated ,80 Indian s Areas in projects of demarcation ,31 Forests ,52 State s Total Area ,00 Source: SEMA, IBAMA, FUNAI, IBGE, CONAB, IMEA Elaboration: IMEA Land Use in Mato Grosso

62 6. Has this rapid growth had major environmental consequences? Yes, as with all land transformations for agricultural purposes 7. How have they been mitigated or managed? Initially poorly, increasingly better through improved NGO vigilance, media coverage, institutions, overall commitment, industry partnerships, and technology Questions

63

64 8. With respect to South America, what have been the major differences in policy, structure, conduct, etc surrounding the growth of the soybean industry in other countries such as Paraguay and Bolivia? I know less about these. But similar SCP, weaker institutions, weaker commitment to the environment, strong presence of multinationals and ex-pats/large land owners Questions

65 9. With respect to the oilseed industry, what are the supply/demand and price trends, and where does soy fit relative to oil palm and rapeseed especially? Soy is a protein crop (derived demand from meat) Oil is a co-product Not a main raw material for bio diesel (ex- Arg.) Palm is an oil crop demand originates from processed foods and biodiesel Questions

66 10. What is the outlook for future years and how might that impact growth of the soybean industry in the US and South America? Raises a great question about deflation and agricultural investment flows Ag Investment has significant benefits as a hedge against inflation Will we see sectoral splits in demand growth/deflation? Japan vs. ROW North vs. South Ag vs. Non Ag Aggregate demand supporting policies i.e. Biofuel/Green Policies Questions

67 11. With respect to China, what are the trends in its oilseed imports, utilization, consumption and sourcing patterns? Very smart, buy low valued grains and benefit from domestic agro-industrial economies Benefited from the development of a large agro-industrial cluster/agglomeration economies

68 12. Is China buying into primary production? Not yet, probably unlikely Very different from mining Spot functions well Very extensive, hard to control Unnecessary exposure to risk Global hedge All firms hurt, so loss of competiveness less a problem Bad investments have differential effects Questions

69 13. How else is their escalating demand affecting the structure, conduct and performance of the oilseed industry in general and soy in particular? All concerned about access to raw materials Sovereign wealth funds State-owned conglomerates Large industrial firms The question for them is how and where in the value chain As with others need to move a lot of $ into an extensive industry Acquisition in an industry with long value chains and high substitutability is not readily apparent Can invest and still be non-competitive Questions

70 14. include something on major S&T developments, including GMO issues of course Low latitude soybeans Impact: major Rust resistance (MT Foundation) Impact: minor GM input events Impact: major Factor productivity Agricultural intensification Silo bags (Argentina) Impact: major Precision/Mapping Impact: moderate Professional Farming Model Impact: major Questions

71 Peter Goldsmith Contact Information