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
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
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
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
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
Soybeans World Wide
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 80% 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%
1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Million Metric Tons The Four countries as a % of World Total 90 80 70 60 50 40 30 20 10 Soybean Production Leaders 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Argentina Brazil China U.S. % of World 0 0% Year
1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 % of World Total 80% Soybean Market Shares 70% 60% 50% 40% 30% 20% U.S. Brazil Arg. China India S.Amer. 10% 0% Year
Million Metric Tons 45 Soybean Meal Production: Four Leading Countries These four countries = 77% of world production 40 35 30 25 20 15 10 Argentina Brazil China U.S. 5 0 Year
Million Metric Tons 30 Soybean Meal Exports: Four Leading Countries 25 20 15 10 Argentina Brazil China U.S. 5 0 Year
Domestic Use / (Production + Imports) 120% Domestic Use: Soybean Meal 100% 80% 60% 40% Argentina Brazil China U.S. 20% 0% -20% Year
Domestic Use / (Production + Imports) 120% Domestic Use: Soybean Oil 100% 80% 60% 40% Argentina Brazil China U.S. 20% 0% -20% Year
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. 2008. Soybean Production and Processing in Brazil. Chapter 21, Soybeans: Chemistry, Production, Processing and Utilization, AOCS Press, Champaign, Illinois. 773-798. Published in Portuguese. 2009. Producao e processamento da soja no Brasil. Boletim de Pesquisa de Soja- Fundacao Mato Grosso 1. January: pp.77-91. Soybeans Mato Grosso
Mato Grosso
500 mile ba
It s a Long Way
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) 1,107 686 (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. 2008. A Opportunidade para a Producao Barasileira de Soja pela Otica da Expansao da Cultura Americana d
Infrastructure Roads Rail Water
Interstate (BR) road quality: East Coast Bias
Alto Taquari
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
Resource Availability Infrastructure Property Rights Transparency Enforcement Information quality and quantity rises Private capital flows Human capital develops Agro-Industrial Cluster Formation
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
-14% US Soybean Basis for 10/22/2009 Basis calculations from CBOT Nov. 2009 futures price of $9.83 per bushel
US Corn Basis for 10/22/2009-20% Basis calculations from CBOT Dec 2009 futures price of $3.88 per bushel
Soybeans: Iso-price lines for selected Brazilian regions -49% 22/10/2009 - Basis calculates from CBOT Nov. 2009 futures price of $9.83 pe bushel
Corn: Iso-price lines for selected Brazilian regions -73% Basis calculations from CBOT Dec 2009 futures price of $3.88 per bushel
$R/sac 20% Differences with Chicago Cash- Diamantino and Averages C.N.P. Daily Prices: 2007-2010 Diam= -19% C.N.P. = -21% 10% 0% Range Minimum: Maximum: Spread: 2007=-34 2007=-12 2007= 23 2008=-29 2008=-7 2008= 22 2009=-25 2009=+11 2009= 36 5-jan-07 5-jan-08 5-jan-09 5-jan-10 Diamantino -10% Campo Novo -20% -30% -40% Day
8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% Price Relationship among Diamantino Campo Novo and Rondonopolis: Monthly 2007-2010 y = 0.0002x + 0.0169 R² = 0.0337 P-Value = 27 1 4 7 10 1 4 7 10 1 4 7 10 1 y = 0.0005x - 0.0886 R² = 0.194 P-Value.005 y = 0.0003x - 0.1044 R² = 0.1084 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.
Illinois Agro-Industrial Cluster: Output Goldsmith, P.D. R.L. Rasmussen, T. Masuda, and H.L.G. Gastaldi. 2008. 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. 19-21. Distribution-10,000 copies
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. 2008. 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. 19-21. Distribution-10,000 copies
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
Index 1990 = 1 1.80 1.70 Key Meat to Yield Growth Indicies: 1990-2006 High Growth rate in soybean land expansion Extensification to meet demand 1.60 1.50 1.40 1.30 1.20 3/4 land 1/4 yield Poultry&Pork Meal Soybeans Hectares Yield 1.10 1.00 Source: FAO and author s calculations Year
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
Kilograms per Hecatre Annual % Change Average Soybean Yields: 1990-2006 2,500 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
3.0 2.5 2.0 1.5 1.0 mt tons/ha, 5-year average 1.99 1.66 1.53 1.47 1.42 1.16 1.12 1.06 0.84 0.76 2.05 2.02 1.75 1.83 0.73 0.77 2.16 2.02 0.94 2.26 2.18 1.03 2.74 2.59 2.29 2.31 1.08 0.98 1.2%/yr (2000-2008) USA Brazil Argentina China India World Ave 0.5 0.45 0.44 0.0 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.
Bushels/Acre Focus on Yield: U.S. Yield Plateau Annual Average Soybean Yield Improvement In Illinois By Decade: 1940-2007 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 2.00% 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% 0.00 1950's 1960's 1970's 1980's 1990's 2000's Period 0.00% Source: National Agricultural Statistics Service and Authors Calculations
Ratio (Bushels/Acre) Focus on Yield: U.S. Yield Plateau Corn:Soybean Yield Ratio, 3-Year Rolling Average: 1940-2005 4.00 3.80 3.60 3.40 3.20 3.00 2.80 2.60 2.40 2.20 2.00 Source: National Agricultural Statistics Service and Authors Calculations 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 Year
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030 Million Metric Tons 300 Where will the feed come from for 92 mmt? 250 200 2030 = 287 mmt 150 100 50 0 2007 = 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
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
Pork Consumption Source: Global Food in 3-D tm, www.globalfoodin3d dynamic visualization software for the food industry
Million Hectares 160 140 No Growth Ave. Yld. Remains at 2.3 mt/ha Adds 67m Soybean Ha. 161 141 Trend Growth Ave. Yld. Rises to 2.6 mt/ha Adds 47m Soybean Ha. 120 100 80 60 94 93 64 1995-97 2005-07 2030 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 www.globalfoodin3d.com
Annual % Change Since 1948 500% Percentage Change in Selected Agricultural Inputs and Outputs: United States 1948-2004 400% Labor +368% 300% Land 200% 100% Chemical Energy Output +166% 0% -100% +6% -27% -76% -200% Year
800% 700% Percentage Change in Selected Agricultural Inputs and Outputs: Mato Grosso, Brazil, 1999-2009* *Source: Martins and Goldsmith, Soybean Factor Productivity in Mato Grosso. IMEA and NSRL, July, 2009. 684% 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%
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
UTILIZATION AREA % Agriculture 8.876.694 9,80 Cattle Raising 21.000.000 23,18 Other Ocupations 1.890.186 2,09 Conservation Areas 3.000.350 3,31 Indian s Areas demarcated 17.937.802 19,80 Indian s Areas in projects of demarcation 5.713.973 6,31 Forests 32.187.800 35,52 State s Total Area 90.606.805 100,00 Source: SEMA, IBAMA, FUNAI, IBGE, CONAB, IMEA Elaboration: IMEA Land Use in Mato Grosso
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
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
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
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
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
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
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
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
Peter Goldsmith pgoldsmi@illnois.edu www.peterdgoldsmith.com Contact Information