The University of Georgia

The University of Georgia Center for Agribusiness and Economic Development College of Agricultural and Environmental Sciences Export Price Comparisons between Georgia and Latin American Countries Prepared by: George Shumaker and Kent Wolfe May, 2012 CR-12-06

Table of Contents Page Relative Costs of Exporting Agricultural Products Georgia Versus South American Examples... 3 South American Situation... 5 Examples of logistics and transportation costs from LAC countries and Georgia... 5 Cotton from Cordele, GA to Shanghai and Rotterdam... 6 Cotton from Brazil to Shanghai and Rotterdam... 7 Items impacting logistics costs of exports in Central and South America... 8 Costs of Exporting Brazilian Soybeans vs. Iowa Soybeans... 9 Soybean Transport Cots to Shanghai China (Brazil vs. USA)... 10 Illustrative Example of Inefficiencies in LAC Markets... 10 Summary and Conclusions... 11 3

RELATIVE COSTS OF EXPORTING AGRICULTURAL PRODUCTS GEORGIA VERSUS SOUTH AMERICA EXAMPLES A request was made to the Center for Agribusiness and Economic Develop, CAES, UGA to compare the relative costs of moving locally produced agricultural products into the export markets with those produced in South American. The basic question being: Is Georgia competitive with South American producers in exporting ag products? A search of the current literature concerning costs of transportation and logistics in South American revealed a publication that discussed and detailed the type of information helpful in answering the basic question. A document written for the 2009 World Bank meeting entitled Logistics, Transport and Food Prices in LAC: Policy Guidance for Improving Efficiency and Reducing Costs provides examples of the costs of moving products produced in various South American nations into the export markets. (LAC stands for Latin American and Caribbean) We will use examples from this publication to compare with similar data obtained from sources in Georgia to arrive at our conclusions. According to the report, transport and logistics costs are high in general the LAC region. The World Bank estimates the average logistics costs for the all the World s developed nations at about 9 percent of GDP. The report estimates that similar logistics costs for nations within the LAC range from 18 to 32 percent of GDP. The report states the international maritime and road haulage components alone can total about 20 percent of FOB value of goods if combined. By the time products are transferred, handled, stored and distributed domestically, the logistics component of the delivered good is often more than 50 percent of the final price to consumers. While this cost is associated with internal logistics, many of the same cost components are incurred on products moving from production areas to the export markets thus raising the cost to importers elsewhere. The report highlights four main factors impacting LAC logistics costs relative to most developed nation s logistics costs. 1. Maritime Transport Ocean freight rates are dependent upon several factors including haul distance, port infrastructure endowment, efficiency levels, inter-port connectivity, degree of private sector participation and competition among service providers. Ports with higher port infrastructure and efficiency have faster turnaround times for vessels and faster cargo throughput. This speeds up the amortization on port investments and reduces 4

costs incurred by cargo owners and consignees as delays, storage, warehousing demurrage charges can be reduced or avoided at more efficient well developed ports. Competition among service providers has been shown to reduce the variance in freight rates. Another important factor impacting shipping costs is the size and type of vessel employed. Vessels that contain cranes to handle freight, called geared vessels can call on smaller ports without sophisticated handling equipment but are higher costs vessels since they lose carrying capacity to the equipment. Other vessels, typically larger in size do not have cranes and call only on ports with sufficient draft depth and handling equipment for their needs. These vessels are lower cost and higher volume carriers with scale advantages. In 2008 a study indicated that the smaller geared vessels had freight costs per unit of weight more than twice the larger gearless vessels. Many LAC countries have smaller, less efficient and less well equipped ports than the U.S. and thus LAC exporters incur higher shipping costs as a result. 2. Customs clearance and Border crossings several studies have found that many of the LAC countries have less efficient customs clearance and border crossing systems than found in the U.S. This may result in from 4 to 12 percent higher freight costs for products moved in many of the LAC nations than in the U.S. However, this is not true of all the LAC nations. Brazil, Argentina and Costa Rica have greatly improved their systems to facilitate international product movement. 3. Inland transportation over roads and trucking- moving goods from point of origin to the ports is often accomplished by truck in many LAC nations. Poor road systems coupled with poor maintenance regimes is a major hindrance to timely product movement. Since the roads are in primitive condition by U.S. standards, truck size, travel speed and carrying capacity is compromised. A similar situation is often found for LAC rail systems. This all results in higher internal transportation costs than typically incurred with in the U.S. 4. High inventory costs are a major logistics bottleneck in many LAC countries. The World Bank estimated that inventory costs were over twice as much in LAC counties compared to the U.S. This due to substandard storage quality and capacity, poor security systems, substandard road systems and ineffective methods of financing inventory. In general, there are many ways in which the U.S. possesses a competitive advantage over most LAC nations in logistics and transportations of ag products. 5

South American Situation The exporting of agricultural products from Central and South American countries is a complex and highly variable situation. It varies by country, by product, by size of the firm doing the exporting and by market destination. At the more efficient end of the spectrum, we might find soybean oil and soybean meal from Brazil and Argentina. These countries possess state of the art soybean processing facilities located on major river systems and near to major soybean production areas. These products can be exported at very competitive prices relative to U.S. soybeans and products. What has developed over time is that South American soybean producing nations have specialized in exporting soybean oil and soybean meal with less emphasis upon exporting whole soybeans. They have retained the value added aspect by processing the soybeans before exporting the component products. They can export those products very competitively due to the location of the processing facilities located near the export terminals. In the U.S. our processing facilities are located closer to the growing areas than exports points since we utilize most of our soybean products rather than export them. The biggest logistical problem they face is the highway and rail systems within each country. Most all of the soybeans need to be moved from the production areas to the processors/export areas either by road or rail. The road systems are not nearly as efficient as we possess in Georgia. The same could be said for the rail systems. Travel speeds are much slower due to rough road conditions and lack of major four lane systems. Truck and train carrying capacities are also smaller than available in the U.S. These factors hamper their export efforts for all products relying upon road or rail for transport to the export terminals. Examples of logistics and transportation costs from LAC countries and Georgia In order to determine typical logistics and transportation costs for Georgia ag products, the Center contacted Mr. Ben Harris, Logistics Industry Coordinator with the Center of Innovation for Logistics, Savannah, GA. He has contacts within the logistics industry serving the Georgia and South Carolina export markets via the ports systems. He was extremely helpful is securing estimates for the costs of exporting two major Georgia products, cotton and frozen chicken. We asked for the typical costs of exporting frozen chicken from Gainesville, GA to both Shanghai and Rotterdam and for cotton from Cordele 6

to the same locations. Mr. Harris secured quotes from leading logistics and expediting firms that handle these products in the Georgia market area. In order to make comparison between the various products and countries and currencies, we will express the logistics costs as a percent of a representative sales price of the product along with the quoted dollar value for the Georgia products. Our first example is for cotton shipped from Cordele, GA to both Shanghai and to Rotterdam. The following table illustrates the major logistical elements and their costs. Cotton from Cordele, GA to Shanghai and Rotterdam Estimated Cost of Exporting Cotton from Cordele, GA Cost per Cost per % of To Shanghai: Container Pound Price Pick up and Delivery to Port of Savannah, GA $760 $0.018 2.1% Port surcharges $468 $0.011 1.3% Ocean Freight to Shanghai $1,425 $0.034 3.9% Total Cost at Shanghai dockside $2,653 $0.063 7.2% To Rotterdam: Pick up and Delivery to Port of Savannah, GA $760 $0.018 2.1% Port surcharges $773 $0.018 2.1% Ocean Freight to Rotterdam $1,500 $0.036 4.1% Total Cost at Rotterdam dockside $3,033 $0.072 8.2% Note: 40 foot Container contains 88 bales of cotton total net weight is about 42,240 lbs Cotton sales price = $.8746 per pound as of May 2, 2012 The main message to be taken from the above table is that we can move large volumes of cotton from the interior of the state of Georgia to distant foreign markets at very low cost levels. The product is moved along very good to excellent highways to the port at Savannah for about 2 cent per pound or about 2 percent of the price of cotton. Port surcharges such as bills of lading, handling, storage and security fees amount to a similar level of expense. The port of Savannah attracts large capacity gearless container vessels whose freight rates are at the lower end of the scale for ocean transport. These vessels can be in Rotterdam within 10-13 days from departure and to Shanghai within about 41 days. Cost of ocean transport is a little over 3 cents per pound or about 4 percent of the price of the cotton. Total cost of moving the cotton from Cordele, GA to Rotterdam is about 7 percent of the value of the cotton and about 8 percent of the value to move to Shanghai. 7

Cotton from Brazil to Shanghai and Rotterdam Ongoing, yet to be published research at Texas A & M University provides data on the costs of exporting cotton from two major ports in Brazil, Santos and Salvador. Brazil has been expanding cotton production in recent years and seeks to expand its cotton exports. The following data was provided by researchers at Texas A & M. It is only a portion of their work but they were willing to provide it to us for use in this paper. Estimated Cost of Exporting Cotton from Santos and Salvador, Brazil Cost per Cost per % of From Santos To Shanghai: Container Pound Price Pick up and Delivery to Port of Santos, Brazil $2,022 $0.048 8.3% Port surcharges $978 $0.023 4.0% Ocean Freight to Shanghai $686 $0.016 2.8% Total Cost at Shanghai dockside $3,686 $0.087 15.2% From Salvador To Shanghai: Pick up and Delivery to Port of Salvador, Brazil $1,343 $0.032 5.5% Port surcharges $789 $0.019 3.3% Ocean Freight to Shanghai $996 $0.024 4.1% Total Cost at Shanghai dockside $3,128 $0.074 12.9% Note: 40 foot Container contains 88 bales of cotton total net weight is about 42,420 lbs Cotton sales price = $.5753 per pound in 2011 A note to explain a major difference between the two preceding tables: The last table for cotton exports in Brazil is from a Texas A& M study where the data was collected during the last half of 2011. The data for U.S. cotton exports was obtained in early May, 2012 from the Savannah Ports Authority and the Maersk Line a major international freight expediter and shipper. That may be a reason there is a substantial difference between the farm price of the cotton and the ocean freight charges. We can make some interesting comparisons between the Brazilian export costs for cotton and that for cotton from Georgia. 8

1. Total pick up and delivery to the port costs in Brazil are higher than those in Georgia, however on a per unit of distance traveled basis, the costs are very similar. Georgia has an advantage as our cotton is produced closer to the port than the cotton in Brazil. 2. Port surcharges are lower at the Port of Savannah than at either of the Brazilian ports. That may be due to stream lined systems in Savannah and lower on site administrative costs. 3. The ocean freight differences may be partially due to the different times of the data samples. It may also be partially due to differences in rates charged by the carrier. 4. Georgia appears to have comparative advantage in the export of cotton relative to producers in Brazil exporting through the ports of Santos and Salvador. Items impacting logistics costs of exports in Central and South America The World Bank report contains a host of information about the cost components of exports for Central and South America based upon a sample of some 55 firms. For instance, the average logistical costs for Mexico and Central American exporting businesses averaged14 percent of sales. Of that 14 percent, 5.3 percent is attributable to transportation and distribution and the remaining 8.6 percent is attributable to inventory management and storage. A similar sampling of 85 businesses in the larger South American exporting nations found that logistics costs averaged about 27.2 percent of sales. Of that 27.2 percent, 19.7 percent was attributable to inventory management and storage while the remaining 7.5 percent was attributable to transportation. Another interesting presentation concerned how logistics costs varied across businesses by size as measured by sales volume. In Latin America, logistics costs fall steadily as sales increase. For example, firms with sales less than $5 million had average logistics costs of about 33 percent of sale while firms with sales over $500 million had average logistical costs of about 13 percent of sales. Most of the decline between sales classes occurred when sale exceed $50 million. This implies strong economies of scale occur only up to about $50 million in sale beyond which there is little further gains from increased sales. In South America the average logistical costs were greater at the low sales levels less than $50 million but were very similar at sales levels greater than $50 million. One area in which there appears to be an endemic problem impacting exports is in the customs offices. They tend to be slower in providing service and subject to time delays and bribery. These inefficiencies, found to varying degrees across countries raise the logistical costs for exporting companies that must deal with them. A study cited in the World Bank paper indicated that customs delay in LAC nation s increases transport costs by 4 to 12 percent. According to firms surveyed in Brazil, deficiencies in the customs performance are perceived as more significant challenges to business operations than those related to infrastructure. The average cost of trading across borders in the LAC region averaged $1,036 per container with a variation of from $685 in Chile to $2,411 in Mexico. This compares 9

with an average of $986 for developed nations. Georgia exporters do not face similar problems as these. Costs of Exporting Brazilian Soybeans vs. Iowa Soybeans According to a March 6, 2012 report by the Foreign Agriculture Service, USDA, poor infrastructure continues to burden Brazilian agriculture despite planned improvements.domestic storage capacity is believed by sources in Brazil to be significantly less than half of production for most bulk crops such as soybeans, corn, and wheat. This places a great burden on the transportation system to handle crops at harvest even though the transportation infrastructure is considered by many to be the biggest roadblock to Brazilian agriculture. The result of poor transportation logistics for grain and oilseeds is evident when comparing the cash price for soybeans received by Brazilian and American farmers this past summer. In July of 2011 (several months after harvest), the cash price in Brazil s largest soybean producing state, MatoGrosso, was about $10 per bushel while in Iowa it was about $13.5 per bushel. The Brazilian National Confederation of Agriculture estimates that compared to competing grain exporting nations; Brazilian producers are at least 20 percent less profitable due to transportation inefficiencies. This detriment to competitiveness is most pronounced in the center-west, which is the largest production region for grains and oilseeds. A recent study by the Brazilian Institute of Logistics found that the cost to improve roads to a sufficient state is 19 times more than the government s current budget for such improvements. Furthermore, while 35 years ago 1.8 percent of Brazil s GDP was invested in transportation improvements, that figure has fallen to just.8 percent. Given that only a very small portion of Brazil s roads are paved and roads are the principal mode of grain transportation, road improvements could significantly affect Brazil s international competitiveness. One road project of significance is the paving of BR-163, which will connect the centerwest region with the Amazon port of Santarem. Along with reducing internal trucking costs for grains and soybeans, it is expected that the road would decrease sea shipping costs to markets such as the European Union compared to ports in southern Brazil. The Brazilian Soybean Producers Association estimates that transport costs will fall by at least $30 per ton for soybeans trucked via BR-163 through Santarem. Along with this significant road project, rail improvements are also in the works, including extensions from the center-west region to northeastern ports. 10

Soybean Transport Costs to Shanghai China (Brazil vs. USA) Brazilian transport costs to China, the top global soybean importer, are significantly higher than the United States costs. In the top soybean production state of MatoGrosso, transport costs as a portion of the total landed price were 31 percent in 2011 compared to 16 percent in Iowa. It costs $125 per ton to truck soybeans to the port in Brazil versus on $38 per ton to transport Iowa soybeans to the ports Near New Orleans, LA. Ocean freight costs to Shanghai are very similar near $50 per ton from either location. Transport costs in the southern production states are comparable to those in the United States. However, soybean and corn production expansion is not focused in the south but rather in frontier states. From these interior states, grain is primarily transported by truck to ports up to 2,000 kilometers away. One road project of significance is the paving of BR-163, which will connect the centerwest region with the Amazon port of Santarem. Along with reducing internal trucking costs for grains and soybeans, it is expected that the road would decrease sea shipping costs to markets such as the European Union compared to ports in southern Brazil. The Brazilian Soybean Producers Association estimates that transport costs will fall by at least $30 per ton for soybeans trucked via BR-163 through Santarem. Along with this significant road project, rail improvements are also in the works, including extensions from the center-west region to northeastern ports. Illustrative Example of Inefficiencies in LAC Markets The World Bank report provides an example of the supply chain analysis illustrating the logistical costs and problems of exporting many products in Central and South America. This example is exporting of fresh pineapples from Costa Rico to St. Lucia in the Caribbean. Due to a miss-match between the dock facilities in Costa Rica and St. Lucia the fruit must travel from Costa Rica to Miami, FL where they are reloaded onto a smaller vessel and then on to St. Lucia. The following is a summary of the costs of moving the bananas from Costa Rica to St Lucia. Item Cost % of Total Producer Price 20 cents/lb 11% 11

Land & ocean transport to Miami 17 cents/lb 9% Miami Port and consolidation costs 28 cents/lb 16% Ocean transport and duties to St Lucia 75 cents/lb 42% Land transport, storage, handling and other 40 cents/lb 22% The message to be taken from this example is that with all the travel of the bananas that the producer price represents only about 11 percent of the final price of the fruit. Transportation represents the largest share of the final value at about 43 percent. Storage, handling, consolidation and wholesale and retail profits represent another 33 percent of the total value. The disproportionate level of transportation and handling costs is typical of much of the trade in LAC countries. The main cause is miss-match between port facilities among trading partners. This causes higher costs as the economies of scale cannot be taken advantage by many LAC countries due to small and/or poorly equipped port facilities. Summary and Conclusions I feel safe in stating that Georgia farmers and agribusiness men have a competitive advantage in exporting most of their agricultural products over their Central and South American counter parts. Their advantages begin with an excellent highway and rail system that facilitates the movement of their products to the post of Brunswick, Savannah and Charleston. The very efficient and competitive trucking industry allows for rapid delivery of large volumes of products in a timely manner with minimal delay. Our ports are large and efficiently operated. They allow for large ocean vessel access that provides transport around the world at competitive rates. Our Port Authority and Customs operations are top-notch, honest and efficient to their duties. Our security and inspections systems are the best in the world. In summary, we can export with the best of them and we are better than most. 12

The Center for Agribusiness and Economics Development The Center for Agribusiness and Economic Development is a unit of the College of Agricultural and Environmental Sciences of the University of Georgia, combining the missions of research and extension. The Center has among its objectives: To provide feasibility and other short term studies for current or potential Georgia agribusiness firms and/or emerging food and fiber industries. To provide agricultural, natural resource and demographic data for private and public decision makers. To find out more, visit our Web site at: caed.uga.edu Or contact: Kent Wolfe, Director Center for Agribusiness and Economic Development The University of Georgia Athens, GA 30502 Phone 706-542-2434 The University of Georgia and Fort Valley State University, and the U.S. Department of Agriculture and counties of the state cooperation. The Cooperative Extension Service offers educational program, assistance and materials to all people without regard to race, color, national origin, age, sex or disability. An equal opportunity/affirmative action organization committed to a diverse work force. Center Report 12-06 May, 2012 Issued in furtherance of Cooperative Extension Acts of May 8 and June 30, 1914, the University of Georgia College of Agricultural and Environmental Sciences, and the U.S. Department of Agriculture cooperation. J. Scott Angle, Dean and Director 13