Feb 08, 2017

Update on Brazilian Infrastructure

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Brazilian farmers are poised to harvest a record large soybean crop, and as a result, there has been a lot of speculation if the infrastructure in Brazil can handle the big crop in a timely fashion. In that light, I thought a recap of the current infrastructure situation in Brazil would be helpful.

Progress on infrastructure improvements in Brazil has been slow, but finally there have been some noticeable improvements in Brazil's highways, ports, railroads, and barging operations.

Highways - On our recent visit to Mato Grosso, we actually drove on an honest-to-goodness freeway, something I thought I would never see in Mato Grosso. BR-163 is still the only major highway going into and out of Mato Grosso, but at least that highway is slowly improving. Approximately 900 kilometers of BR-163 from the city of Sinop in northern Mato Grosso to the border with Mato Grosso do Sul will be converted from a two-lane highway to either a freeway or a limited access four-lane highway.

Progress on the project has been somewhat haphazard, but the southern-most 100 kilometers have been completed and it is equal to the best highways in Brazil (see later photo). Progress on completing the remaining approximately 800 kilometers has not been as good. One stretch of BR-163 through a small mountainous area north of the state capital of Cuiaba that had already been completed, is now closed due to structural defects in the roadbed.

The company in charge of the entire project has indicated that they underestimated the cost of the project and they are looking for outside investors in order to complete the project. They have also indicated that they will not meet the original timetable for completion and that it will take at an additional 5 years to complete.

In the meantime, one thing they have done that is very important is that they have eliminated the pot holes on the existing stretches of BR-163. This greatly improves the average travel times and safety on the highway. Now it is not quite as "hairy" when you need to pass some of the thousands of trucks on the highway (see later photos). So while the freeway is still a few years away and many secondary roads are nearly impassable during the rainy season, the major roads in Mato Grosso are in the best shape that I have seen in many years.

Before any of the current construction had begun, the travel time between Rondonopolis, which is the second largest city in Mato Grosso, and the state capital of Cuiaba (a distance of 210 kilometers), was approximately 5 hours on a good day. The travel time is so slow because of the thousands of dual tandem grain trucks traveling the two lane curvy road up and down hills. At times passing the trucks is impossible, so you just have to wait as they slowly move up the hills. Once the road is converted to a four-lane limited access highway, the travel time between the two cities will be reduced to approximately 2 hours.

BR-163 has already been converted to a toll road to pay for the improvements and the tolls are not cheap. To travel the length of the state one way, the cost for a passenger car is approximately $14.25 and for a dual tandem grain truck, it is approximately $128.00. Nearly all the major highways in Brazil are being converted to toll roads in order to pay for upkeep and expansion.

Additionally, BR-163 is in the process of being asphalted from northern Mato Grosso to the Amazon River. There are about 180 kilometers left to go, but completing the project has been slow due to several companies involved in the project declaring bankruptcy. Hopefully, the project may be completed by the end of 2017. Once completed, a huge amount of soybeans and corn in Mato Grosso will flow north to ports and barging operations on the Amazon River instead of to ports in southern Brazil.

Ports - We have discussed many time the "Northern Arc" of ports on the Amazon River and along the northern Atlantic Coast of Brazil. These half-dozen ports are being built and/or expanded to handle soybean and corn exports from central Brazil. It is estimated that there will be a 40% saving on transportation costs if the grain flows north instead of south.

With increased competition from the "Norther Arc" of ports, the big ports of Santos and Paranagua in southern Brazil have been forced to upgrade and modernize their operations in order to stay competitive. The Port of Paranagua has invested heavily in recent years on upgrading their operations and the Port of Santos announced last week a major investment in upgrades.

The Brazilian government announced late last week an R$ 369 million upgrade of the Port of Santos. The upgrade includes dredging the channel leading to the port, dredging the berths, and improvements at the berths.

The improvements were announced by the Minister of Transportation, Ports, and Civil Aviation, Mauricio Quintella Lessa. The most important component of the project is the dredging. The dredging will increased draft of the channel and the berths allowing for faster and safer entrances and exits from the port. This will speed up loading and unloading resulting in reduced wait times and reduced costs. The company in charge of the dredging will have 17 months to complete the project.

The Port of Santos is Brazil's leading port responsible for moving approximately one-third of Brazil's exports and imports. Santos is the leading port for the export of agricultural commodities such as soybeans, sugar, corn, cotton and meat products. It is also the leading container port in Brazil moving 3.8 million containers in 2015.

The Port of Santos was responsible for moving 113.8 million tons of cargo in 2016, which was 5% less than the record amount set in 2015. A two-year long recession in Brazil has reduced the amount of goods moving through the port. In 2016, a total of 4,723 vessels docked at the port for 81.4 million tons of exports and 32.4 million tons of imports.

Railroads - Currently there is only one railroad serving the southeast corner of Mato Grosso, but that is expected to change in the coming years. There have been numerous meeting/discussions/plans for extending that railroad further into the state and then to build a railroad from central Mato Grosso parallel to BR-163 straight north to the Amazon River.

Bidding on the extension of the Ferronorte Railroad further into Mato Grosso is set to start later this year. The proposed railroad north to the Amazon River is being called the "Gain Railroad" and there has not been a timetable set for the bidding process. My guess is that it might be later this year or sometime in 2018. Once the bidding is done, completion of the railroads will probably take at least five years.

Barging operations - There is already several barging operations up and running on the Amazon River and other barging operations are in the planning stages for several other southern tributaries of the Amazon River. These operations will supply much of the grain for the "Northern Arc" of ports.

It will be years before all these projects are completed, but once up and running, the cost of transporting Brazilian grain to overseas markets could be reduced by as much as 40% making Brazilian products more competitive in world markets.

With the United States pulling out of the Trans Pacific Partnership (TPP) and threatening to undo the North American Free Trade Agreement (NAFTA), the Brazilian agricultural sector is anticipating a greater market share of the world's agricultural exports.

For example, five of the countries in the TPP are among the top 30 countries that import agricultural commodities from the state of Mato Grosso. Mato Grosso exports soybeans, soybean meal, soybean oil, corn, cotton, and meats. Vietnam ranks 6th in the value of imports from Mato Grosso, followed by Japan in 7th place, Malaysia in 13th place, the United States in 26th place, and Chile in 27th place. With the U.S. out of the TPP, Brazil and Argentina feel it will open the door a little wider for their agricultural exports. All three countries (Brazil, Argentina, and the U.S.) compete in the same markets with the same agricultural products.

The Minister of Transportation did not specifically say that the upgrades to the Port of Santos were in response to the United States potentially pulling back from world markets, but it is part of a larger pattern in Brazil involving the upgrading and expansion of all the ports important to the agricultural sector.