A recent shift in the purchasing practices of meat producers in the U.S. illustrates the power of the weather, and the extent of its impact on the cost of what we eat.
According to an article in the WSJ, Smithfield Foods, Inc. (NYSE:SFD), which is the largest pork producer in the world, has had to resort to buying corn from Brazil, as domestic corn prices shoot through the roof due to the worst drought seen in the U.S. in decades.
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The difference between corn prices prevailing at a Brazilian port and in the U.S. Gulf of Mexico has never been higher – $290 per metric ton in Brazil versus $345 in the U.S. Gulf of Mexico. In effect, Smithfield Foods, Inc. (NYSE:SFD) has found it cheaper to buy in Brazil, ship it to the Eastern U.S., and then transport it into plants by rail.
The action is historic considering the U.S. is the world’s largest producer and exporter of corn. According to the Financial Times, the last time corn was imported to the U.S. was in 2008, that too as seeds, not as animal feed.
But whereas the U.S. grapples with the likelihood of a corn shortage, Brazil has had a bumper crop of a record 70 million tons of corn. The vagaries of the weather have seen a shortfall in the production of soybeans in Brazil, and this could ease congestion in the ports, making corn exports even more attractive. According to a USDA estimate, this year Brazil could export 14 million tons of corn.
This raises the possibility of Brazil’s economy benefiting significantly in the case of a global food shortage, due to weather or other concerns. On corn, Alysson Paolinelli, former Brazilian minister of agriculture and head of Abramilho, the national association of corn producers, is quoted by the Financial times as saying, “Brazil is becoming more and more competitive in corn,” and adding that farmers had learned how to grow a second corn crop in the first few months of the year on the back of early soya harvests.
The last fact mentioned is significant, and indicates the country’s readiness to beef up agricultural productivity and exports to counter a global economic slowdown – as they say, food never goes out of fashion!
According to the U.S. International Trade Commission (USITC) in its publication Brazil: Competitive Factors in Brazil Affecting U.S. and Brazilian Agricultural Sales in Selected Third Country Markets, Brazil has succeeded in rapidly increasing domestic agro-production by expanding the supply of cultivable land and improving yields, thereby more than meeting growing domestic demand and leaving a surplus for exports. In fact, Brazil is now a force to reckon with in the global markets for the supply of soybeans, soybean meal, and oil, corn, beef, poultry, pork, cotton, and orange juice, as well as its traditional exports of sugar and coffee.
Brazil is aided by a huge land supply, abundant water resources and favorable weather patterns. These factors contribute together to make the intensive cultivation of high-yield crops viable. The Brazilian government is also stated by the USITC to have created excellent research that is helpful to farmers. Brazilian farming is known for its competitive costs.
Given these powerful advantages, Brazil’s economy could see a boost from agricultural exports, provided the government could address certain key bottlenecks.
The first is the transport and port infrastructure. Brazilian port congestion is notorious, and the government needs to extend its road and transport infrastructure to farming areas in the interior. High cost of credit is another concern. Closer attention needs to be paid to the problems faced by Brazilian farmers, due to disease.
Nevertheless, Brazil’s agricultural performance is creditable, and critical for global consumers.