Have had a fantastic time in Brazil. It is a country with a tremendous amount of opportunity and issues, some of which I will highlight below. For your information, we travelled to Sao Paulo, Brazillia down to Goiania, Uberaba, Ribeirao Preto and then flew to Rio de Janeiro. Thus, we didn’t get an opportunity to visit the Mato Grosso or other newly developed areas and as such my comments will be based on the areas I have seen. Our guide was the head of new products for Latin America (Mexico and all of South America) for Bayer and most of my information is sourced from him. Due to the language difficulties it was also very difficult to get good cost of production data from the various businesses we saw, however, we could obtain rainfall, some yields and land price data.

Firstly, the country has the potential to become a real agricultural powerhouse. It has abundant water and scale, both of which are hard to find in today’s global marketplace. It also seems that the rainfall is quite secure. In the areas we visited, rainfall was 1500-1800mm, with a lower limit of 900mm which is still a great deal. Furthermore, anecdotally it seems that if climate change is going to occur, Brazil’s rainfall will increase by another 20% (whether that is across the entire country or just pockets I am unsure).

Secondly, it appears that the Brazilian government has the will to really promote agriculture in this country. When we visited Brazilia, we met with the head of the agricultural “caucas” (a number of politicians from all sides of politics who have an interest in agriculture). This group numbered approximately 200 individuals out of the total parliament of 600 people. As a result, there is a real political will to support and promote agriculture and its development. This also extends to the fact that you could find a designated channel on TV that televised the auctions of cattle and horses for the public to watch. We also met with one of the local politicians (Moacir Micheletto) who seems to hold a bit of sway. He is coming out to Australia in September as part of a trade delegation/investors who are looking into coal mining in Australia. I have his contact details and although he didn’t speak English (at least to us) he may be interesting to talk to about investing in Brazil. We also heard from Greg Wallis (Austrade, Sao Paulo), that a number of Brazilian companies were looking to invest into the Australian sugarcane industry (details on which companies were not provided).

Another interesting comment is that Brazil has an additional 70 million ha to expand crop production without having to knock down more rainforest. This land is sourced from existing grazing operations. However, with respect to land clearing, the Government have introduced legislation to farmers to maintain remnant vegetation levels of approximately 20% of their farm in the southern areas of Brazil and 80% in the Amazon. These regulations are not being enforced with any vigour at present (according to the bureaucrats we met with in Brazilia) but if a foreigner were to flout the rules it may be a different story.

The other major limiting factor we saw was road infrastructure. Brazil is a big country and a lot of the areas that have been opened up do not have great access roads except if you front a highway or one of the major spurs. Furthermore, the cost of freight is a significant component for a number of farmers and makes me question whether investing in some of the newer areas that are being developed will be price prohibitive when it comes to moving product to port (90% of the freight from Matto Grosso to port is via road). This is particularly the case with low value crops like corn and soy. It is also a consideration if the price of fuel increases again as grain infrastructure is very poor. There are other issues such as the “cost of Brazil” (ie doing business), the bureaucracy and labour issues, but I won’t touch on these as you asked me to concentrate on the farming side of the country. I am also unsure if there is a double tax treaty with Brazil, and how easy it is to repatriate profits (withholding tax issues?)

Despite Brazil having a high rainfall climate, that brings its own challenges. Pests and diseases were frequently identified by growers as being major issues. I am unsure of their current spraying technology and chemical rotation practices, but the chance of resistance developing to both insects and diseases is very high.

Interest rates were approximately 12% at present and the politicians we spoke to were curious about how we as Australian farmers were accessing credit as it appears to be a major difficulty in Brazil at the present moment given the Global Financial Crisis. I imagine that this situation will improve in the future as the global economy eventually gets back on track but it may impact on production in Brazil for another 1-2 years.

I will now touch on the industries I saw and my views of them:

Dairy – I see massive potential for dairy. There is very little if any fresh milk sold in supermarkets (whether this is due to the distances that the product have to move from the farm to consumer or whether there is little refrigeration amongst households I am unsure) but there is a great deal of yoghurts and cheeses and I see this sector increasing in the future. It is interesting that when I met a chap from New Zealand, he said that they could grow 50t/ha of grass in Brazil and only 20-25t/ha of grass in New Zealand. He also said to me that nothing in Brazilian agriculture will get close to the returns they can achieve in dairying.

The dairies we saw were feedlot style rather than grass based like New Zealand and it will be interesting to see how this sector develops. Land prices for the dairies we saw in Minas Giras and Sao Paulo ranged from US$8,000 to US$15,000 per ha on a rainfall of 1500-1800mm. The dairy farm for Ma Shou Tao (one of the leading family farms in Brazil) was milking 300 head with an average production of 9000L per annum. This was the 19th biggest dairy in Brazil (but maybe this was only one of his farms, not sure with the language barrier and he only spoke to us for one hour). They are crossing Holstein with Zebu to create a milking cow that can handle the tropical temperatures (aiming for a ¾ Holstein, ¼ Zebu).

Cropping – We saw fields and fields of soybean, corn and lesser crops like peanuts (for rotation with sugarcane). Average soybean yields were around 3t/ha which for the rainfall (1500-1800mm p.a.) seems a bit light and disease (soybean rust) is a big problem with 4 sprays being required. Corn needed to be sprayed up to 4 times for an insect that eats the end of the cob (corn borer I think, I will have a better idea on summer crop agronomy after my time in the USA in July) and each spray was US$30/ha. Corn yields were up to 9t/ha but commonly around 7-8t/ha. Depending on the rainfall, double crop soy to corn is possible and Ma Shou Tao were relay cropping grass into young established corn stands to then put beef cattle on to graze over the winter. This option could be expanded into wheat planting, which I feel is an underdeveloped crop (at first glance) in Brazil. The reasons for this are that Brazil are one of the world’s largest importers of wheat and thus, any pricing should be based at (or close to) import parity rather than export parity for corn and soybeans. Transport costs should also be less than the 1500 km from the Matto Grosso to the coast as much of the wheat is grown in southern Brazil.

The rainfall for winter is about 20% of the annual rainfall (which would be between 300-360mm in crop) but their yields are only 3t/ha, which seems very light to me (on that rainfall I would be targeting 4-5t/ha). Despite wheat being grown in the southern end of Brazil and land being expensive there, I believe that possibly relay cropping wheat into corn stands could work with GPS guidance and controlled traffic (both of which I saw very little evidence of). In fact the evidence of strong mechanisation (like in Australia) was very weak. We did see a couple of new John Deere tractors and self propelled boomsprays travel past on trucks but on the whole the machinery we saw on farms were quite small and not overly modern. This may be very different in the western, braodacre areas like Matto Grosso. There is also very little on-farm storage in Brazil and there is interest from some individuals in establishing private storages (Ma Shou Tao had a 24,000t facility it established 2 years ago.

Cropping country we saw ranged from US$4,000/ha (for undulating country) to US$10,000/ha for the flat, highly arable high rainfall country. Anecdotally, we heard that agricultural land prices have stabilised or in some cases come back 10-20%, but I still feel that agricultural land in Brazil would be a good asset class to have an exposure to. It is my understanding that country gets cheaper the further north and west you go, with the cheaper country selling for US$1,000/ha which is uncleared. The soils in Brazil are also quite naturally acidic and require a significant amount of lime to bring them into production. We did hear figures of US$300/t (this number could have been lost in translation)for agricultural lime but this to me seems very excessive (only A$30/t in Australia) but maybe there is very little lime in Brazil?

Coffee – Coffee was an interesting crop and one that could also be integrated into a farming enterprise as it can be grown on land that is unsuitable to row cropping or wheat. Yields for coffee beans averaged around 4t/ha, with a duality in production (less one year, more the next). It takes approximately 3 years for plants to begin to fruit, the plant lasts for 15 years before needing to be replaced and management of the crop did not seem too complex. The plantation we saw had full drip irrigation (and was using fertigation for nutrition but drip irrigation is not very common in Brazil) but very little tie-up in machinery. Some sprays for insects and fungicides were required and in the Cafe de Carrera region the grower was receiving US$2/kg for the better quality coffee beans (graded score >75) but US$0.80/kg for the poorer quality (graded score between 50-75). We mainly saw Arabica beans which are the higher paying expresso style coffee as opposed to Robusta which is a lower paying instant coffee bean. The farm we saw was supplying a cooperative but seemed to be doing quite well. Again, net returns are hard to find out given language barriers. The coffee plantation was worth approximately US$10,000/ha established in the area we were in and water for irrigating was free (although it was mentioned that this would more than likely change in the future).

Sugarcane – This industry I feel is not one to be in at present, although if you took a longer term view on oil prices and the future of renewable energy now may be a good time to enter given the financial distress some of the sugar mills are allegedly facing (I have heard anecdotally). Cane yields were approximately 90t/ha, although we did hear figures of 10t/ha for every 100mm of rain (which could put yields up at 150t/ha in a 1500mm rainfall zone – I could not confirm this however). Prices are approximately US$15/tonne, but were US$20/t 2 years ago. It appears to me that the mills have all the power in this industry. Spraying for insects and sugarcane rust is needed and sugarcane can be harvested for 5-6 times (ie harvest annually for 5-6 years) before replanting is necessary.

One mill we visited was quite secretive and spoke no English (we had to rely on interpreters asking our questions, translating and then translating the answer back) but basically implied that the growers were making no money at the moment but needed to stick with the industry in the longer term. I feel that if one was going to enter the sugarcane industry, you would have to consider either owning your own mill (either individually or as part of a consortium) or joining a co-operative to be in control of your own destiny, particularly given your exposure to the weather over a nine month harvesting window (April to December). Despite my questionable views on sugarcane, it was by far the most prevalent crop we saw in our trip, particularly around Ribeirao Preto (Sao Paulo province) where all we saw was sugarcane.

Beef – We did not visit any beef farms so it is very difficult to give you an idea on production other than to highlight the grass growing potential in this country given the high rainfall, high humidity and long growing season that the tropical and sub-tropical C4 grasses here enjoy. A lot of the cattle country is being pushed north towards the Amazon as competing land use (cropping, sugarcane, coffee etc) are generating superior returns to cattle. From the perspective of a number of the Brazilian BBQ’s we enjoyed, Brazil have a long way to go to obtain better quality (taste, tenderness) beef than what they enjoy at present, unless all these premium cuts are exported. There is also the issue of foot and mouth disease, which is still yet to be effectively controlled, with Brazil pushing the individual farm and region food safety angle at the WTO to preserve export markets.

Tomatoes – Unfortunately we could not visit the Unilever plant due to a scheduling error however I have heard anecdotally that farmers are now growing processing tomatoes and growing 3 crops a year (soy, corn, tomatoes) which would be an interesting gross margin to examine. This crop could be a good fit in a dryland or irrigated system assuming that one was close enough to a processing plant and could obtain a contract

Chicken – Whilst we did not visit a chicken farm we had Rob Kestal (Nuffield 2007) on our tour with us and he has previously met a US grower who had relocated a 1 million bird operation from the USA to Brazil because cost pressures were so much less and returns significantly better. Whilst chicken meat imports are presently banned in Australia, this could change in the future and Rob told us how it’s a strong cashflow business. The other benefit of this business would be value adding the grain produced on farm into arguably the best feed conversions in meat outside of fish (approximately 1.7-1.8kg of feed for 1kg of meat in chicken) and you could utilise the manures for your farming operation (as you also could for dairy).

Forestry – Whilst we didn’t visit any forestry projects, there were a number of bluegum and other eucalypt plantations for chips and pulp. We were told that the growing time in Brazil was approximately half that compared to Australia (about 7 years?) which would make Brazil an interesting case study if carbon credits needed to be generated in a hurry, or even from a production point of view compared to Australia. Then again, maybe the cost of land would prevent that from happening.

In summary Brazil was a fascinating country with a great deal of potential. In fact our Nuffield group were very interested in forming our own consortium to look at investing in land over here because of the security of rainfall and the scale. These are techniques and skills that we would bring to a business model. I feel that if investors are serious about investing in Brazil, they should look at assembling a number of growers with strong technical expertise in the agriculture of interest (be it dairy, cropping, coffee, sugarcane etc), particularly in precision agriculture, and fly them into Brazil for a month with a good interpreter to get a closer understanding of the production systems and potential to farm in this country. I would propose that Australian (graingrowing and sugar) and New Zealand (dairy, beef and growing grass) farmers have the best expertise.