Long before he travelled to Brazil, Rick Strankman couldn’t shake the idea that
his future in farming looked dim.
Margins on his Altario, Alta., farm seemed to be getting tighter every year and there was little to make him think they would improve.
To him, prairie farming seemed filled with obstacles and frustrations.
His feelings were confirmed by a recent visit to Brazil, which convinced him that farmers in that country’s frontier regions are in a better position than Canadian farmers to compete in world markets.
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“There’s something wrong with primary agriculture in this country,” said Strankman a few days after returning from his tour of Brazilian frontier farmland.
“With Western Canada, it’s like hardening of the arteries. Personally,
I can’t see a guy with a lot of capital investing it here in (Canadian)
agriculture.”
But investing in Brazil seemed enticing.
“Maybe it wouldn’t be so hard to relocate there,” he mused.
Many farmers across North America are wondering the
same thing. Tales of Brazil’s potential – its massive, untapped
land base, its low production costs and its frontier spirit – have
been weighing on the minds of some North American producers
who worry their ability to compete is diminishing.
And while some have wondered about moving south to chase opportunities in Brazil, others have resigned themselves to the economic situation on the Prairies.
But many economic analysts and farm group leaders who have investigated Brazil’s economic expansion say there is no reason
for despair. Things aren’t so bad for producers here and they
aren’t so great for producers there.
Under the gleaming veneer of Brazil’s agricultural expansion lies a rough structure with wobbly legs that most North American farmers probably wouldn’t want to rest their futures on.
If Canadian farmers continue to do what they do
best, there is no reason to think they cannot continue
to be world leaders.
“There may be huge rewards down there, but there
are also huge risks,” said Ron Obermoller, president
of the Minnesota Corn Growers Association, who recently returned from a tour of Brazilian farms.
“To me, they’ll get five to 10 years of prosperity, but
it’s a powder keg.”
Brazil’s competitive advantages can look impressive
on paper.
Uncleared land in frontier regions costs far less
than North American land with similar productive value. Brazilian farm workers can be hired for about $300 Cdn per month.
But while Brazilian farmers may have low land costs in the interior of the
country, they also have much higher transportation costs.
Instead of being able to haul crops to a nearby railway, most farmers
have to truck them to coastal ports more than 1,000 kilometres from
Brazil’s interior.
The roads are clogged with grain trucks and beaten
by heavy use. And, as more farmland is opened up, the
condition of roadways is likely to worsen.
Another prominent cost is grain storage.
There is no developed commercial grain storage system in
Brazil, so farmers must build their own on-farm storage.
Prairie farmers also deal with this cost but unlike their
counterparts in Brazil, they can rely on an extensive farm
credit and safety net system.
In Brazil, banks rarely lend to farmers, and when they do, the interest rates are many times greater than they are in Canada.
As well, there is virtually no government safety net system.
There are also problems with farmland tenure. In addition to unsettled
Indian land claims that lead to small and sporadic conflicts
in the interior, a major movement of “landless workers” is clashing
with Brazil’s commercial farmers, in some cases attempting
to take control of farmland.
Farming in Brazil has some major advantages, but many disadvantages. Parry Dixon, director of economic research
for Archer Daniels Midland in the United States, said land
prices in Brazil’s interior are now surging in areas close to roads.
In the northern Brazilian state of Mato Grosso, some land prices
have quadrupled in the past five years.
And Brazilian farmers still have to pay about double what most
North American farmers have to pay in grain transportation.
“Their costs are going up,” said Dixon.
“They still have to develop an infrastructure, and somebody has to pay for that.”
Dixon said low farmland prices in Brazil will “correct” themselves if the land is productive.
Minnesota Soybean Growers Association executive director Jim Palmer said American farmland prices might have to go the other way – drop to acknowledge the new flood of South American land on the market.
“Farmers always say ‘buy land because they aren’t making any more of it’, but down there they are making more of it,” said Palmer, who recently visited a number of Brazilian grain and oilseed operations.
But he also thinks Brazilian land prices and production costs will increase as the agriculture industry develops.
When this happens, Brazil’s competitive advantage in agriculture will be less obvious.
“Our costs are going to have to come down, but theirs are going to go up,” said Palmer.
Canadian and American analysts say Brazilian production advantages generally apply only to
bulk commodity production.
That isn’t necessarily a direct threat to prairie farmers because the Canadian agriculture industry is moving
away from low-value commodity production.
“We have to look at more than simply the cost of production,” said Martin Rice, executive director
of the Canadian Pork Council.
“We’re still quite well positioned.”
Brazilian hog farmers are able to build cheap barns
and secure low-cost labour and can rely on huge
domestic feedgrain crops, Rice said.
That allows them to produce cheaper bulk pork than Canada.
But Canadian producers have focused on producing healthy, high quality pork that can be sold to premium markets such as Japan.
Brazil can’t sell into those markets because the country is not free of the threat of foot-and-mouth disease and production is also affected by a variety of other animal diseases.
“They have very challenging obstacles to achieving high health status,” said Rice.
Without that status, Brazilian farmers will have
to rely on markets like Russia, which pay poorly.
A number of countries that border Brazil also have
foot-and-mouth disease, so Brazilian producers may
shy away from designing their industry for export
markets, Rice added.
“Having more than 10 or 15 percent of their industry focused on exports would be very dangerous for them.”
Right now, Canada exports about 50 percent of its pork production.
Canadian farmers are also beginning to concentrate more on segregated varieties and are increasingly adopting specialized crops.
Brazil may be able to produce cheap soybeans, but the Canadian canola industry is marketing its oil as a premium, healthy product that is designed to trade above soybean oil.
“It’s going to be a different market than in the past, which will demand more marketing skills, but we’ll be able to compete,” said Broadview, Sask., farmer David Sefton, a director of the Canola Council of Canada.
“We’re not going to compete with Brazil for billion bushel sales of soybeans to China, but the more sophisticated the market becomes, the more demanding it becomes.
“Canada has always been known as a specialty marketer.”
Brazil’s perceived threat to prairie farmers comes from its ability to supply world markets with more bulk commodities.
But supply is only one side of the supply and demand equation, and analysts say the continuing growth of world demand may mean that Brazil’s expansion is
not as big a threat as some had feared.
“Right now the oilseed market is tight, and yet Brazilian farmers are growing all these beans, and nearby (Chicago soybean futures) prices are $9.35 (US per bushel). That tells you something,” said Canadian Wheat Board analyst David Boyes, who specializes in South American markets.
“That’s good news. That says Brazil can bring it on and demand is keeping up.”
So far, Brazil hasn’t ruined world grain and oilseed markets.
World stocks have been falling for a number of years as increasing world consumption outstripped world production. If developing countries with their huge populations continue to develop, their populations will consume more and demand should increase.
“We wouldn’t have any problems at all if the people of India and China were consuming at the levels we are here in Canada,” said Boyes.
Analysts at the Canadian Wheat Board’s Grain World market outlook conference said urban expansion in China is eating up parts of that country’s
land base.
Unlike Brazil, China does not have huge areas of unused, arable land.
Farm productivity is likely to increase in China because many primitive methods are still employed and few modern inputs are used. But China also has a chronic water shortage problem that will be worsened by urban development.
Irrigation farming will probably become much more difficult.
Obermoller, who was part of a group of farmers that built a $100 million soybean processing plant in Minnesota last year, said he is confident world demand for soybeans will keep growing.
That will allow him and other American soybean producers to maintain viable farming operations, even if new South American production takes the peaks out of the market in the future.
“I don’t see it flooding the market. I see it stabilizing the market. I don’t expect to have $10 soybeans all the time,” said Obermoller. “But if we can stay in that $5 or $6 range, it’s doable for us.”
And, after visiting Brazil and seeing some of the disputes over land ownership that are growing between large-scale commercial farmers and landless workers, he thinks expensive farmland in Minnesota might not be such a bad investment.
“Part of the price of our land has to do with having a stable government. That’s part of the reason some of that Brazilian farmland hasn’t been settled and farmed before,” he said.
“If the government isn’t stable, you could lose a $5 or $6 million farm tomorrow.”
The sudden surge of a developing exporter can be jarring for traditional exporters such as Canada, added Boyes.
But often that exporter’s threat can be overstated.
New production can often be fitted into the existing or expanding world markets.
“Two years ago, the big bugaboo was the former Soviet Union,” Boyes said.
“They were going to push us all out of the business. But this year they had a drought and are importing wheat.”
Obermoller said many of his worries about Brazil were allayed during his visit to South America.
The trip revealed problems in Brazil that many Minnesota farmers hadn’t heard about.
But there was one advantage Brazilian farmers possessed that many North American farmers seem to have lost: optimism.
“What bothers me around here is the attitude of farmers,” said Obermoller. “We’re so down that we don’t want our kids to farm. We feel we’re going backwards. (Brazilian farmers are) just the opposite. They see a future. That’s what impressed me.”
