AgDM newsletter article, December 2000

Brazilian soybeans—Can Iowa farmers compete?

Phil Baumel Bob WisnerMike Duffy Don HofstrandBy Phil Baumel, Bob Wisner, and Mike Duffy, professors of economics; and Don Hofstrand, extension farm management specialist, 641-294-6263, pbaumel@iastate.edu

This is the third in a series of three articles on Brazilian soybean production. Previous articles were:
Brazilian soybeans— What is the potential?
Brazilian soybeans -- Transportation problems

In the previous two articles we discussed the rapid growth in soybean production in Brazil and the transportation problems it must overcome to continue this expansion into the future. Below is a discussion of the competitive position of Iowa soybean farmers and what they must do to compete with Brazil.

Cost of production

Estimates of the cost of producing soybeans in Mato Grosso and in Iowa are shown in Table 1. Iowa producers are at a cost disadvantage to Brazil on all inputs except fertilizer, herbicides and insecticides. As Brazil improves its infrastructure, their fertilizer costs will fall but will likely remain above costs in Iowa.

Labor costs in Mato Grosso range from $80 to $200 per month plus free housing. Laborers sometimes work seven days per week during the planting and harvest season with no additional pay for the extra days. Thus, labor costs per bushel in Brazil are only one-third of those in Iowa.

In spite of these advantages, the total non-land cost of production is higher in Matto Grosso than it is in Iowa. Iowa's total non-land cost per acre is $139 and Matto Grosso's is $167.

However, the relevant comparison is cost per bushel rather than cost per acre. A portion of Iowa's advantage is lost in the transition from acres to bushels because Matto Grosso's average yield is higher than Iowa's. In spite of this, Iowa's total non-land cost is still lower than Matto Grosso's.

Brazil's greatest competitive advantage is its land cost. The land cost for Iowa soybeans is $2.38 per bushel higher than for Mato Grosso soybeans. When land cost is included, total cost per acre and per bushel for Iowa are substantially higher than for Matto Grosso.  Total soybean production costs including land are $2.13, (61 percent) per bushel higher in Iowa than in Mato Grosso. Iowa farmers must find a way to compensate for this disadvantage if they are to compete with Brazil.

Cost per acre

  Cost per bushel

Non-land costs

Iowa

 

Mato Grosso  

Iowa

  Mato Grosso

Seed

$21.00

 

$11.00  

$.42

  $.20

Fertilizer & lime

25.00

 

70.00  

.50

  1.27

Herbicides & insecticides

30.00

 

36.00  

.60

  .65

Labor

14.00

 

5.00  

.28

  .09

Machinery

34.00

 

29.00  

.68

  .53

Other

15.00

16.00  

.30

  .29

Total non-land costs

$139.00

 

$167.00  

$2.78

  $3.03

Land cost

$140.00

$23.00  

$2.80

  $.42

Total cost

$279.00

 

$190.00  

$5.58

  $3.45
Yield per acre 50   55        

* Sources: Duffy, Michael and Darnell Smith, 2000 and personal conversations with Brazilian soybean producers and with Joao G. Martines-Filho.

Can Brazil sustain continuous soybean production?

Midwest farmers often have the impression that their Brazilian counterparts raise continuous soybeans, without rotation. That is a myth, probably coming in part from the fact that Brazil is not a significant exporter of corn, and an assumption that corn is the main agronomic alternative to soybeans. By world standards, Brazil is a large producer of corn, but uses almost all of it domestically. The reasons Brazil is not a corn exporter are:

Brazil's soybean growers typically don't grow continuous soybeans. They have rotations that include wheat, corn, cotton, rice and sugar cane. In newer producing regions of the Cerados, the growing season is long enough to permit two and in some cases three crops per year, with one or more of these alternative crops grown as a second or third crop. Rice typically is planted on newly cleared land for the first two years while the soil acidity is being lowered to a level that soybeans and other crops can tolerate. Much of Brazil's sugar cane is produced for its extensive alcohol fuels program. In Brazil, consumers have a choice of buying either pure alcohol or gasoline for their cars.

Brazilian farmers in the traditional soybean areas have followed this rotation pattern for much longer than central and northern Plains U.S. farmers, without adverse effects on yields. In fact, Brazilian soybean yields have increased a little more rapidly than those in the U.S. From 1970 to 2000, the average Brazilian soybean yield increased 107 percent, compared with only 45 percent for U.S. soybeans.

Cost of production and transportation

As shown in the previous article in this series, Brazilian soybeans – Transportation problems, the cost of transporting Brazilian soybeans to Northern Europe is significantly higher than for Iowa soybeans. Will smaller transportation costs offset the higher production costs of Iowa soybean producers? The cost of transportation analysis presented in the previous article is included with the production costs and shown in Table 2.

Table 2. Estimated cost of producing and transporting soybeans in Iowa and Mato Grosso, Brazil (U.S. dollars)

Cost per acre

Cost per bushel

Iowa

Mato Grosso

 

Iowa

Mato Grosso

Non-land production cost

$139.00

$167.00

 

$2.78

$3.03

Transportation costs to Northern Europe

 

from Jefferson, Iowa *

42.50

 

.85

from Sapezal, Mato Grosso **

83.05

 

1.51

Total costs

$181.50

$250.05

 

$3.63

$4.54

Land cost

$140.00

$23.00

 

$2.80

$.42

Total costs

$321.50

$273.05

 

$6.43

$4.96

* Rail-barge from Jefferson, Iowa to New Orleans and ocean vessel to northern Europe.

** Truck-barge from Sapezal, Mato Grosso to Itacoatiara and ocean vessel to northern Europe.
If just non-land production costs and transportation costs are included, Iowa has a substantial cost advantage. However, when land costs are included, Brazil still has about a $1.50 cost advantage per bushel.

Using rail transportation rates for shipping soybeans from Mato Grosso to an ocean port is about $.70 more than the route listed in Table 2. However, even the higher rail transportation costs do not totally offset Brazil's cost advantage.

The transportation cost analysis above assumes that Northern Europe is the final destination. However, the Pacific Rim is also an important market for soybeans. Because Brazil is farther east than Iowa, the distance from Brazil to the Pacific Rim is substantially greater than from Iowa to the Pacific Rim. So, Brazil’s transportation cost disadvantage is greater when the destination is the Pacific Rim rather than Northern Europe.

Competitive solutions for Iowa farmers

Ways of increasing Iowa's competitive position in producing soybeans include reducing non-land production costs, reducing land costs, maintaining or increasing government payments, reducing marketing costs, and improving soybean quality.

Lowering non-land costs

One solution for Iowa farmers is to reduce the non-land cost of production. Possible cost reductions could come from:

Reduce farmland values

Farmland values are the major cause of Brazil's cost advantage in soybean production. So, reducing land values is critical if Iowa farmers are to compete based on cost. Iowa farmers become competitive if farmland rental rates drop by about $50 per acre.

Farmland tends to be a unique production input. Different than seed, fertilizer, chemicals, etc., land does not have to be remade every year. So it has no annual manufacturing cost. Also, most farmland, except that located next to cities, has limited alternative uses. Finally, land is fixed in supply and becomes the limiting resource when grain supplies become scarce.

Due to these reasons, farmland becomes the residual claimant of profits in crop production. If profit levels are high, farmers will bid these profits into higher land values and rental rates. Conversely, if profits are low (losses), farmland values and rental rates will decline until breakeven levels are reached again.

As shown above, Iowa farmers can easily compete with Brazilian farmers if land cost is not taken into account. So, by reducing land values and rental rates, Iowa farmers can be competitive. The reduction in values and rents will occur automatically if market forces are allowed to work. However, it would be an extremely painful process. First, the downward adjustment would take place slowly placing tremendous financial pressures on farmtenants. Secondly, the eventually impact on landlords would be severe due to the magnitude of adjustment needed.

Increasingly, owners of farmland are not farm operators. The percent of Iowa farmland owned by the farmer-operator fell from 54 percent in 1982 to only 31 percent in 1997. Therefore, most of the reduction in income due to reduced land returns is shifted to non-farm landowners. Often these are retired farmers.

The cycle of tightening margins

Iowa farmers go through a continuing cycle of tightening profit margins. Several consecutive years of good world weather conditions usually leads to high yields, overproduction, and low prices. However, an occasional year of poor weather results in significantly reduced yields, lower production, a period of shortage, and higher prices. Believing the false expectation that a new age of higher prices in agriculture has dawned, the higher prices are quickly capitalized into higher farmland values and rental rates. Also, in South America, land clearing activities accelerate and the production area expands.

The poor weather is usually of short duration and normal weather conditions return. This results again in higher yields, larger supplies, and lower prices. However, the increased farmland values in Iowa and expanded production area in South America make the profit picture for Iowa farmers tighter than before. After several years of good growing conditions, another poor weather year will start the cycle over again, tightening the noose around the necks of Iowa farmers.

Increase government payments

Direct government payments to farmers have been a traditional way of making Iowa farmers competitive during periods of low prices. To make Iowa farmers competitive with Brazilian farmers would require annual payments of about $50 per acre or $1.50 per bushel. Unless a structural change occurs in the cost of producing or transporting soybeans in either Iowa or Brazil, government payments would need to be continued annually into the foreseeable future.

Government payments of this size would probably be capitalized into higher farmland values and rental rates. To compensate for the higher production costs, government payments would need to be increased. This would start a cycle of higher production costs and greater dependency on government largess.

Increase quality

To capture an increased share of the export market, exporting countries must provide a quality product at the cheapest price. This could be accomplished by:

Conclusion

The farmers of Mato Grosso have lower production costs than Iowa farmers. Even after higher Brazilian transportation costs are factored in, they are still the low cost producers. The one cost item that makes Iowa farmers higher in cost is farmland values. If farmland values are allowed to fall, Iowa farmers can compete with Brazil on world markets. However, the adjustment would take a painful toll on farmers and landlords. Reducing costs in other areas of soybean production would soften the decline but would not eliminate it.

So, if Iowa farmers want to compete with Brazil on exporting commodity soybeans without continued large government support, the impact will be severe. However, Iowa farmers may want to consider competing on quality with high value soybeans rather than competing on cost with commodity soybeans.

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