Agriculture

Global emerging markets

Richard Ferguson RFerguson@rencap.com

The future of soft commodities trading

Agriculture
Global emerging markets

Richard Ferguson RFerguson@rencap.com

The future of soft commodities trading
We have become used to the idea of structural change across the agriculture sector in recent years. However, most analysis of these profound changes tends to focus on the emergence of industrial farming groups across the corporate landscape. What is still missing is an analysis of the equally profound impact that these aggregated enterprises will have on existing businesses. The effect will be felt most keenly by the trading houses, which have dominated the agriculture sector throughout the modern era. As easy as ABCD. The dominance of the traditional trading houses is shifting, due to two simple changes in the landscape: the emergence of larger farming groups; and, crucially, the availability of cheap information, which is no longer under the control of the larger trading groups. These drivers, in tandem with resource nationalism, food security and what we call market dislocation, are having a profound impact on the structure of the industry. This loss of oligopolistic power will force the traditional trading houses to enact fundamental and radical changes to their existing businesses. New market participants. Few will have heard of Gavilon, Libero Commodities and Russia’s United Grain Company (UGC). Fewer still will be aware of the plans being put in place by governments and ministries in countries as diverse as Abu Dhabi and South Korea to establish alternative trading platforms. The ultimate paradox is that while these companies – old and new - were all founded to reduce uncertainties, the outcomes are less certain than at any other time in the modern era. New orthodoxies. The companies best placed to survive these vast shifts in power will be those willing to surrender complete control of their businesses and acknowledge new market dynamics. Those attempting either to maintain or establish control of a rapidly changing landscape will struggle to cope with the realignment of the sector. New suppliers. The dominance of the United States, Canada and Australia as agriculture suppliers is eroding in relative terms. Brazil and Russia – despite the setbacks experienced by the latter through this year’s forest fires and droughts – will not only shape some of the corporate entities that are emerging, their positions as soft commodities suppliers will also be greatly enhanced. The infrastructure challenge. However, making this transition will require massive investment in infrastructure – from ports, railways and silos, to investment in farms themselves. The ability to harness Brazil and Russia’s natural resources through a favourable investment climate, underpinned by a strong rule of law, will amount to little if there is no corresponding investment in both countries’ creaking infrastructure.

Contents
Agents of change Resource nationalism, dislocation and food security The companies in the frame The traders’ response The infrastructure challenge Russia and UGC Brazil Russia: Now for the hard bit An overview of the Russian agriculture sector The development of the Russian agricultural sector Land use Land ownership Major agricultural products Brazil: The past is another country An overview of the Brazilian agriculture sector The development of the Brazilian agriculture sector The role of government Land use Farm structure Agricultural output Livestock Sugar versus ethanol Supply-side impediments 3  4  5  12  16  16  21  25  26  28  32  36  40  46  47  49  52  54  57  60  65  66  69 

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are becoming bigger. not only is their access to information greatly enhanced. Cargill and Louis Dreyfus (ABCD). Aggregating this sort of information and using it to one’s advantage was never going to be an option for the type of traditional farming community symbolised in Grant Wood’s iconic (and much parodied) painting. Bunge. but increasingly we have witnessed the emergence of industrial farming groups. which. the fact that the cost of information has declined significantly in the past 10 years means that one significant competitive advantage in the ABCD armoury is no longer the weapon it was. In isolation. However. In other words. Archer Daniels Midland. and underfunded farmers have long been at the mercy of well-capitalised trading houses. or that the club simply included a few more letters of the alphabet. but their own technological know-how and access to capital is also increasing sharply. 3 . Therefore. a farm of 50. A decade ago. Adam Smith’s view that (to paraphrase) business people rarely meet to act in the public interest. one might assume cheap information was the norm. American Gothic. large-scale farmers but expensive information). the only real change effected by cheaper information would be that the farmer would understand the extent to which he was a price taker. To illustrate the point. has now disseminated among a considerably wider group of participants.Agents of change Structural change can be so gradual that its effects can only be captured through the lens of the historian. while simultaneously knowing it was raining too much in parts of Iowa. A fundamental realignment of the sector is under way. The second development is the emergence of industrial farming enterprises. now the 12 biggest arable farms in Russia – if combined – would be about the same size as Belgium. (i..e. The familiar arrangements and structures that have dominated the business since the invention of the telegraph are now in the throes of change. but instead contrive to raise prices. the second structural. would have become axiomatic. was once expensive information to obtain and control. Paradoxically. and in a manner that years hence will likely be described as seismic. and only the well capitalised – specifically the ABCD companies – could afford it. the farming industry remains highly fragmented. The technological shift is that the information oligopoly that previously aggregated among the dominant industry quartet. while not in the same league as the seed and fertiliser suppliers or trading houses.000 ha was a rarity. This is true of the soft commodities sector. This lasting change is being driven by two interconnected shifts. In short. somehow we cannot fathom the present in a similar manner. In this case. and the inescapable truth is that they are surprisingly simple adjustments: the first is technological. As for the reverse. but the agriculture sector remained highly fragmented. while we are prone to simple interpretations of a distant past. Doubtless. the existence of well capitalised. and 2) how little he could actually do about it. a farmer could look at soft commodities prices in a newspaper and wonder: 1) how (and why) he couldn’t achieve the prices quoted therein. these two developments would hardly challenge the major trading businesses’ operations. one would probably find that the oligopolistic tendencies of the ABCD quartet remained intact. Knowing it was not raining in the state of Victoria in Australia. seemingly complex events draw straightforward explanations.

The current era. farmers. First. there is an opportunity for someone to develop logistics and infrastructure along the Silk Road – and it won’t necessarily be Cargill or ADM. the two developments working in tandem will have a considerable impact. and is not a forced seller when harvest comes because he. has expensive silos. we shouldn’t ignore some brutal truths in this somewhat Panglossian assessment. Two years later. The birth of the 100. but is still rare in overall terms. but it plays such a crucial part in the human psyche that it will always be a motivating factor in the development of the sector.Agriculture Global emerging markets However. other supplementary themes should be considered alongside these pivotal shifts. Of course. not the exception. Ultimately he is in a position not just to witness the arbitrage opportunity by cutting out the middleman. dislocation and food security We have noted how lower information costs. In a previous professional existence. expensive storage facilities. in the main. is also forcing the traditional trading houses to rethink their ways of working. Ignore the hobby farmers of Western Europe and the subsidy junkies of the developed world. while the newly urbanised affluent are based in societies where infrastructure and logistics remain poor. there is a multitude of asset-rich but cash flow-impoverished farmers on the planet. in which we are perhaps witnessing fundamental longterm shifts towards a multi-polar world. the well-capitalised corporate farmer is becoming more common. possess little capital and even less cash. The 19th century roots of the old trading houses give an indication of the geostrategic influences that held sway at that time. The third supporting theme is that of food security. In short. This is accentuated by the fact that the new industrial farms are more likely to be based in emerging markets. In short. The fact is that some 85% of the world’s farmers produce from less than 2 ha of land. lack access to information flows. but the storage of food for times of shortage dates back to antiquity. coupled with the industrialisation of farmers. that number has leapt to 221mn references. size isn’t everything. However. aligning interests to challenge the existing market structures takes time. there is the issue of resource nationalism. and when harvest comes they are forced sellers because they can’t afford big. we noted how you only had to type the words food security into Google and 31mn references came up in one-fifth of a second. Let us assume an extreme example to illustrate the point: if Kazakhstan becomes a strategic supplier of Chinese grain demand. The leading grain trading companies might have been around for more than a century. but to act on it. has been driving change throughout the soft commodities sector. even among the wellcapitalised.000 ha-plus agricultural business. too. We would certainly question some of the tenets of food security. 4 . It is not a new theme. A well-capitalised industrial farmer knows the end users for his products. Equally.000 ha-plus agricultural business has been paralleled by the emergence of the cash-strapped and over-indebted 100. and crucially. In short. Resource nationalism. A second supplementary theme is what – for want of a better term – we might call the dislocation theme: that is. hundreds of millions of hopelessly impoverished farmers is the norm. the infrastructure and logistics facilities are in the developed world.

Anyone who believed in the long-term structural theme has been amply rewarded in the past 10 years. a Hong Kong-based. it is the three supplementary themes of resource nationalism. and is a direct challenger to the predominance of the traditional grain traders. it became slightly less North American and somewhat more international in outlook. It was that simple. we break them down into three key groups: the state-sanctioned challengers. For example. when it was divested from ConAgra in 2008. The notable difference between the other companies profiled in this section and Gavilon is that the others are fundamentally emerging market businesses. Gavilon isn’t a new company – its roots date almost as far back into the 19th century as those of Louis Dreyfus Commodities. Resource nationalism possibly plays a pivotal role in the development of Russia’s UGC. Libero Commodities’ heritage is more focused on the rising power of farmers and the dissemination of information – but resource nationalism plays a small part in its strategic thinking as well. The companies in the frame Gavilon The emergence of Gavilon demonstrates the extent to which the grain trading market is changing. while our driving themes of lower information costs and the rise of industrial farms are common to all new market participants. the 15% stake acquired by China Investment Corporation in 2009 and its high ranking in the Fortune Global 500 say everything that needs to be said about the company’s first decade as a listed company. the privatesector challengers and those that appear to operate between these two worlds. we draw a comparison with one company we see as broadly similar: Noble Group. Nebraska. specifically Asian economic growth and escalating global trade patterns. it is an impressive achievement. This lack of comprehension was reflected in the weakness of the research coverage on the stock.77 at end-2009. and the fact that within months of listing. For a company only founded in 1986. So who are these challengers to conventional wisdom? Broadly speaking. it was trading below its issue price as it was engulfed along with every other corporate. however. The author of this report witnessed at close quarters the original listing of Noble Group in 1997. dislocation and food security that define the investment philosophies of individual companies. Noble Group’s NAV rose from a range-bound $0. $817mn end-2009 EBITDA.06/share in its first five years as a listed company to $0. The company’s current $9bn market capitalisation. Before we look at Gavilon. What was apparent – indeed. Notably. food security is probably an element in the South Korean and Abu Dhabi governments’ strategic thinking. in the Asian financial crisis.04-0. Gavilon is headquartered in Omaha. remarkable – at the time was how few people understood the simple dynamics driving the business.Agriculture Global emerging markets Therefore. It was a direct play 5 . However. Noble Group took advantage of these structural changes by being off the radar screen of the existing major trading houses. Singapore-listed commodities trading business. Gavilon’s development is most likely prompted by the notion of dislocation.

Storage and distribution of crude oil. Asia and other emerging trade routes. In 1997.'s grain facilities in Texas Nine grain elevators Both Gavilon and Noble Group faced early baptisms of fire. indicating the relative size of the latter. What it does demonstrate is the extent to which the market is changing.e. storage and distribution. Fifth largest grain merchandiser in the US. The crucial difference between Noble Group and Gavilon is the fact that the latter has done this from a base in the US (i. Fertiliser potash fertiliser products.3mnt storage capacity. Its independence and lack of legacy structures mean it is not held back by the conflicting plans and objectives of a parent company. It has prominent shareholders in the shape of Soros. in the domestic market of three of the four trading houses that make up the ABCD quartet). fertiliser distribution. with a combined storage capacity of 14. at the peak of the boom in soft commodities prices just prior to the onset of the global financial crisis.000 tonnes dry storage shed.'s grain elevator in Wisconsin Galesburg Order Buyers. and Gavilon emerging as a buyout from ConAgra in 2008. Ospraie and General Atlantic. feed milling and bean crushing combined licensed storage capacity in excess of 140mn bushels Grain storage na Storage capacity of 5mn bushels Storage capacity of 400. with Noble Group having listed just prior to the Asian financial crisis.'s Arkansas River grain operation Vasby Farms. 100. and its expansion plans centred on places such as Latin America. capital-hungry company to secure funding to compete with the major trading groups in their domestic market? After all. Source: Company data 6 . Agriculture as well as feed and food ingredients. Gavilon’s international scope will likely become more evident in the years ahead. Figure 2: Gavilon operating segments Segment Operations Key facts Grain and oilseeds origination. Brisbane sugar terminal covered truck receiving station and ship loader Charlie Myers Grain Co.6mn bushels Port facility with a private berth. phosphate and Second largest fertiliser distribution network in the US. Gavilon might well follow a similar path. Operates over 60 storage and handling facilities with about 1.'s west-central Illinois assets Asset details Grain handling. natural gas. Cargill’s profits are 12x those of Gavilon. Origination and distribution of nitrogen. As noted.ft of natural gas storage.000 bushels Acquired in 2010 2010 2010 2010 2010 2010 2009 2009 Location US US US US US US Australia US Source: Company data Eight grain elevators and one receiving station. Operates 89 grain facilities with more than 150mn bushels of storage capacity.Agriculture Global emerging markets on Chinese growth. Inc.'s grain elevator in Wisconsin Irv’s Feed and Supply Inc. Figure 1: Gavilon asset purchases Asset DeBruce companies Minto Grain LLC Pine Bluff Port Terminal. and its growth plans are increasingly international. natural gas liquids and renewable fuels. Energy Manages over 4mn bbls of crude oil storage and 14bn cu. would it have been possible for a new. Two decades back. Inc.. the investment banking and analytical community was too wrapped up in financial crises to see what was happening under its nose. Mitsubishi. Inc.

state-of-the-art grain facility can hold grain for several years and it would represent real food security. One therefore has to ask what is the single motivation behind ADS’ development of a commodities trading house if it doesn’t deliver genuine food security? Obviously the significant financial resource available to the nascent enterprise is one factor. There are two options for controlling physical output: the acquisition of agricultural assets – a common enough theme among Gulf enterprises in places such as Ethiopia and Sudan – or the establishment of a trading house. Does BP provide energy security to the UK through the ownership of a 25% stake in TNK-BP? Clearly not. Therein lies a problem with some of the proposed solutions to food security. After all. which are somewhere in the region of $1trn. Clearly. using food security as the prime objective ignores the fact that trading physical on a commodities exchange or owning overseas agricultural farmland has one major drawback: ownership may be vested with one person. However. Ownership could be meaningless in a crisis. In a country where an export ban is enacted. and the same logic applies to overseas food assets when looking at food security. 16% Agriculture. the notion of food security probably takes on a meaning that is as much psychological as financial.Agriculture Global emerging markets Figure 3: Gavilon segment EBITDA (three-year historic average) Fertiliser. 32% Source: Company data Abu Dhabi Sources When you only produce a tiny percentage of your domestic annual food and water requirements. In Abu Dhabi Sources’ (ADS) case the approach appears to be to build a trading platform for soft commodities (as well as other commodities). company or institution but it relies on overseas storage facilities which are based elsewhere. then Abu Dhabi should look more seriously at building a complex of grain terminals in the desert. 52% Energy. It’s also worth highlighting the fact that if food security was a genuine ambition. funding for this venture could be substantial given the Gulf state’s strategic reserves. possession will mean a lot more than legal title. a well-managed. 7 .

skills Commodity markets Farmers Inefficiencies in logistics Ports Source: Libero Commodities The obvious advantage for Libero Commodities is the fact that increasingly wellcapitalised farmers can hold the physical output on site. Ultimately. the farmers receive higher margins from trading activities. In return for their 50% stake in the business. rather than transferring ownership to the trading houses. as well as smaller positions in soybeans and corn. Libero’s shareholder farmers allocate a proportion of their physical output to the parent company to trade. Figure 4: Libero Commodities’ market position Traders Input suppliers Information asymmetries Banks Lack of access to capital Inferior marketing / risk mgmt. It may or may not seek private investors at some point in the future Libero is a Geneva-based trading house which is 50% owned by 30 Brazilian farming groups.Agriculture Global emerging markets Libero Commodities Libero Commodities operates a unique model and demonstrates the increasing power of industrial farmers. 8 . The company commenced operations in 2010 and has been backed by one of the major trading houses. The company has a dominant position in cotton. which manage some 5mn ha of land in the Mato Grosso region of Brazil.

explore different ways of employing this co-operative model into inputs as well as outputs and taking the model into new markets.000 tonnes of each commodity. Its unique position in the market should allow it to take the model and employ it across other geographies in time.000 ha of land has been added to Agrotrade’s farming operations. The company did not acquire any additional farmland in 2008 but in each of the last two years another 5. there was a change in the company’s strategy. the company is looking at extending its operations into soybeans and corn and trading some 300. resource nationalism and dislocation are also two underlying drivers of the company’s development.000 tonnes of cotton in 2010/2011. Asian demand is already becoming an increasingly important part of the company’s operations (China accounts for some 30% of trade). Libero’s challenge will be to take the early concept and widen it into more Brazilian crops. The company believes it will trade 200. In 2007. the amount of land in the company’s land bank accelerated to 25. The company’s total storage capacity is approximately 530. coupled with the availability of cheap information. Agrotrade already had 12 silos and had begun to turn its attention to agriculture with the acquisition of 3.000 ha of agricultural land. In 2006. Libero Commodities’ progress is obviously highly correlated to these developments. The operations are 9 . This requires investment in cotton classification and logistics. The success of the project to date is demonstrated by the fact that it was backed by one of the major trading houses and embraced by some 30 industrial farmers at the earliest stages of development. The clusters are centred on the company’s existing storage facilities. these figures represent a considerable uplift given that the company only traded 10. which represents some 20% of total Brazilian cotton exports. In other words. However. Currently the company has a 35.000 tonnes making it the sixth-largest private-sector grain trader in the country. Agrotrade now owns 12 grain silos in Ukraine. Ultimately.000 tonnes of cotton and 2mnt of soybeans and corn. Libero Commodities believes this will be effective in the market for regular delivery over 12 months. In 2011. while it still holds a competitive advantage. which will allow cotton to be tracked straight to the port without being unloaded or handled in warehouses. Agrotrade Founded in 1998. which is 100% irrigated and harvested in dry weather.000 ha.000 ha of land and become one of the leading agriculture holdings company in Ukraine. there is more to it than this: Libero Commodities is a Brazilian company and 50% of its equity will always be held by its shareholding farmers.000 tonnes in 2009/2010. The company also plans to add an intermediary service to guarantee delivery of product exactly as specified by the contract. has provided a platform for new market entrants to challenge incumbents. The aim is to achieve a similar standard to Australian cotton. and will help build longstanding relationships with international clients.200 ha land bank.Agriculture Global emerging markets We have noted how the rise of the industrial farmer. Overall. the company’s strategic aim in agriculture is to control up to 200. At this stage. The company expects to trade some 125.

to the extent that we analyse the company and its plans in much greater detail in a dedicated section of this article (see Infrastructure challenge: Russia and UGC). Agrotrade made some $9. the company produced 80.3mn in net profits. 10 .Agriculture Global emerging markets already showing promise. Figure 5: Agrotrade operating segments Segment Trading Agriservices Farming and processing Grain and oilseed trading Grain storage services Transportation services for agricultural producers Cultivation of sunflowers.000 tonnes of grains and oilseeds produced in 2009 Crop yields were above Ukrainian averages in both 2008 and 2009 Source: Company data Crucially. Agrotrade made $1. the company still remained profitable: in 2008/2009. It is expected that in the current financial year. This niche is profitable. In effect. These operations.5mn in profits. At this stage. and in 2009/2010.000 tonnes of grains and oilseeds were traded in 2009 Agrotrade owns 12 grain silos with a total storage capacity of 530. Kharkiv and Luhansk. corn. In 2007/2008. are sufficiently divorced from the ports through which most of Ukraine’s exports flow. in the Oblasts of Poltava.000 tonnes . having yielded above the Ukrainian average in sunflowers. despite the depth of the global financial crisis.4mn. Agrotrade’s profitability will return to pre-crisis levels with some 71% of revenues coming from trading. this means Agrotrade operates between the extremes of local markets and the international markets. The two subsequent years saw a decline in profitability primarily. However.000 tonnes of grains and oilseeds. we highlight some of the key aspects of UGC’s development. it managed to make some $4. due to lower soft commodities prices and the effects of the global financial crisis as well as increased costs associated with the establishment of farming operations. wheat and barley in both 2008 and 2009. Agrotrade has developed its storage and trading operations in five graingrowing regions in the east of the country. Figure 6: Agrotrade revenue split (2009/10) Farming 12% Figure 7: Agrotrade EBITDA split (2009/10) Farming 20% Agriservices 17% Trading 52% Trading 71% Agriservices 28% Source: Company data Source: Company data United Grain Company The establishment of UGC is fundamentally linked to Russia’s overall infrastructure plans. corn. wheat and barley Sunflower oil extraction Buckwheat grits processing Wheat flour milling Operations Key facts One of the top 10 grain exporters in Ukraine 548. In 2009. Sumy and Chrnihiv.the sixth-largest in Ukraine 80.

the issues raised in the report are valid. and the identification of the problems faced is accurate. specifically: The poor state of the country’s grain market infrastructure generally. In other words. An economic purist might argue that provided there was a working rule of law and half-decent returns to be realised. which is likely to shape export demand and domestic output. over time. there is no economic or technical rationale in adding to the country’s grain inventories even including the country’s intervention fund. indicating a need to attract investment at a rate that is unlikely to be provided by the private sector alone. it is unable to provide long-term resolutions to them. Let’s face it. issued under the broadly translated title of A plan for the development of grain market logistics and infrastructure in the Russian Federation. a shortage of port facilities and an inadequate transport infrastructure. What we can say with a greater degree of certainty is that the plans are not as sinister as some commentators suggested last year. one might reasonably assume private capital could get it to the surface and swiftly to the consumer. The fact is that the rule of law in Russia is what might be euphemistically termed a work in progress. government must take a leading role. all of which hinder export potential. A lack of modern elevators. However. The scale and complexity of the tasks involved in developing the Russian grain market. there is a level of pragmatism mixed with the reality of current operating conditions. The fact that food security is not the pressing issue that others see it as. the Russian government published its long-awaited and muchconjectured plans to develop the country’s grain business. 11 . and that surpluses can only be used in the export market. The fact that dozens of small. if a 100bn bbl oil reserve was discovered in Iowa. could perhaps have discarded the word “plan” and replaced it with the words “wish list”. the Russian market can satisfy its own needs. illiquid and capital-hungry participants constitute Russia’s agriculture sector suggests it will be years before there will be a domestic market participant capable of achieving these aims. Given the political uncertainty and investor wariness that exists with many Russian investments. The plan. That is not to denigrate the plans or their observations. the establishment of UGC does not confirm that the state is intent on re-creating a Soviet-style monopoly. In other words. The private sector’s inability to provide the significant amounts of capital required to develop the logistics and infrastructure in an integrated manner. Ultimately. the logic behind the development of the UGC concept appears to be driven by some fairly pragmatic issues. the market would provide the necessary funds for investment. On the other hand. The second point outlined above – the market’s inability to supply the funds required for such an enormous undertaking – is debatable. then.Agriculture Global emerging markets In February 2010. A view that. in all likelihood. Sustained growth in world grain demand.

The omnipresent excuse of food security was often employed. These leviathans have not survived and prospered without an evolutionary – and perhaps revolutionary – spirit. A brief description of the business models adopted by some of the key companies in the industry is set out below. where there is a clear parallel with the Soviet era is that this output figure ignores the scale of the capital inputs required to deliver it. we consider the capital demands of farming even at its most basic level. two of the largest grain traders. In conclusion. In recent years. this omits wider infrastructure. some grain traders focus on exports and imports and operate between the processors. The fact that they have done so for such a sustained period of time and. have reasonably vertically integrated businesses and are active in grain origination. in part. And bear in mind. Business strategies Cargill and Bunge. they can’t be written off. Few corporate entities have enjoyed the durability of these businesses. says something about their corporate DNA. a hangover from the Soviet days and the nation’s need to distil and aggregate everything into large single-number outputs. storage and handling and the processing of grain into finished products. Louis Dreyfus and Glencore fall into this category. But to suggest that somehow the traditional trading houses are entering a period of long-term structural decline may also be wrong. and leave aside for a moment the scale of spending required to modernise Russia’s archaic infrastructure. logistics capital expenditure and ongoing operating expenditure. Ignore the reasons why this was considered necessary. various Russian commentators and academics have postulated a view that Russia needed to lift grain output to 150mn tpa from the 100mn tpa currently produced. it could be said that it was. as private companies.Agriculture Global emerging markets To demonstrate this point. In contrast. In short. The most imaginative and clear-headed may emerge as long-term winners. ideas. what this arithmetic suggests is that the vast capital sums required to develop a modern. companies and structures indicate the challenges facing the traditional trading houses. The traders’ response The previous models. Of the four that constitute the ABCD quartet only one (ADM) was founded in the 20th century. state-of-the-art infrastructure in the absence of an unbending rule of law simply cannot be delivered by a few corporate farms with net asset values or market capitalisations of $200mn. However. they will likely adapt and they are highly unlikely to end up as footnotes in corporate history. in some cases. 12 . and that was in 1902. An annual increase in 50mnt of grain would require perhaps 15mn ha of land and approximately $15-20bn of capital investment. Equally.

The company purchases grains and oilseeds from farmers and intermediaries. and leveraging them through a common logistics system.Agriculture Global emerging markets Strategies of the major grain trading companies Bunge Bunge adopts an integrated. Consequently. These commodities are purchased from mills. In addition. The milling business of the company’s food products segment provides processed wheat to food processors and bakeries. as part of a global company with operations from farming to retail. Glencore originates and markets all the major grains and energy crops. co-operatives and. Cargill Cargill’s grain trading division is vertically integrated. in some countries. This activity is supported by subsidiaries in storage. grain processing and milling companies. regional merchants. However. where it is sampled. Bunge improves operational efficiency. primarily poultry and pork. through its Agricultural Products division. silo companies. the grains are shipped to international destinations or sold to local customers. import and domestic distribution to local consumption markets throughout the world. directly from farmers. The grain is then transported to its elevators. the company also retains a part of the stock to serve its animal feed and edible oil production facilities. Customers comprise feedlots. graded and stored. wheat and corn millers and oilseed processors. but decentralised. Its principal customers for grains are feed manufacturers. approach to its operations. From the elevators. poultry and aquaculture producers who use these products as animal feedstock. The company’s grain trading activities include origination and aggregation for export to primary agricultural production centres and shipment. Decision making is delegated to local operations but. Louis Dreyfus Louis Dreyfus transports grains between elevators. these subsidiaries benefit economically and operationally from one another. while the principal buyers of oilseed meal products are animal feed manufacturers and livestock. Glencore Glencore’s primary focus is on mineral and energy products. processing and handling infrastructure. It stores. blends and supplies these commodities and processed products to local and international customers. The company purchases grain directly from farmers or by bidding at various country elevators. Bunge’s agribusiness operations are dependent on global demand for meat products. Sourcing oilseeds and grains from its agribusiness unit. 13 .

so surely the reverse is true when it comes to large-scale farming groups? Interesting thoughts. Louis Dreyfus). including changing locations or reducing processing capacity.Agriculture Global emerging markets Fundamental strategic advantages The emerging theme of scale in farming must surely be viewed as a threat to the trading houses? Surely an opportunity exists for a farming operator in Russia or Brazil to deal directly with customers and cut out the middleman? We know small farmers are at a disadvantage when it comes to dealing with the asymmetric information flows of the leading grain trading companies. they have the ability to ensure consistency of supply throughout the year and to originate crops across hemispheres and continents. Grain traders draw considerable synergies through the integration of these activities with their grain trading businesses. Association with suppliers and customers: The leading firms work in close association with farmers and customers. such as shipping and logistics (Cargill. and they offer consultation services to improve farm productivity. This is another area in which the large grain traders beat regionally integrated farms given the traders’ extensive infrastructure (ports. scale allows them to provide variety and the flexibility to ship grains to their customers using inhouse networks. the major grain traders have operations in other related businesses. 14 . Glencore). fertilisers (Bunge). Consequently. Louis Dreyfus). are vital for the success of any agribusiness firm. Bunge). which gives them an advantage over farm collectives and regional traders. All acknowledge that the success of the farmers is crucial to their own success. On the supply side. At the same time. Their global footprints enable them to exploit considerable arbitrage opportunities arising from regional pricing differentials. but consider the advantages that the grain traders possess and how they might prove enduring: Global footprint: The leading trading firms have a global network of elevators and terminals in numerous strategic locations worldwide. A notable example of this was when the Australian wheat crop failed in 2007. In addition. terminals. In many cases. process and sell commodities. elevators and so on) along with co-ordinated sales and logistics. The major trading companies also have a strong network of marketing and distribution offices in key markets. Logistics: Logistics and the supply chain play a critical role in the grain trading business. some companies made significant gains from the large uplift in prices. store. Decisions about when and where to buy. Global intelligence and logistics are irreplaceable. processed food and food ingredients (Cargill. Glencore. and metals and minerals production and distribution (Glencore. transport. the grain traders can reduce the natural volatility and cyclicality of the agricultural sector which swings between strong and weak harvests and high and low inventories. The grain traders were able to identify the problem before it happened and redirect normal trade flows. no doubt. Operations in complementary business activities: In addition to agricultural commodities. therefore avoiding delays commonly associated with public ports and transport networks. Louis Dreyfus. energy trading (Cargill.

but we make a fundamental strategic error if we think that the provision of a commodity product means there is no association with added value. The grain trading companies possess a range of advantages that would be difficult to replicate. depressions and various other calamities. 15 . The collective corporate memories of the grain trading houses stretch. By staying close to suppliers as well as customers. in many cases. Clearly. back to the 19th century and have survived wars. While there is no doubt that the larger farm holding company will become more prominent in the years ahead. the trading firms are involved in the entire supply chain and possess significant bargaining power. One should expect them to remain dominant forces in the 21st century. smallholders will retain a prominent role in the supply chain. competition is likely to increase.Agriculture Global emerging markets numerous grain traders create financial products – including structured trade finance and risk management – to help their commodity customers control expenses and manage risk.

The company would also establish a network of offices in major importing countries to promote its exports.3% over 2009-2015.8mnt in 2009 to 8. Given that these activities would require an investment of close to RUB100bn over 2010-2015. Towards this goal. It is this surplus that the government wants to export. Apart from capacity building. The government’s objective is to increase Russia’s grain exports from 23mnt in 2009 to 38mnt by 2015. Together.The infrastructure challenge Russia and UGC Objectives United Grain Company (UGC) is the Russian government’s chosen vehicle to implement its strategy of enhancing grain exports. Figure 8: Russia grain production. UGC would also aim to become a major player in the world export market. since the government has also decided to fix the inventory level at 15mnt. by 2015. associations. these measures are expected to reduce the infrastructure load on each tonne of grain exported by RUB488. with the aim of enhancing grain storage capacity from 1. with UGC’s share in 2015 being 16mnt. Furthermore. inventories and required exports Figure 9: Russian grain exports (mnt) and global market share (%) (mnt) Production Consumption Inventories Required Exports Russian grain exports Russian exports global share (RHS) 120 100 80 60 40 20 0 2009 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E 20 10 0 2008 2009 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E Source: Russian government strategy paper on UGC 40 30 24% 22% 20% 18% 16% 14% 12% 10% Source: Russian government strategy paper on UGC 16 . UGC plans to forge partnerships with international unions. producers and processors in importing countries. hence the focus on building support infrastructure. Export promotion The government expects grain production to increase at a CAGR of 4. It would include assets consolidated from various state-owned companies involved in different activities including storage and port handling. with private investment augmenting state funds.5mnt to 16mnt of grain by 2015. consumption is expected to increase at a CAGR of 1. the company would develop new markets for Russian grain and strengthen existing ones.4%. consumption. The company also plans to optimise transport logistics including the routing and despatch of grain. and increasing port handling capacity from 3. the government intends UGC to exist as a public-private partnership. Over the same period. there would be a sizeable surplus.4mnt by 2015. UGC would primarily focus on infrastructure development relating to grain storage and port handling.

0 10 8. The current state of infrastructure The major factor limiting the growth of exports is infrastructure. linear and port elevators account for 32mnt of storage capacity.52 1. “Russia’s transport system facilities are stretched to their technical limits”.00 2015 E 2. port facilities for transhipment and transport infrastructure. From the 2001/2002 season to now. Figure 10: Additions to elevator capacity and total capacity (mnt) Acquisition of elevators Modernization of elevators Construction of elevators Total elevator capacity (RHS) 3. UGC expects SIF closing stocks to be at a level of 5mnt from 2010 onwards. Transport infrastructure: According to the government. while domestic traffic has decreased from 13mnt to 11mnt.0 1.0 0.0 1. including 13mnt at the deep-water port on the Black Sea and 6mnt at the shallow-water ports on the Azov Sea.5 3.92 2.5 8 5. Bulk handling takes place through ports on the Azov-Black Sea basin. This build-up of capacity requires an investment of about RUB82bn over 2010-2013. the volume of exports carried by rail has increased from 3.44 8. and creating a mechanism for continuous monitoring of the grain market and proposing recommendations for planning and control.00 0. specifically.44 2. the company would also conduct operations on behalf of the State Intervention Fund (SIF). Further.85 Addition to capacity (RHS) 3.0 2.5 0.0 35 30 25 20 15 10 5 0 0 Source: Russian government strategy paper on UGC The development of port handling capacity includes the modernisation of Novorossiysk Commercial Sea Port and a shallow-water terminal on the Sea of 17 . including storage containers in agricultural enterprises and processing companies. linear elevators and port elevators. elevator capacity.87 2 0. and the construction of new elevators.5 1.00 2010 E 2011 E 2012 E 2013 E 2014 E 0.0 2009 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E Source: Russian government strategy paper on UGC Figure 11: Investment in elevators (RUBbn) and addition to capacity (mnt) Investment 2. Elevators: Total storage capacity in Russia is 118mnt.0 6 1.44 7. developing regulatory tools such as pledging transactions.Agriculture Global emerging markets Another role that the company plans to play is to assist the government in regulating the domestic market by upgrading technology for grain intervention.07 4 1.5 1. Port handling capacity: The total capacity of ports for transhipment is 22mnt of grain per annum. Of this.44 8.7mnt. Targets UGC plans to increase elevator capacity through the acquisition and modernisation of existing elevators. and the company expects a reduction in storage costs of RUB174 per tonne of grain by 2015.5 0.5mnt to 9.20 1.

8 0.000 tonnes of flour and 550. These activities entail an investment of RUB11bn over 20102013.5 4.0 8.000 tonnes of feed by 2015.6 0.0 16.0 2012 E 1.5 1. UGC’s objective is to increase annual processing output to 950.Agriculture Global emerging markets Azov.000 tonnes of flour and 1.2 1. However.0 Addition to capacity (RHS) 5 4 3 2 1 0 Source: Russian government strategy paper on UGC Source: Russian government strategy paper on UGC UGC would also establish a transport company. The company plans to increase the proportion of block shipments from 1mnt in 2010 to 6mnt in 2015.2 0.5 3. primarily by increasing the utilisation of existing facilities.0 18 15 12 9 6 3 0 3 2 1 0 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E 0.0 Figure 13: Investment in port handling (RUBbn) and addition to capacity (mnt) Investment 4 4.5 2013 E 1. Figure 12: Additions to port handling capacity and total capacity (mnt) Additional capacity 5 4 3 2 1 0 2009 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E 3.000 tonnes of feed.7bn. 18 .0 Total capacity (RHS) 16. UGC also plans to purchase 3.5 12.4 1.0 2011 E 1.0 0.0 0. The company currently has annual processing capacity of 635.0 13.0 2014 E 0.050.5 2010 E 1. These measures are expected to reduce transport costs by RUB119 per tonne of grain by 2015. which will be funded through project financing and contribution from private investors. and are expected to reduce loading costs by RUB195 per tonne of grain by 2015.6 1. the utilisation rate is less than 50%.5 3. and the construction of new deep-water terminals on the Black Sea and in Russia’s Far East. and work towards optimising the routing and despatching of grain.000 wagons by 2015 at an investment of RUB5.4 0.0 0.7 2015 E 300 270 570 560 500 Number of wagons added (RHS) 800 900 800 700 600 500 400 300 200 100 0 Source: Russian government strategy paper on UGC UGC also intends to develop processing facilities for flour and feed production. Figure 14: Investment in wagons (RUBbn) and addition to wagons (units) Investment 1.

0 20.0 35.000 60 1.0 5. Figure 16: Total infrastructure investment required (RUBbn) Elevators 40. logistics and processing is close to RUB100bn spread over 2010-2015.500 75 2.500 850 1. with elevators accounting for over 83%.0 15.0 0.0 25. with port handling registering the largest decline.000 0 Source: Russian government strategy paper on UGC The total investment required for elevators.050 60 Feed production 80 Investment (RHS) 90 80 70 60 50 30 20 500 290 395 2010 E 545 2011 E 700 2012 E 825 2013 E 900 2014 E 950 2015 E 595 440 730 40 30 20 10 0 1.0 10. 19 . port handling.Agriculture Global emerging markets Figure 15: Flour and feed production ('000 tonnes) and investment in processing facilities (RUBmn) Flour production 2.0 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E Port handling Logistics Processing Source: Russian government strategy paper on UGC As a result of these infrastructure-building activities. UGC expects to see a reduction in the infrastructure load per tonne of grain to reduce by RUB488.0 30. by 2015.

there is sufficient scope for private players at every step of the value chain. the Russian government requires the participation of private investment. Russian government paper on grain market logistics and infrastructure 20 .Agriculture Global emerging markets Figure 17: Reduction in infrastructure load per tonne of grain (RUB) 500 392 400 300 200 100 0 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E Source: Russian government strategy paper on UGC Figure 18: Split of reduction in infrastructure load per tonne of grain by 2015 (RUB) 488 Storage Port handling Transport 441 313 260 119 174 55 195 Source: Russian government strategy paper on UGC UGC’s plans in context When the Russian government decided to use UGC as its chosen vehicle to implement its plans of promoting exports. commentators raised the possibility of the Russian state trying to dominate the grain trade business. UGC’s market share is large. Figure 19: UGC’s forecasted market share in Russia Grain exports 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E Linear elevator capacity Port handling capacity Grain carriers. to achieve its targets. we feel such an analysis is misguided. wagons Source: Russian government strategy paper on UGC. Although UGC would be a major grain trader. In fact. but not dominant. However. As the chart below demonstrates.

unpaved roads add 35% to transport costs. railways. Now in its second phase. For instance.000 miles or more over poor and congested roads to reach seaports. PAC 2. This is a particularly pertinent problem in the nontraditional farming areas of the country’s northern and central regions. Roads. state and local roads. A corresponding problem in the relatively well-developed Southern regions is not unpaved roads. it costs farmers in Mato Grosso.what is often referred to as the “Brazil cost”. through higher fuel consumption and maintenance. farmers in Central Brazil have to send their produce to distant ports over pothole-ridden roads instead of by rail or waterway. However. However. The country has about 1. more alarmingly. Brazil Source: Agroconsult 44 22 21 . The Brazilian government has taken steps to remedy this situation through its Growth Acceleration Programmes (known by their Portuguese abbreviation.Agriculture Global emerging markets Brazil The most commonly cited obstacle to Brazil’s status as an agricultural superpower is the poor state of its infrastructure . of which only 12% are paved. Some farm commodities travel 1. while the quality of its rail infrastructure achieved a marginally better ranking. involves investments of up to BRL1. PAC). Figure 20: Average cost to transport a tonne of soya from field to port ($) 120 100 80 60 103 40 20 17 0 Argentina US Parana. This problem is especially acute in the central and northern regions. Another (no less shocking) way of looking at this is to consider that it costs more to transport a tonne of soya to the south-eastern ports of Paranagua and Santos than to transport it onward to China. Brazil’s road quality ranking was a fairly lamentable 105. the WEF labelled the quality of port infrastructure at a dismal 123. at 87. but road congestion. almost 5x what it costs US farmers to get soya to port. A glance at the current state of Brazil’s infrastructure The World Economic Forum's (WEF) Global Competitiveness Report 2010-2011 ranked the quality of Brazilian infrastructure at 84 out of 139 the countries included. where inadequate capacity often leads to long delays and additional costs. PAC 1’s implementation was so poor that PAC 2 should not be seen as some kind of a panacea. for a country where agricultural exports are likely to play a major part in economic development.6trn. Brazil Matto Grosso. According to Agroconsult. which are now driving Brazil’s agricultural dominance.6m km of federal. storage and port facilities have not kept pace with the frantic growth of agricultural production and exports. Roads fulfil some 68% of Brazil’s transport needs. By some reckonings.

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Despite having one of the world’s largest river systems, waterways as a means of transportation are poorly developed in Brazil. Similarly, railways – much cheaper than road transport – are not an option for most farmers. Another infrastructure bottleneck is storage capacity. When farmers lack sufficient storage space, they become forced sellers at harvest time and lower margins result. While estimates vary, total grain storage capacity in Brazil is likely to be somewhere between 120-130mnt. This would imply a deficit of about 15-25mnt based on a 2010 grain harvest of around 146mnt. According to Brazil’s Agricultural Economics Institute (IEA), grain production in Brazil has grown 77% since 2000, while storage capacity has expanded only 52%. Again, paralleling the situation regarding transport infrastructure, the lack of storage capacity is more critical in regions where recent agricultural development has been rapid such as Mato Grosso. The third component of infrastructure that is vital for exports is port infrastructure. Around 95% of Brazil’s trade passes through its ports. There are 34 major ports and around 128 privately operated terminals. However, absolute numbers conceal the blunt fact that Brazil’s port infrastructure is woefully inadequate to service the country’s growing needs and ambitions. During the peak of the 2009 harvest, many ships faced delays of up to 30 days, due to congestion. Growth Acceleration Programmes (PAC 1 and PAC 2) Recognising the shortcomings in its infrastructure and its importance in delivering future economic growth, the Brazilian government placed a greater policy emphasis on infrastructure when it launched its four-year Growth Acceleration Programme (PAC) in 2007, which had as its central objective 5% annual GDP growth. The intention of PAC 1 was to spend almost BRL504bn by 2010, comprising a mix of public and private funding and spread across several sub-sectors such as energy, logistics, social and urban infrastructure. The total was revised upwards to BRL638bn in 2009 and recently was raised still further to BRL657bn.
Figure 21: Source of funds for PAC 1 (2007-10) Direct government investment 13% Private investment 43% Figure 22: Allocation of funds for PAC 1 (2007-10) Logistics 12%

Investment by state enterprises 44%
Source: Brazilian federal government

Social and urban infrastructure 34%

Energy 54%

Source: Brazilian federal government Note to Figures 21-22: Split available only for the initial PAC 1 amount

Energy was the key focus of PAC 1, cornering more than half the total initial investment, of which oil and gas accounted for nearly two-thirds. Social and urban infrastructure was the next major item, within which housing was the priority area.

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Under logistics development, highways were the prime beneficiary. Of the subsequent increase in outlay, most was directed towards housing.
Figure 23: Split of PAC 1 - Energy Renewable fuels 6% Power generation 24% Electricity transmissio n 5% Figure 24: Split of PAC 1 - Social and urban infrastructure Light for Subways all Water 2% 5% resources 8% Basic sanitation 23% Figure 25: Split of PAC 1 - Logistics Airports Ports 5% 5% Railways 14% Highways 57% Waterways 1%

Oil and natural gas 65%
Source: Brazilian federal government Note to Figures 23-25: Split available only for the initial PAC 1 amount

Housing 62%

Merchant marine 18%

Source: Brazilian federal government

Source: Brazilian federal government

Set against PAC 1’s lofty aims, its implementation has been less impressive. As of April 2010, five-sixths of the way into the programme, completed projects account for less than half the total planned investment. Even including projects in progress, the total investment up to May 2010 is only BRL464bn or approximately 71% of the planned amount. Bureaucracy, corruption and delays in environmental licensing have all played a part in PAC 1’s poor implementation record.
Figure 26: PAC 1 - Investment allocated to completed projects (%) 50%

40%

30% 46.1% 20% 32.9% 10% 17.8% 21.7% 40.3%

0% Dec-08 Apr-09 Aug-09 Dec-09 Apr-10
Source: Brazilian federal government

Despite PAC 1’s failure to achieve most of its targets by 2010, the government announced an even more ambitious follow-up plan – PAC 2, which envisaged investment of BRL959bn over 2011-2014, and a further 632bn beyond 2014, bringing a total investment of BRL1.59trn. In common with its predecessor, PAC 2’s major priorities are energy and housing.

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Figure 27: Allocation of funds for PAC 2 (2011-14) Water and light for Bringing citizenship to community all Urban development 3% 2% 6% Transportation 11% Energy 49%

Housing 29%

Source: Brazilian federal government

While the numbers may seem large in absolute terms, they are brought into sharper focus when considered in relation to GDP. If we take Brazil’s 2009 GDP of BRL900bn, PAC 2’s total investment of BRL959bn over four years translates into approximately 27% of GDP per year. However, given that GDP is also likely to grow rapidly over the next four years, this percentage would be lower. If we take the Ministry of Finance’s forecast of an average annual GDP growth rate of 5.7% over 2010-2014, PAC 2’s total investment over 2011-2014 would represent an average of 22% of GDP. As the chart below shows, gross capital formation as a proportion of GDP has been declining over the past three decades, with the trend reversing only in the past few years. PAC 2 would accentuate that trend.
Figure 28: Gross capital formation as a % of GDP 25% 20% 15% 10% 5% 0% 1960s 1970s 1980s 1990s 2000-06 2007 2008 2009 1Q10 2Q10 20% 23% 21% 19% 18% 20% 19% 21%

17%

17%

Source: World Bank, IBGE

Clearly, we could take a pessimistic view towards the implementation of PAC 2, given the poor execution of PAC 1. The optimistic view would be that the lessons learned during PAC 1 would help during PAC 2. The key fact remains that Brazil ‘s already impressive agriculture industry is likely to force incremental infrastructure improvements simply through the sheer scale of the opportunity in Brazil’s soil. Whether that opportunity is maximised, however, remains to be seen.

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our concern is that Russia focuses too heavily on the output side of the equation at the expense of inputs. If the agricultural market is liberalising over the long term. again. Yields remain low by any standards. However that will require a considerable improvement in perceptions of the rule of law.Russia: Now for the hard bit Eight years ago. Some voices have raised concerns about the Russian government’s attempts to create a state grain trading company. Infrastructure is poor but being upgraded rapidly. However. In part. over the longer term. Our reservations are slightly different: will the 25 . they could provide a formidable challenge to some of the world’s biggest trading houses. it took two-to-three years to register acquired blocks of land indicates the bottlenecks across the sector. The fact that. to make a successful transition from its current position will require considerable investment in primary production. the one word that comes to mind is potential. Rather. A greater emphasis on market mechanisms will promote competition. A key aim for the country should be to avoid rebuilding an agricultural model built on past collectivist failings. There might be a tendency to see this year’s drought and forest fires as the hard bit. as well as an overhaul of the country’s antiquated infrastructure. At the corporate level. To do so. Heavy investment by a range of entrepreneurs and companies has placed some of these farms at the cutting edge of the sector. but are getting better. The biggest contribution the Russian government could make to the country’s agricultural sector is to speed up the land registration process. and invest in elevator capacity and associated infrastructure can be provided by the market. they should be seen as mere blips. Land is changing hands but the registration process is more akin to the Soviet era. The labour force is poor but. provide Russia with another vital source of export-generated earnings. in time. The country’s soils are some of the best on the planet. This will bring in more capital and investment and. Russia’s land reform laws laid the foundation for a renaissance in Russian agriculture. Consider the enforceability of property rights. If one views Russia’s agricultural inputs and outputs in isolation. is improving rapidly. However. cut margins for traditional middlemen and provide access to capital in an industry desperately short of it. bring 40mn ha of land up to standard. the ability to raise yields. Size and scale have a habit of blinding the most sensible and practical of minds. that was the easy bit. Governments consistently think they can manage processes and allocate resources better than the private sector when much of the evidence suggests otherwise. may have long-term detrimental effects on the development of the sector. yet 40mn ha of land has remained untilled since 1992. as we believe it is. in our view. Instead. in some cases. that means placing greater trust in market mechanisms and thinking less about overall outputs. these companies are not just going to make domestic headway but. One only need look at the biggest farming groups in the country to see how private sector participation has brought much-needed capital into the industry. An emphasis on supporting market mechanisms and enforcing property rights could have a major impact on investment. Stand inside the control rooms of some of the bigger farming companies and you are witness to a modern revolution.

While agriculture accounted for only 5% of GDP in 2008. much has changed in the past 20 years. There are also important welfare implications to be considered given that 18% of the population lives below the poverty line and food accounts for 36% of household expenditures. food security. Although these reforms sparked off an agricultural transformation. In short. Following a lengthy period of decline. remain a sensitive part of the country’s economy and its importance far outweighs its contribution to GDP. where once it was self-sufficient in meeting national meat demand. the sector’s contribution to the overall economy fell. cobbled together in the 1920s and framed against a flawed political and economic ideology. represented the second great reform programme of the 20th century. To this day it holds a powerful grip on the imagination.e. Output targets. it absorbed approximately 11% of the country’s labour force. Some positions have been reversed: from being a net importer of grain. Yet. an indication of the strength of non-agricultural sectors. occasionally less so. The construction of the collectives. restructuring is a long-term theme. These reforms gave peasants the opportunity to acquire land and led to the brief emergence of a rural middle class – the kulaks.Agriculture Global emerging markets government allocate resources efficiently. An overview of the Russian agriculture sector When it comes to Russian agriculture. Like many other current business issues in Russia. The restructuring process can only be described as a work-in-progress. the reforms of Peter Stolypin in the first decade of the 20th century are just as pertinent. the country has now become a big importer of highvalue beef. 26 .. It does. Therein should lie a lesson for the sector today. However. the disestablishment of the old collectives. were killed off for political gain and did not endure. given the vast sums required to raise output and modernise the country’s creaking infrastructure. Three times in the 20th century Russia implemented dramatic agricultural reform programmes. too. Russia has become a net exporter. the agriculture sector has grown strongly in recent years. We are familiar with the most recent which began in 1992 and is still ongoing i. Some vestiges of the sector from the Soviet era still remain in place – almost quaintly so – and the old and the new rub alongside each other sometimes easily. they. despite that progress. pork and poultry. land as a strategic resource. However. Political interference will always play a part in Russian agriculture. export bans – all have become prominent themes across the sector in recent years. they were killed off by the other revolutions and wars that wracked the country in the two decades that followed their implementation. however.

Russia is also one of the world's top producers of sunflower seeds (the country’s chief oilseed crop).200 1. household plots are concerned primarily with the production of vegetables and milk for family consumption.400 1. While agricultural enterprises and private farms are primarily involved with the production of commodities (grains. the length of the growing season and the erratic nature of the weather all present some formidable challenges.000 800 600 400 200 0 260 2000 307 2001 345 2002 431 2003 592 2004 764 2005 989 2006 1.0% 5.800 1. Barley. potatoes. the second major grain. winter temperatures.5% 5. sunflower and sugar beet) for commercial sale. Grains are among the country’s most important crops and occupy more than 60% of the crop land. A major stumbling block is the land registration process.4% 6. which has also become one of the most consistently profitable crops. 27 .600 1. There are three types of farms that are traditionally responsible for production of these agricultural products – agricultural organisations (enterprises). they limit agricultural activity to about 10% of the total land area. as a result. Combined. The rest is devoted to pastures and meadows. even though they control just 6% of the agricultural land. These household plots account for about 50% of Russia’s agricultural output.Agriculture Global emerging markets Figure 29: GDP ($bn) and agriculture as a % of GDP GDP 1. of which only 75% is arable. Despite this.6% 5. barley and sunflower seeds. the majority (58%) of agricultural land was privatised. the pace of reform has been slow. the outputs of all of which declined between 6% and 16% in 2007. Obviously a major structural development within the agricultural enterprises segment in recent years has been the emergence of large-scale corporate investments in agriculture.660 2008 Source: IMF. due to demand. private farms and household plots.0% 6% 5% 4% 3% 2% 1% 0% Given the geographical scale and topographical extremes of the country. Wheat is the most important and accounts for over half of the country’s grain production with an average annual output of about 45mnt. In 2006 and 2007. with an average annual production of approximately 16mnt. freezing temperatures and droughts in various parts of the country had a major impact on the principal crops including wheat. Russia is also the world’s second-largest potato producer after China. is grown mainly for animal feed and beer production.7% 5. World Bank Agriculture as a % of GDP (RHS) 7% 6.1% 5. Russian farmers are hardly a homogeneous group. Harsh climates.4% 5.0% 5. In 2002 a number of prohibitions on buying and selling land were removed and.294 2007 1.

In order to make optimal use of its production. The use of mineral fertilisers and other expensive inputs plunged. The dismantling of price and trade controls substantially narrowed the gap between world and domestic input prices for agricultural goods. This forced collectivisation was aimed at replacing the small-scale. Obviously this implies not just an inefficient structure but also a lack of access to capital. driving yields down. This goes some way to explain the government’s plans to set up a grain trading agency. the sector stabilised and began to show signs of improvement. The former USSR was one of the world's leading producers of cereals with cotton. and reduces the incentive to take land out of the old collectives. As a result. the Ministry of Agriculture (MoA) intends that the Agency for the Regulation of Food Markets (AFM). livestock and grain stores from the peasantry. poorly structured and dependent on state support for survival. Collectivisation of farm land was established by Joseph Stalin in 1928 by confiscating land. which is gradually resulting in increased efficiency as farmers try to maintain productivity while struggling with resource constraints. Following the break-up of the Soviet Union in 1991. large state farms had to contend with the sudden loss of substantial government subsidies. non-mechanised and 28 . the country needs to increase its grain storage capacity and build more silos and elevators. As a result. The development of the Russian agricultural sector Agricultural reform has proved a challenging task for Russia during its transition from a command economy to a market economy.Agriculture Global emerging markets which is both costly and time-consuming. pulling down demand for feed grains with it. Pre-1991: The Soviet Union Agriculture in the Soviet Union was organised into a system of state farms (sovkhozes) and collective farms (kolkhozes). livestock production. the cost of which is prohibitive. According to the USDA. The transition to a more market-oriented system introduced the element of fiscal responsibility. will be turned into a major Russian grain trader and will likely take a controlling interest in 28 of the country’s major grain elevators and terminals. which got underway with the establishment of the grain trading exchange (NAMEX) in April 2008. in which it will hold a 25% stake. increasing the plight of producers further. machinery. is the development of the futures market. sugar beets and potatoes being the other major crops. an open joint stock company. declined significantly. A lack of access to capital hampers development given the shortage of physical infrastructure available. The forced collectivisation of agriculture during the soviet regime left most farms badly managed. the vast majority of former state and collective farms remain in business as joint stock operations and operate with an unrivalled degree of inefficiency. a priority sector during the pre-reform period. Another development that has longer term ramifications for the agriculture sector. Most farms could no longer afford to purchase new machinery and other capital investments. After a desperate decade of decline. as well as for the country’s financial system.

However. agricultural production was only 58% of its average level between 1989 and 1991. With only 3% of total sown area in the 1980s. Under extremely bureaucratic policies.Agriculture Global emerging markets inefficient farms prevalent at the time with large-scale mechanised and efficient farms. Livestock production. with the bulk going to the livestock sector. in turn. Private plots played a significant role in the Soviet agricultural system as the government allotted small plots to individual farming households to produce food for their own use and for sale as an income supplement. By 1989. declined more sharply over this period. Production suffered accordingly. As 29 . The rise in feed requirements caused by the growing herds.4% of GDP. the Soviet Union introduced an agricultural reform programme designed to increase productivity by forming contract brigades consisting of 10-30 farm workers who managed a piece of land leased from a state or collective farm. the agricultural sector was highly subsidised with the majority of support delivered via cheap inputs. Crop production. Throughout the Soviet period. In 1986. Between 1970 and 1990 livestock herds and output in the USSR grew 63%. In the 1980s. stimulated the crop sector. Subsidies ensured that any attempt to adopt more efficient production methods were killed stone dead. The brigades were responsible for the yield of the land. especially fertilisers and fuels. recovering marginally to reach 6. the productivity rates of private plots far exceeded their size. In the late 1980s the average annual output of feed grain in the former USSR rose by approximately 50% compared with the late 1960s. the Soviet Union went from being self-sufficient in food production to being a net food importer. subsidies to agriculture accounted for 11% of GDP. they produced over a quarter of agricultural output. these reforms failed to have a material impact as too many other distortions remained in place. application and productivity. administrators who were unaware of the needs and capabilities of the individual farms decided both input allocation and output levels. The expansion of the livestock sector also led to increasing agricultural subsidies. extensive machinery and an abundance of chemical inputs as well as a large rural workforce. but also in absolute terms. However. By 1999. Some of the loss in output was a direct result of the implementation of price and trade liberalisation and the corresponding reduction in producer and consumer subsidies. In the pre-reform period. the dominant sector in terms of its contribution to gross agricultural output.8% in 1999 in the aftermath of the Russian financial crisis. 1991-1999: Transition phase The Russian agricultural sector fared poorly during the transition period of the 1990s. And no wonder it was fantastically unproductive. the share of agriculture in GDP fell below 6%. despite immense land resources. By 1998. the agriculture sector was fantastically unproductive throughout the history of the Soviet Union. farmers were paid the same wages regardless of effort. Agricultural production decreased not only relative to the national product. At the beginning of the 1990s agriculture accounted for 16. Another hallmark of this period was the emphasis placed on increasing livestock output. Meanwhile. however. which in turn determined their remuneration. declined less than the sector average but fluctuated wildly due to changes in weather conditions.

the failure to restructure large farms meaningfully. prices fell. the failure to improve market infrastructure. 1992=100 Crops production index Livestock production index 120 110 100 90 80 70 60 50 40 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: FAO Some of the other reasons for the decline in the agriculture sector. apart from the elimination of pricing support and subsidies. the use of these inputs plummeted. As the economy developed – up until the financial crisis in 1998 – pricing policy in the sector became steadily less dependent on the state compared to other sectors in the economy.6mnt over the same period. gasoline use in agriculture declined from 11. were the slow pace and inconsistency of reforms across the sector – for example. Even in the heavily protected livestock sector. And. state support was not wholly eliminated. by the end of the 1990s. Although various types of subsidies steadily diminished during the 1990s. In 1993 the government bought 63% of all the cereals sold by agricultural enterprises. the country had achieved the basic elements of a market-based agricultural sector.3mnt in 1990 to 2. For example. Figure 30: Evolution of agriculture in Russia: crop and livestock production indices.9mnt and mineral fertiliser use decreased from 11. Price liberalisation resulted in high inflation rates and substantially reduced consumers’ real incomes and purchasing power. the continued stalemate over land ownership and use rights. the state’s share declined from 79% to 41% during this period. while diesel use fell from 20mnt to 5. By 1998 this had declined to 12%. which were later written off.Agriculture Global emerging markets these subsidies declined after 1991. Farms regularly received ‘soft loans’ from state or quasi-state lenders. of course. 30 . Prior to the reform period the government offered support to producers by setting domestic producer prices above world prices. had a big impact on the sector. and the re-imposition of trade barriers and administrative price controls (the last of which was done at a regional level). this hit demand for feedstock grains. Despite these problems and setbacks. Once trade was liberalised.4mnt in 1998. Trade liberalisation. State procurement of vegetables declined from 71% of output in 1993 to 37% in 1998. The role of the state as a basic buyer of farm products and as an agricultural input supplier had diminished considerably. Declining real incomes hurt the livestock sector particularly badly.1mnt to 1. Farms received indirect subsidies through the recurring policy of writing off debts. too.

respectively. poultry imports from outside the CIS have been restricted by a physical quota while imports of red meat have been under a tariff rate quota (TRQ). Growth in agricultural output has primarily been driven by growing crop production. which increased by 5. At the end of 2003. CIS imports. The reforms provided regional authorities with considerable power and discretion.7% annually during this period. White sugar imports originating from areas outside CIS are levied at a specific duty of $340 per tonne. The federal government has also introduced various trade restrictions that have implications on different sections of the sector. rationing. which allows them to curtail monopolies and ensure that agricultural land is used for farming. The most common of these include controls over retail and wholesale prices (by fixing price ceilings or trade margins). mandatory marketing of agricultural production to regional food corporations.2% pa between 1999 and 2005. Sugar is another commodity that comes under a special import regime. Russia extended the meat TRQ regime to 2009. the creation of grain and other product reserves. as well as international. There is another side to this: regional administrations have in some cases implemented their own trade policies with respect to other regions. Administrations deploy various means to influence food markets in their regions. In 2004 and 2005. while agreeing to a gradual increase in the quota volumes and a downscaling of over-quota tariff rates. with agricultural output growing at an average rate of 3.Agriculture Global emerging markets 2000-present: Recovery phase The sector has steadily recovered since the dark days of 1998. which is often more rigorous than the national standard. with all quotas allocated annually to countries based on historical imports. This may sound unremarkable. which demarcated the roles of the federal government and regional administrations in providing agricultural support. Raw sugar imports are subject to a more complex regime. The most significant development of the recent times has been the passing of ‘the law on the turnover of agricultural land’. a variable import levy was introduced to replace the earlier TRQ system. Since April 2003. trade barriers. In 2004. 31 . otherwise a $340 per tonne duty is applied. are free of duty if white sugar is processed from sugar beet. subsidies and compensation from regional budgets and financing of agricultural programmes from regional budgets. the country initiated administrative reforms. In addition. Raw sugar imports are now subject to a specific tariff. which has led to the introduction of inter-regional. In 2005. accounting for the majority of Russia’s white sugar imports. whose rate varies between $140-$270 per tonne depending on the level of average monthly price at the New York Board of Trade (NYBOT). which legalised the purchase and sale of agricultural land. This allows farmers to consolidate plots into more efficient units and use them as collateral. but it is possibly one of the most significant events in Russian farming since the Stolypin reforms of 100 years ago. the applied variable tariff (according to value) on raw sugar imports was approximately 98% and 61%. a number of regions have introduced their own testing laboratories and demand that foreign products meet a local standard.

input subsidies and output payments for livestock products constitute the core of domestic support to the sector. with regional administrations assuming responsibility for the implementation of support measures previously carried out by the federal government.0% 2. its share of the total state budget has fallen. agricultural support has been decentralised. rose in nominal terms between 2001 and 2006. some 50% of spending was allocated at the federal level. However.0% 2001 2002 2003 2004 2005 2006 Source: OECD Figure 32: Break-up of budgetary spending on agriculture at federal and regional levels Federal 100% 80% 60% 40% 20% 0% 2001 2002 2003 2004 2005 2006 Source: OECD Regional In recent years.0 2. the North 32 . the Northern region. Figure 31: Budgetary expenditure on agriculture ($bn) and agricultural expenditure as a % of total Budgetary expenditure on agriculture As a % of total budgetary expenditure (RHS) 3. it still lies below the pre-crisis level.5 0. elite seeds and insemination material.0 2. While the overall budgetary expenditure on agriculture. farms enjoy access to budget-financed soft loans that are generally not repaid. From the mid-1990s. a series of large-scale debt restructurings for agricultural enterprises was implemented. Additionally. It is spread across 12 zones.2 2.2 2. one autonomous okrug (district) and two federal cities. the East Siberian region. constitute the majority of budgetary support. down from an average of 2. the Urals region. the Volga-Vyatka region. namely. comprising 46 oblasts (provinces).7 2. By the end of 2006. Land use Russia is a federation.8bn) were fines and penalties. the overall amount of restructured debt was estimated at approximately RUB82bn ($3. Total agricultural support relative to GDP was 1. 9 krais (territories).0 1. which includes disbursements from both federal and regional budgets. 21 republics. Input subsidies on working capital loans and payments for variable inputs.0% 0.8% during 1995-1997.5 2. of which RUB72bn ($2. the Far Eastern region. the Volga region.0 0. While support to the sector has risen since 2002.8 3.2bn). Until 2004.5 1.5 3.0 3. the North Western region. Interest rate concessions. the West Siberian region.4 2. the federal share has declined sharply since 2004. one autonomous oblast. such as fertiliser.4% during 2002-2006.0% 1.Agriculture Global emerging markets Government support to agriculture The 1998 financial crisis led to a substantial reduction in budgetary support given to the agricultural sector.

the Central Black Earth region and the Kaliningrad region. soils and wildlife. spread across 11 time zones. unfavourable topography and poor soil quality deters agricultural activity in most parts of the country. the Central region. with a variety of landscapes. Figure 33: Russia by region Central Black Earth Region Far Eastern Region Northern Region Volga-Vyatka Region Central Region Kaliningrad Region North Western Region Urals Region East Siberian Region North Caucasus Region Volga Region West Siberian Region Source: Renaissance Capital Russia is the world’s largest country.Agriculture Global emerging markets Caucasus region. climates. Harsh climatic conditions. Figure 34: Total land split Agricultural land area 13% Permanent meadows and pastures 44% Arable land 56% Nonagricultural land area 87% Source: FAO Source: FAO Figure 35: Agricultural land split 33 .

the region is endowed with the Chernozem. with wheat being the dominant grain. Chernozems. In addition to grains. However. respectively. through southern Russia and Kazakhstan. However. only 60% is used for cultivating crops. or black earth soil. Russian soils are characterised by low levels of fertility and range from poor quality acidic soils in the northern regions to highly fertile soils in the southern regions of European Russia. the North Caucasus region and the Far East region. potatoes are grown in the colder regions ranging from 50°-60° north latitude. including wheat. the Urals and Siberia. before ending in Manchuria. the region is considered to be the country’s most agriculturally productive area. occupy less than 6% of the land area. barley. sunflowers and soybeans are grown primarily in the North Western region’s Vologda oblast. the most agriculturally productive soils. However. Winter wheat is cultivated primarily in the North Caucasus region while spring wheat is cultivated in the middle Volga region. Grains. leaving only 10% for agriculture. some 19% is more or less in the tundra belt and about 4% is covered by water bodies. devoid of trees and interspersed with mountain ranges. making it very fertile and turning the area into Russia’s main source for grains. which has a high humus content and a low level of acidity. The Russian landscape has been characterised by the typical grasslands of the steppe. With about 65% of the land being dedicated to agricultural activity. In addition. In a country exposed to the most extreme climatic conditions. respectively. even in this fertile region. 34 . barley is the country’s second most important grain and is primarily cultivated in the colder regions extending from the highlands of southern Siberia to as far as 65° north latitude. rye and corn are among the most important crops and cover about 60% of the entire crop land. while the rest is devoted to pastures and forage. fodder crops dominate produce and occupy 60-65% of the sown area. Sugar beet is grown mainly in the central black earth region Russia. forage crops occupy only 35-40% of sown land. natural calamities such as droughts and inadequate precipitation have adversely affected agricultural yields. the Far East region and in South Western Siberia. even in drought-prone areas. The region is characterised by a broad belt of grasslands. This region extends from Hungary to Ukraine.Agriculture Global emerging markets Approximately 75% of Russia is characterised by broad plains and low hills lying to the west of the Urals to the taiga forests and tundra of Siberia. which occupy 22% and 16% of the total land area. More than half the country is covered by forests. and comprises Russia’s Central Black Earth and Volga regions. Out of this area. In the colder northern and north western regions of the forest zone. Uplands and mountains cover most of the area along the federation’s southern border. in the more agro-productive central and eastern regions. Oilseeds such as flax. this transitional zone of moderate temperature and adequate levels of precipitation offer an ideal setting for agriculture. The two main soil types are Podzols and Gleysols. In terms of annual output. Few grain fields in Russia are irrigated. over the years.

Much of this fallow land remained abandoned post the dissolution of the Soviet Union. The number of crops in rotation may vary from two to four or more. fertiliser use in Russia has also picked up in recent times. By mid-March 2008. As corporate farms begin to make a significant impression on the landscape. Inadequate or incomplete certification of land distributed to state farm workers in the form of land shares. In the southern forest-steppe and steppe regions. an increase of 14% over the same period last year. This led to inaccurate surveys and estimates of cultivable land.9mn ha in 2008. where spring crops/forage rotations dominate. One of the primary reasons for this has been the decline in cultivated area. primarily as a result of declining farm subsidies and the inability of farmers to buy inputs such as pesticides and fertilisers to protect crops and enhance yields. an 11% increase over 2007. in contrast to western Russia. Figure 36: Agricultural. In eastern Russia. The country’s cultivated area decreased from 79. 35 . grain/fallow/grass crop rotations are the most feasible. including: A decrease in the sown area of feed grains and other forage crops.6mn ha in 2005). The presence of vast tracts of fallow land. estimated at about 25mn ha in 2006 (38. with perennial pastures occupying 25-33% and soil protection crop rotations occupying up to 70-80% of the arable land. arable and cultivated land (mn ha) Agricultural land 200 180 160 140 120 100 80 60 40 20 0 2003 2004 2005 2006 Source: Rosstat Arable land 193 192 Cultivated land 194 168 118 80 117 77 116 76 102 75 Despite having the world’s largest land mass.6mn ha in 2003 to 76. crop rotations are dominated by cereal/fallow and cereal/sown crop/fallow cycles.6mnt of nitrogen fertiliser). agricultural producers had applied about 1mnt of mineral fertiliser (including 0. following the break-up of the former USSR. some 2mnt of mineral fertiliser on an active ingredient basis will be applied this year. primarily due to dwindling livestock inventories.Agriculture Global emerging markets Russian farmers employ several crop rotation schemes to maintain soil fertility. Rapidly increasing fertiliser prices may restrict consumption in the future. Russia is still some way from returning to the output levels it was able to sustain during the Soviet era. This decline is attributable to several factors. According to the MoA.

2. The government will impose export duties on mineral fertiliser in an effort to curb exports and increase supply in the domestic market. In 2008. out of the 12mn shareholders.3bn ($90m) was planned to be allocated for fertiliser procurement support with an expected increase in mineral fertiliser acquisitions from 1. According to Aug 2008 estimates. the country has made significant progress in the privatisation of land. However. However. RUB2. The MoA has been taking certain initiatives to combat problems associated with soil fertility and reclamation of unused agricultural land: In 2008. In addition. 2.0mnt in 2008.8mnt in 2007 to 2. the MoA planned to reclaim 700. This piece of legislation recognised the right of private ownership in agricultural land by dividing large tracts of state and collective land among rural people who lived in and worked on these farms. the MoA recently established a Department of Land Policy and Property Relations. In 2008. only 3-4% have fully completed the registration process. To improve soil quality. thereby increasing the area of idle land. 1. this has not brought about a significant change in the manner in which operations are run in the sector because even though almost 60% of agricultural 36 . shareholders have completed the registration process but have no interest in farming or leasing the land. Land ownership Land in Soviet times.000 ha of unused agricultural land. with the exception of the small garden plots (which occupied only 3% of the country’s agricultural land). the government began to partially subsidise the purchase of mineral fertiliser. Subsequent reform laws provided shareowners the option of withdrawing land plots from joint shared ownership for the establishment of independent peasant farms.500 ha of land. the success of this measure remains debatable as an adequate supply of fertiliser for grain producers will depend on the farmers’ ability to purchase the same rather than government restrictions on fertiliser exports.Agriculture Global emerging markets 1. measures to impede water-driven soil erosion will be implemented on 19. As a result of mass re-organisation of the former state and collective farm land. while measures to combat wind-driven soil erosion and desertification will be implemented on 45. the share of stateowned agricultural land dropped from 97% in 1990 to around 42% in 2003. who hold a combined 110mn ha of agricultural land. was under the complete control of the government bureaucracy. as outlined in the Federal Program for the Development of Agriculture and Regulation of Agricultural and Food Markets for 2008-2012. which includes determining precise field coordinates and receiving a title. encourage adoption of modern agricultural technologies and solve issues related to land ownership.000 ha of land. However. In some cases. The distribution was in the form of paper shares as per a mechanism that became known as ‘joint shared ownership’. since the passing of the Land Reform Law in 1990.

household farms and private family farms. these family farms contribute 7% to the country’s total agricultural output. Figure 37: Split of agricultural land ownership State 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1995 2003 Source: Rosstat Private 3% 56% 58% 97% 44% 42% Agricultural organisations (former state and collective farms) dominate production of most agricultural commodities. Average farm size (ha) 5. accounting for 43% of total agricultural output. Like agricultural organisations. the production is primarily for commercial purposes. In 2009. Figure 38: Structure of agricultural farms in Russia (2006) Farm type Ownership Description These are the successors of the former collective and state farms. the importance of this sector in marketed output is much smaller than in the overall production. Emerging after reforms in the early 1990s. there are three modes of farming operations in Russia – agricultural organisations. nearly 78% of Russia’s grains and 71% of the country’s sunflower seeds are produced by these enterprises. For example.5 6 Source: Rosstat. From our discussions with various parties. At present. usually directly at local farmers’ markets. These are physically demarcated land parcels owned by individuals in rural areas and account for an astonishing 50% of the country’s agricultural output.Agriculture Global emerging markets land is currently under private control. The majority of the households produce primarily for self-consumption and sell the rest to consumers. Thus. in 2009. The production is intended wholly for commercial use. they accounted for 21% of the country’s grain production and nearly 29% of its sunflower seed production. The smaller private farms complement these enterprises in commodity production. USDA 37 . Virtually all individually owned land in corporate farms is in the form of land shares owned by the local rural population. the majority of this land is still represented by land shares. it would seem reasonable to assume that as much as 70% of agricultural land in Russia is still owned by the state or held in the form of private sector land shares.000 Agricultural land holding (%) 81 Agricultural organisations (enterprises) Multiple shareholders Private (peasant) farms Individual 81 13 Household plots Individual 0.

buying and selling of land was restricted and ‘alienation’ of land was allowed only to the state and not to individuals. potatoes. 38 . While land shares held in the form of paper certificates could be sold to other members of the collective. however. when the plot was passed on in inheritance. produce mainly livestock products. the number of individual private farms increased sharply but their development has stalled since then. when the peasant farmer relocated to another region or when the seller undertook to use the proceeds from the sale for the establishment of a non-farm business). It was not until the adoption of the law on agricultural land transactions in Jan 2003 that ownership rights in agricultural land (including buying and selling) were finally normalised. Figure 39: Split of production of major agricultural products by farm type (2008) Agricultural organisations Household plots Private farms Eggs Milk Livestock Vegetables Potatoes Sunflower seeds Sugar beet Grains 0% 10% 20% 30% 78% 40% 50% 60% 70% 18% 13% 71% 89% 1% 80% 44% 57% 71% 81% 0% 29% 1% 10% 21% 90% 100% Source: Rosstat 76% 51% 40% 23% 1% 4% 3% 10% 6% With the introduction of various laws and decrees defining the legal forms of land ownership and the procedures for certifying and exercising ownership rights. on the other hand. these peasant farms face serious operational difficulties and are also handicapped by a lack of competitive input and output markets. But. Currently. few peasants established individual farms and the management and operating practices of large agricultural enterprises remained largely unchanged Immediately after the demise of the Soviet Union. It should be noted.Agriculture Global emerging markets Household plots. as it has turned out. The fact that they still produce half the country’s total agricultural products while operating on a mere 6% of its farm land indicates the high productivity of these plots. Consequently. sugar beet and oilseed. Land transactions Earlier legislation relating to land focused on providing use rights to the farmers. also use some land belonging to agricultural organisations for livestock activities. physical land plots could be sold only under special circumstances (when the landowner retired. the number of private farms declined to 255. However.100 in 1995.400 in 2007. after reaching a high of 280. it was expected that private holdings would be created in rural areas and the large-scale collective farms would be restructured. that household plots. vegetables and milk. and virtually no bulk crops such as grain. in addition to the land formally given to them.

Mortgaging has been permitted only since January 2004. previous prohibitions on the buying and selling of land have been removed. the restrictive impact of this provision has been alleviated by allowing long-term leasing for 49 years. It provides pre-emptive rights to local governments and municipal authorities to purchase land plots and land shares. the law can be bypassed by resorting to alternative mechanisms such as public auction. All these problems are further aggravated by a general lack of market information pertinent to land transactions as the agents do not have sufficient knowledge of mechanisms and procedures necessary for the registration of land transactions. there is no need to offer the share to other pre-emptive buyers (the joint owners. but in practice it significantly delays the completion of land transactions. at present. land mortgage has a limited role in the country and is unable to fulfil its role as a facilitator of land transactions. So. The restriction is aimed at preventing concentrations of large land by one person. Upper limit on concentration of land by physical An individual (including the close associates) cannot own more than 10% of the total agricultural land in a persons or legal bodies created by physical persons given administrative region. The conversion of a land share in a collective farm into a plot of land requires the whole area in joint-shared ownership (often several thousand hectares) to be surveyed.Agriculture Global emerging markets Figure 40: Key provisions of the law on agricultural land transactions (Jan 2003) Farm type Description The law prohibits the sale of agricultural land to foreigners and companies with majority foreign capital. and imposes highly restrictive conditions. With a gift of land. However. However. landowners often avoid the legislative registration procedures and resort to general power of attorney or give the land away as a gift. 39 . Consequently. As a result. withdrawal of a single plot of land from joint-shared ownership requires up to one year of constant occupation. Source: Rosstat With the adoption of the 2003 law. or the municipality). These administrative barriers involve additional expenses for the applicants and lead to sharp increases in transaction costs and time. the technical barriers to meet the basic requirements are virtually insurmountable. The bureaucracy has created numerous procedural obstacles that complicate land transactions. According to various experts. further development of land market activities is severely restricted by the inadequacy of the administrative and technical infrastructure. With general power of attorney. Land ownership by foreigners However. The private deal can Sale of farm land go through only if the authorities refuse or let the option lapse (within one month). as high registration costs and complex procedures prove to be a major obstacle to land transactions. the oblast government. The law is intended to prevent socially undesirable transactions. Another serious impediment to the growth of the agricultural sector in the country has been the policies surrounding the mortgaging of agricultural land. It is an expensive operation (estimated to cost about $20 per ha) and it is also time consuming (a minimum of two months). especially regarding the requirements for documents. Negotiations for a piece of agricultural land (or even a land share) between private parties cannot be concluded without offering the authorities the option to buy the land on the same terms. Another major problem is the multiple steps required and the entirely opaque processes of the authorities involved with the registration process. following a special amendment of the 1998 general mortgage law. as required by the law. the seller gets the money and empowers a third person to sell the land share and complete all the necessary arrangements. although the 2004 amendment formally allows agricultural land to be mortgaged. gifts and so on.

Major cereal crops include wheat. poor soil quality and the inability of farmers to afford fertilisers and yield improving technological inputs. the livestock industry has regained some prominence in the agricultural sector. As a result. poor economic conditions resulted in a sharp decline in livestock inventories. Major industrial crops include sunflower seeds. rape seeds and soybeans) together accounted for about 71% of total cultivated land. beef and milk. scattered areas and is negligible compared with cattle and pigs. where sheep and goats dominate. As incomes have risen. around 12% of global barley production and 25% of global rye volume. the northern areas of the country concentrate mainly on livestock production. vegetables and melons 4% Oil crops 10% Technical crops 1% Note: Technical crops comprise of sugar beets and flax fibre Grains 61% Source: Rosstat In 2009. In terms of oilseeds. While southern and western regions of the federation concentrate primarily on grain production.Agriculture Global emerging markets Major agricultural products Extreme climates. Poultry is reared in small. sunflower seeds. although it employed about 11% of the labour force. sugar beet and flaxfibre. grains and oilseeds (sunflower seeds. of which winter wheat is the main crop for both private farms and agricultural enterprises. After the Soviet Union was dissolved in 1991. sugar beet. In 2008. Pigs also form an important category and are raised in areas of European Russia and the Pacific coast. although the high demand for frozen chicken has made it one of the country’s largest import items in the past few years. Russia accounted for about 9% of global wheat production. deter agricultural activity across many areas of the country. the country was the world’s largest sunflower seed producer with a 21% market share. In addition. Cattle are the most common form of livestock except in the drier areas. Russia's main agricultural commodities include grains. potato production in Russia accounted for about 9% of the global potato market in 2008. Figure 41: Split of planted area by crops (2008) Forage crops 24% Potatoes. agriculture accounted for about 5% of the country’s GDP in 2007. vegetables. barley and rye. fruits. 40 .

Kazakhstan and Ukraine. About one-third of US frozen cut poultry exports are sent to Russia.0 15. but with the agriculture sector trailing other sectors.3 1.3 15.4 1.4 19. India. while around two-thirds of Brazil’s pork exports find their way into the country.2 3.5 12.4 7.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: FAO Agricultural exports 31.8 10.0 0.5 25.4 10.5bn.6 1. Russia is a net-exporter of grains and oilseeds.1 1. The import-export gap is likely to remain for a while yet given the country’s numerous bottlenecks.Agriculture Global emerging markets Figure 42: Split of livestock population (Dec 2009) Hogs and pigs 29% Cattle 34% Sheep and goats 37% Source: Rosstat In value terms. Ukraine and the US are Russia’s largest agricultural food suppliers.1 8.0 7. The main export destinations include Egypt.0 12.7 1.5 7.0 10. Jordan.5 4.8 41 . Imports of foodstuffs consist mainly of meat and other high-value products such as fruits.0 20.7 2. Tunisia.4 7. Brazil.4 11.7 9. The EU.3 2. since then. imports have continued to increase at a faster pace than exports and in 2008 the gap nearly quadrupled to $23.0 5.0 24. beverages and confectionary products.0 30.2bn in 2000.2 1. Figure 43: Agricultural trade in Russia ($bn) Agricultural imports 35. The nation’s agricultural import-export gap reached a trough of $6. Clearly this is an indication of how the country has grown rapidly overall. Russia is a net importer of agricultural and food products.9 1. Deal with these and the Russian agriculture sector would enjoy a renaissance.9 12.9 0. processed foods. However.

Spring barley typically accounts for about 90% of the total sown area for barley. which were abolished in July 2008.15 tonnes/ha in 2009. The yield is expected to decrease to 1. winter wheat accounted for about two-fifths of the total wheat area planted and about 60% of output (due to higher yields compared with the spring crop). Like wheat and other grains. the rest is used as feedstock.Agriculture Global emerging markets Wheat In 2009. Figure 44: Wheat production (mnt) and exports as a % of production Production 70 60 50 40 30 20 10 0 45 2006 49 2007 64 2008 62 2009 42 2010 E Source: USDA Figure 45: Wheat consumption (mnt) and stocks as a % of consumption 35% 30% 25% 20% 15% 10% 5% 0% 50 40 30 20 10 0 36 2006 38 2007 39 2008 42 2009 48 2010 E Source: USDA Exports/production (RHS) 29% 30% Consumption 27% Stocks/consumption (RHS) 28% 35% 30% 25% 20% 24% 25% 10% 11% 10% 8% 15% 10% 5% 0% Barley Barley is one of Russia's main feed stocks. Russia exported 25% of its wheat output. the government implemented prohibitive export duties on wheat and barley. and exports are expected to fall to 4mnt. the country accounted for approximately 9% of total global output. About 70% of the country's wheat is food-grade. In 2007. In 2006. primarily due to the extremely hot weather and forest fires. The grain is typically planted over 23mn ha to 26mn ha and it is harvested as a winter and a spring crop annually. and about 15% of production was exported in 2009. The combination of reduced feed demand and several decent crops since 2001 is reflected in increased wheat exports and lower imports. Output is likely to decline by over half YoY in 2010 as yield is expected to decrease 42 . look at the current year. The country accounted for approximately 12% of global output and 12% of global consumption (as feed).9mnt of the stuff.7mnt. As an indication of what can happen occasionally in Russia. However. a tight international grain market and surging prices for wheat made export a profitable option for the farmers. Russia was the world’s fourth-largest wheat producer. barley is also grown in spring and winter.57 tonnes/ha from 2. barley is expected to suffer due to excessive heat and drought. Similar to wheat. In 2009. With an output of 61. High domestic consumption leaves little room for exports. which resulted in increased exports in 2007. Wheat accounted for about two-thirds of Russia's grain output in 20009. In Nov 2007. wheat production is expected to declines by 32% over 2009. Feed consumption accounted for about 73% of the total barley consumption in 2009. In 2010. Russia produced 17.

6mn ha in 2009.6mnt in 2009. with Russia accounting for 22% of global production. In recent years.3% of total production in 2009. Russia’s sunflower seed production accounted for 21% of global output. drought is expected to result in sunflower seeds yield decreasing from 1. As with other crops. Exports accounted for a mere 0. Figure 48: Sunflower seed production split (2009) Other EU-27 United 17% 23% States 5% China 5% Argentina 8% Russia 21% Ukraine 21% Figure 49: Sunflower meal production split (2009) Other 21% Turkey 4% Argentina 9% Russia 18% Ukraine 21% Source: USDA Figure 50: Sunflower oil production split (2009) Other 20% Turkey 5% Argentina 9% EU-27 21% Source: USDA EU-27 27% Ukraine 23% Russia 22% Source: USDA Although the trade in sunflower seeds is limited. Sunflower oil is also a primary food product in the country. As a result.9 tonnes/ha in 2010. output is likely to decline 17% in 2010 compared with 2009. with the 43 .98 tonnes/ha in 2009. Consequently.Agriculture Global emerging markets to 1. driven by a combination of high prices and low production costs relative to wheat. In terms of sunflower meal. the area harvested for the oilseed increased from 3. Russia is a net exporter of the commodity. Russia was the third largest producer in 2009. accounting for about 21% of global output. In 2009.15 tonnes/ha in 2009 to 0. making it the world’s third largest sunflower producer. farmers’ planting decisions have become largely market-based and the profitability of sunflower seeds has fuelled a significant expansion in cultivated area.4mn ha in 2001 to 5. Exports would likely fall to 0.25mnt in 2010 from the 2. just behind the top produce Ukraine. Figure 46: Barley production (mnt) and exports as a % of production Production 25 20 15 10 5 0 18 2006 16 2007 23 2008 18 2009 9% 7% 3% 9 2010 E Source: USDA Figure 47: Barley consumption (mnt) and stocks as a % of consumption Consumption 16% 12% 8% 4% 0% 18 15 12 9 6 3 0 16 2006 8% 7% 15 2007 17 2008 17 2009 12% 9% 21% Stocks/consumption (RHS) 25% 20% 15% 10% 10 2010 E Source: USDA Exports/production (RHS) 15% 15% 5% 0% Sunflower seeds Sunflower has become one of the most consistently profitable crops in Russia.18 tonnes/ha from 1.

0 0. In 2007.00 ha and these plots lack access to inputs and capital.1 2005 3.0 0.7 35.4 1992 3.2 2003 3.0 6. Simultaneously.3% 5.7% 0. sunflower meal and sunflower oil are major export products for the federation.4 2008 6. Between 1997 and 2006. Pests and diseases are a major problem.8 2006 0.0 50% 40% 2.4% 2. Figure 53: Potato .2% Exports/production (RHS) 3% Figure 52: Sunflower meal and oil production (mnt) and exports as a % of production Meal production Oil production Meal exports/production (RHS) Oil exports/production (RHS) 3. Annual production over the past 15 years has continued to hover around 35mnt.0 2006 2007 2008 2009 2010 E Source: USDA 2% 30% 20% 10% 1% 0% 0% Potatoes Potatoes are a staple next only to bread in the region.0 2006 2.0 6. well below the global average of about 16 tonnes/ha.8 28. the average yield in Russia stood at 11 tonnes/ha. The country accounted for 9% of global production in 2009 and is second only to China.1 50 40 30 10 0 44 .9 36.1 2008 2.Agriculture Global emerging markets remainder used for domestic consumption. Output has risen sharply in recent years.2 2002 3.7 2007 7.0 2. The increasing use of fertilisers should also drive yields.0 4.7% over the past decade. it was estimated that the average Russian consumes about 264 lb of potatoes annually and that potatoes account for 18% of an average Russian’s diet. respectively.2 2000 3.9 2007 2. Figure 51: Sunflower seed production (mnt) and exports as a % of production 8. Although Russia is one of the world’s largest potato producers. Low potato yields are primarily attributed to the fact that about 93% of the output is accounted for by privately owned family plots of about 0. High profitability and the low cost of sunflower seeds compared with other grains should increase the sown area for sunflower.3 3 2 20 1 0 3.3 1995 3.06-4.9 Production (RHS) 37.3 38.9 31.6 36.4 2009 0.1 2004 3.9 34.0 32.5 2010 E Source: USDA Production 2. Sunflower seed imports in the nation are also negligible and are restricted to high-quality seeds only.Area harvested (mn ha) and production (mnt) 4 38.0 1.2% 5.2 2009 Source: Rosstat Area harvested 39. output has declined by 0. accounting for 29% and 20% of total output in 2009.

Beef production declined 4% in 2008 over 2007 because of poor cattle husbandry which will resulted in low productivity and reproductive inefficiencies. Rosagroleasing.3 1. 45 .2% of global production. The Russian government has recognised this bottleneck and has taken initiatives to increase imports of livestock genetics. In 2009. This should help promote higher dairy yields and beef production through the breeding of specialised breeds.4 2.4 Consumption 2. Investors are put off by the absence of profitability of this sub-sector.137 895 940 0 2006 2007 2008 2009 2010 E Source: USDA The government recently introduced the State Programme for the Development of Agriculture and Regulation of Food and Agricultural Markets .2008-2012 to encourage beef production and address Russia’s declining cattle numbers. under the National Priority Project and financed by the government agricultural leasing agency. This programme includes import-substitution policies to encourage local livestock production.200 1. live cattle. while it accounted for only 2.Agriculture Global emerging markets Beef and veal Beef and veal demand in Russia witnessed significant growth over the past few years outpacing production. Canada and Australia.4 1.3 1.8% of global beef and veal consumption.4 1 1. Russia accounted for 3.4 2 1. semen and embryos are imported from Europe.2 Figure 55: Beef and veal imports ('000 of tonnes) 1.000 800 600 400 200 0 2006 2007 2008 2009 2010 E Source: USDA 939 1.3 Production 2. Accordingly.030 1. Dairy cattle are the main source of domestic beef in Russia as the commercial beef cattle industry is still in its infancy. the recovery of the country’s beef industry will be delayed. as long as the conversion of dairy cattle to beef continues.2 2. However. Figure 54: Beef and veal production and consumption (mnt) 3 2.

2mn agriculture enterprises is obviously fragmented. In 2008. Brazil benefits.7% of Brazil’s GDP derives. It is a pioneer in 46 .000 enterprises farming more than 1. Agriculture accounts for some 6. 190mn ha of underutilised land is equal to the entire amount of farm land in the EU. In a long-term liberalising environment. Over the entire country there is a further 90mn ha of land available for farming. Brazil has the fourth-largest agricultural land resource in the world after China. coffee.Brazil: The past is another country You only need to look back to the 1980s to see Brazil as another country. tobacco. The government plays a role in the sector but. We have said it before and it is worth saying it again. the sector accounts for some $106bn of GDP.. which can be brought into production.1 producer and exporter of sugar. of which 265mn is productive. A country which has 5.e. The country is the No. The country imports approximately $12bn of agricultural produce annually. It is the world’s leading exporter of beef and poultry.7% of the country’s total (over 25% if all the associated agribusinesses are included) and it employs some 22mn people in one form or another (i. First. Sandwiched between two crises . coffee.the 1982 Mexican debt crisis and the 1994 Tequila Crisis .000 fewer than was the case a decade back.e. ethanol. It also holds the No. In our view. The country’s farmland is approximately 330mn ha. It also has considerable knowledge not just of private sector farming on an industrial scale but also of operating within a legal framework where property rights are enforceable and more certain than in other environments.2mn farms have some 330mn ha of farmland. Some 10mn ha of degraded land in the Amazonian region could also be used for farming. To reinforce a perception of strength. there are around 50.ran a period known in Latin America as “the Lost Decade”. its geography and topography combine to make the country highly diversified and less reliant on individual product lines compared to its peers and third.e. The experience of Brazil – outside the major trading blocs of the modern era – means that the country has learnt to compete in the same manner as New Zealand farmers did in the 1980s.. Brazil is nothing less than an agricultural superpower in the making. government intervention hinders development. And the country’s potential is considerable.. employing some big numbers can help. The country’s emerging status in the sector is underpinned by three key factors. i. Almost $72bn of produce was exported in 2008 and the agricultural trade surplus was some $60bn. orange juice and tobacco. i. Brazil’s 5. its land and labour costs make it an unrivalled low-cost producer. Meanwhile it exports some $72bn worth of the stuff. However. 11% of the population).1 slot for exports of beef and poultry. More importantly. orange juice. $106bn. In the Cerrado part of the Central West it is estimated that 90mn ha of land is available for farming. the country exported $72bn of agriculture produce and enjoyed a $60bn trade surplus in agriculture products. the country has the experience of running largescale farming operations with a high degree of vertical integration. The country has some 190mn ha of underutilised farmland. 6. this is 600. and accounting for about 44% of the total area.000 ha. Australia and the US. Second. The country is the world’s leading producer and exporter of sugar. it has liberalised to a far greater degree than its international peers. If Brazil could set a moniker for its recent history it would be “The Found Decade” and at the forefront of that rediscovery would be the country’s agriculture sector. since the late-1990s.

Farm indebtedness remains high. Production. In short. Many are vertically integrated. machinery or skilled workers and the negative side of government interference may be on the rise again. An overview of the Brazilian agriculture sector Brazil’s categorisation as an emerging market power is mirrored more specifically by its emerging status as a prominent agricultural superpower.Agriculture Global emerging markets the production of bio-fuels and a world leader in using fuel ethanol in the transport sector.5% today. A coherent policy response to these issues will ensure a bright future for the Brazilian agriculture sector. These large farms account for some 44% of the total agricultural area. In the 1990s the country liberated the sector from the dead hand of state control.000 enterprises which farm more than 1. In fact. A convenient – for an export-driven sector at least – devaluation of the currency in the late-1990s also prompted an export boom and a fourfold increase in exports between 1990 and 2006. many participants lack access to capital. Government expenditure on the farming sector declined from almost 6% of GDP in 1990 to 1. we do see a range of problems which need to be addressed so that it does not lose the advantages that also once characterised neighbouring Argentina. Its vast agricultural area of 265mn ha. oilseeds and livestock it was necessary for the government to reduce its involvement in the sector. whether plant and equipment. it is estimated that there is close to 90mn ha of cultivable land – all with lower environmental consequences than the Amazonian regions. the industry is still highly fragmented. While we believe that the country will enhance its status as a leading agricultural producer in the years ahead. There may be 5. These farms are well capitalised. In common with most countries. economic progress and regulatory reforms have brought significant investment into the agriculture sector. for Brazil to reach its status as one of the world’s largest producers and exporters of grains. the amount of underutilised farmland in Brazil is 10mn ha more than the entire cultivated area of the EU. which includes 47 . Trade stability. few countries have the same depth of experience of large-scale farming. In the Cerrado part of the Central West region. This might sound like an advert for Brazil. over $7bn of agriculture bad debts are in the system.8mn ha of cultivated land each year places more strains on a limited infrastructure. anything less than that and the long-term benefits that will accrue to market participants will head elsewhere. sophisticated and are even developing their own infrastructure instead of depending on a distant government to help them. Brazil looks and feels like an agricultural superpower.2mn enterprises but there are still around 50.000 ha. Who needs analysis when the world of big numbers does your work for you? Brazil explodes the myth that somehow there is a shortage of arable farmland on the planet. To put that into perspective. The role of government in Brazil’s agriculture sector has been more limited than one might at first think. logistics and marketing bottlenecks are ubiquitous and adding an expected 1. However. Another 90mn ha of underutilised pasture could be converted to crops and a further 10mn ha of degraded land in the Amazonian states could be brought into proper cultivation. the Brazilian farming sector remains fragmented.

The sector has played an increasingly important role in the overall economy and in easing the country’s balance of payments problems. Figure 56: Real GDP ($bn) and agriculture as a % of GDP 1. In 2008.9% 6. World Bank 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 Source: FAO Brazil has several natural and market advantages that allow it to be a low-cost agriculture producer. Australia and the US.4% 6. In 2008. coffee. ethanol.6% GDP 8% 6% 4% 2% 645 554 504 552 664 882 1. In 1990 Brazilian agricultural exports amounted to some $9bn 48 .200 1.6% 6. coffee.7% 5. oilseeds and livestock.7% of the country’s total. In 2009. Rising global incomes and Brazil's ready availability of land.575 0% Figure 57: Agricultural population (mn) and agricultural population as a % of total Agricultural population 50 40 30 20 10 0 44 41 35 31 28 36% 30% 23% 30% 19% 16% 13% 13% 12% 12% 11% 24 24 23 22 22 20% 10% 0% As a % of total population (RHS) 40% 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: IMF. water and labour have driven both production and exports. of which 69mn ha is utilised as crop land (arable land and permanent crops). low production costs. including abundant. It also was the world’s leading producer of sugar. Brazil’s agricultural sector has benefited from a range of factors: currency devaluations. and a world leader in using fuel ethanol in the transport sector. orange juice. which can be employed for agricultural purposes. The majority of the Brazilian agricultural sector is located in the South and Central-West region.0% 5.7% 6. orange juice and tobacco. This is no short-term success story but a longterm upward trend. It is also a pioneer in the production of biofuels. an indication of Brazil’s changing economic and social landscape as well as the increasing capital intensity of the sector.089 1. is surpassed only by China. beef and poultry. It is one of the world’s largest producers and exporters of grains. cheap land and suitable climatic conditions. agriculture accounted for approximately 36% ($72bn) of the country’s total exported goods. The dominant theme of the Brazilian agricultural sector is not just size but also diversity.5% 6.333 1. Over the past decade. Direct employment in the agriculture sector in 2008 was 11% of the population compared with 36% of total population in 1980. The country has some 265mn ha of agricultural land.000 800 600 400 200 0 Agriculture as a % of GDP (RHS) 7. Although Brazil is already a major player in the global agriculture sector.600 1. it is the potential to expand its production capabilities – especially in the Cerrado region in the Central-West – that fires the imagination.Agriculture Global emerging markets cropland and pasture. which amounted to almost $60bn in 2008.0% 5. technological advancements and domestic and foreign investment. Therefore. agriculture in Brazil accounted for 6. It is estimated that this region alone has at least 90mn ha of unused new land. tobacco.400 1. Brazil was the world’s biggest exporter of sugar. it is hardly surprising that Brazil is not just a net exporter of agricultural products it also has the largest agricultural trade surplus in the world.

7 11. and local subsidies. US and Asia account for approximately 57% of Brazil’s agricultural exports. we cannot isolate the successes and say that they were due to a free market model or 49 .5 39. indicating the growing prominence of Asian markets.9 4. It enjoys a low-cost resource base and has easily raised output by expanding the area under cultivation and increasing productivity. However.6 49. These include supply constraints. Livestock and Supply (MAPA) The government has played an important role in shaping Brazil’s agricultural sector. favourable natural conditions for raising a variety of crops.Agriculture Global emerging markets and rose to almost $72bn in 2008. Despite that. compared with 5. public expenditure on the agricultural sector is low compared with recent years. Moreover. as well as a lack of access to capital.6 8.6 5. such as transport and marketing bottlenecks.7 NAFTA 10% Source: Ministry of Agriculture.split by destination (2008) Agricultural exports 71. Figure 58: Agricultural trade in Brazil ($bn) Agricultural imports 75 58. it won’t be plain sailing – hindrances do exist. Factors such as land availability. These include preferential credit. On the demand side. driven primarily by volume expansion between 2000 and 2003 and driven. although this represents a decline from 40% in 2003. Brazil is well positioned to benefit from long-term changes in demand.9% over 1985-1989. Government incentives for agricultural producers are wide ranging and have contributed significantly to growth in the sector. it can be attributed to a range of factors. In 2008. tax exemptions.8 24. Whether in agriculture or in other policymaking frameworks. The development of the Brazilian agriculture sector Tempting though it may be to attribute Brazil’s development of its agriculture sector to recent events.9 Other 25% 43.5% of total government expenditure in the period between 2003 and 2005. by the currency devaluation in 1998-1999.4 EU 33% 4.8 23. potential for increasing crop yields. Overall. China represented around 11% of total agricultural exports.4 60 45 30 15 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 20. rising consumer demand for higher value foods coupled with the growth of Brazil’s biofuels industry could reduce the potential of Brazil’s export sector. marketing and infrastructure improvements as well as an array of federal.0 30. Agricultural expenditure accounted for only 1. decisions and policies implemented in the distant past often have benefits that are realised years later and Brazil’s agriculture sector is no stranger to this truism.8 4. and the existence of a large domestic market set against a favourable macroeconomic backdrop should help Brazil consolidate its position as a leading agricultural producer in the future. The EU accounts for almost 33% of all agricultural exports. state. The EU. many of which date back decades.9 5.8 US 9% China 11% Asia (exChina) 13% Source: MAPA Figure 59: Agricultural exports . financing for agricultural research.2 6.8 4. in part.

. Yields remained ghastly. through the incorporation of new land and aggressive road construction policies. The horizontal expansion phase (1945-early 1970s) The intervention/modernisation phase (early 1970s-late 1980s) The free market period (early 1990s-present) Horizontal expansion (1945-early 1970s) Brazilian agriculture remained very primitive during this phase.e. The government introduced a far-reaching reformulation of agricultural strategy which included some key initiatives outlined below. Export quotas and licences. In tandem with the Perónist government next door. the devaluation of the currency in 1998-1999 was a policy failure with hugely positive implications for the agriculture sector). the Brazilian government implemented an import-substitution strategy to promote domestic economic growth while limiting foreign debt and foreign exchange. cotton. sugar and a few minor commodities and a semi-subsistence sector that produced for the domestic market.. Some of the successes were even rooted in initial failure (e. however. were applied sporadically and were often combined with direct export taxes on Brazil’s major agricultural commodities. the total cultivated area increased by almost 83%. Incredibly. While the region witnessed a mere 17% yield increase from 1949 until 1969. to over 39mn ha. In common with neighbouring Argentina the government ensured that it was the urban-industrial constituency which was favoured at the expense of the rural sector and the agriculture sector. Intervention/modernisation phase (early 1970s-late 1980s) As horizontal growth reached its natural limits by the end of the 1960s.Agriculture Global emerging markets an interventionist model: it all depends.3% over the period between 1949 and 1963. geographical) expansion.g. It was characterised by an export sector that relied primarily on coffee. the overall performance of the agriculture sector during the period was reasonable due to horizontal (i. The disincentives of import substitution and industrialisation policies were circumvented by maintaining adequate access to land on concessionary terms for landowners and farmers. in the same period. Brazil’s agricultural exports were heavily taxed using both direct and indirect policies in an effort to supply the urban sector with cheap agricultural products. the agriculture sector underwent a phase of modernisation driven by capital inputs and strong government intervention. as well as prohibitions on trade. Yields were consistently low and there were few policy initiatives to modernise the sector. The modern evolution of the Brazilian agricultural sector can be divided into three distinct phases. Geographical expansion. The increased emphasis on capital intensity was aimed at the bigger agri-businesses and ensured that access equipment and chemicals were more readily available. The establishment of a rural credit system in 1965 providing financing on easy terms to commercial agriculture 50 . resulted in an annual crop output growth of 4.

government purchases of wheat and milk were removed and the marketing boards for coffee. Exports increased from $1. and export restrictions on soybeans. up until the mid-1980s. agricultural exports increased at a much slower pace than the country’s total exports. especially in soybean and meat production. as was the requirement for corn import licences. minimum support prices were abolished. reduced inflation to approximately 5% per year and ignited a five-year consumption boom. to 58mnt in 1985 and to 72mnt in 1989. Brazilian agro-industrial exports became increasingly diversified. The output of grains and oilseeds increased from 22mnt in 1965. In a span of about twenty years. sugar and wheat were abolished. 51 . However. While in 1965 agricultural exports represented 83% of the country’s total exports.3bn in 1965. Economic reforms in 1985 eliminated domestic and export taxes on agricultural products. possibly the most significant economic factor affecting agricultural output in Brazil since the mid-1990s was macro-economic: the introduction of the Real Economic Stabilisation Plan. it had a remarkable impact on both production and productivity. However. Being a low-cost industry with a propensity to export. going beyond a small group of tropical commodities (mainly coffee. in the 1980s. their share declined to 39% in 1985 and to 30% in 1990. minimum price policies Inducements for the formation and expansion of agribusiness complexes The availability of subsidised credit expanded markedly and. which stabilised the economy. double the 1970 level. ethanol and fruits. However. As a result. and the administration of. and meat were removed.Agriculture Global emerging markets The implementation of a broad-based research body focusing on agriculture in 1972 – the EMBRAPA (Empresa Brasileira de Pesquisa Agropecuária) system An improvement in the instruments used in. and the rural credit system became increasingly regarded as wasteful and distorted. the government introduced the real.000% before 1994. together with the currency devaluations of the 1980s. this devaluation had a positive effect on the country’s agriculture sector. cotton. to $5bn in 1975. However. sugar and cocoa) and incorporating new products such as soybeans. which led to a significant devaluation of the currency. During the early 1990s. With inflation levels in excess of 1. The minimum price policy. the effectiveness of agricultural credit in expanding output began to weaken (debt crisis). in early 1999. production of major crops (soybeans. edible beans. government intervention and support measures were reduced. and wheat) rose to 54mnt in 1990. brought about a considerable expansion and diversification of agricultural exports. In the second half of the 1980s the incentives and subsidies of the credit policy were replaced with those provided by the minimum price policy. Brazil adopted a floating exchange rate. Liberalisation phase (early 1990s-present) Rapid expansion followed in the mid-1980s when the policies which had diverted resources from agriculture towards the industrial and services sectors were dropped. corn. meat. rice. some state-owned enterprises were sold.

by means of subsidised rural credit. with total export value increasing four-and-a-half times in the period. The period between the mid-1960s and the early-1980s was a period in which government intervention was the norm: in agricultural commodity markets. Significant policy changes were introduced by 1995. 1961=100 600 500 400 300 200 100 0 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Figure 61: Agricultural exports value index. the sector was uncompetitive – except for a few tropical products such as coffee and sugar – and was characterised by an uneven distribution of farm income which almost institutionalised large and unproductive landholdings.000 1. through government purchases and storage of excess supply and so on.500 1. shifting the priority towards land reform and family farming. and the debt crisis of the 1980s forced the Brazilian government to reduce support to farmers and review its sector policy goals. The introduction of the Real (in conjunction with the microeconomic reforms of that time) helped to promote a more benign investment and domestic consumption environment so that when currency devaluation came. The reforms of the 1990s have proved enduring. The government created a new ministry. agricultural policy centred on the objective of promoting food security for an urbanising population while compensating the agricultural sector for its anti-export bias.500 2. Structural reforms introduced in the early-1990s witnessed the elimination of export taxes and price controls. the unilateral reduction of trade barriers and the introduction of private instruments for agricultural financing. The role of government Agricultural policy goals and programmes in Brazil have changed significantly over time.000 2.Agriculture Global emerging markets Figure 60: Agricultural production index. with price support mechanisms. In retrospect. 1961=100 3. Exports witnessed a sharp increase in the period 1990-2006. to run programmes targeted at family-run farms and 52 .000 500 0 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Source: FAO Source: FAO It might seem unusual for a sector to perform well under two seemingly contrasting economic environments. calamity inevitably leads to reform. deregulation and liberalisation of commodity markets. nearly four-and-a-half times that of 1970 and more than double that of 1990. However. During this period. the Ministry of Agrarian Development (MDA). Crop production in Brazil reached an all-time high in 2008. the reason is probably quite simple. export growth gained prominence. During the mid-1960s.

With significant institutional and policy changes. capacity building. urbanisation. Overall. however.826 1.538 1999-2002 4.602 1995-1998 7. It also adopted policies targeted at family agriculture (known as PRONAF). Rising incomes. and extension services. the Brazilian agriculture system made the transition from a traditional local business to an increasingly global and industrial model.464 5.972 630 9.686 6.150 2003-2005 3.024 2.464 1. Farmers in Brazil are increasingly exposed to markets that are much more demanding in terms of food quality and safety.Agriculture Global emerging markets land reform. government expenditure on agriculture decreased both in relative and absolute terms and traditional agriculture expenditure was sacrificed to support land reform programmes.712 9.00% 1. Increased foreign direct investment (FDI) by large private agribusinesses displaced domestic competitors.698 1990-1994 8. increased industry concentration and eliminated many medium and small companies. more concentrated and vertically integrated and more open to international competition.488 Traditional agriculture /total 94% 93% 82% 73% 55% Agrarian organisation /total 6% 7% 18% 27% 45% Agricultural expenditure /total government expenditure 5.80% Source: EMBRAPA 53 .8% by 2005.017 681 10.80% 3.6% of total government expenditure during the Sarney administration (1985-1989) to about 1. including subsidised credit lines. It fell from 5.40% 2. Federal government expenditure on land reform increased from 6% of total farm programme spending during the Sarney administration (1985-1989) to 45% during the first Lula administration (2003-2005). The number of agriculturerelated programmes increased from 30 before 2000 to 100 in 2003.60% 2. economic liberalisation and access to competitive raw materials led to an investment boom by multinational food processors and retailers during the 1990s. Figure 62: Average annual expenditure on agricultural policies ($mn) Agrarian organisation Period Traditional agriculture Total (land reforms) 1985-1989 10. research.

Agriculture Global emerging markets Figure 63: A brief history of the Brazilian agriculture sector 1965-1985 1985-1995 High inflation Controlled exchange rates High growth rates Increased government expenditures in farm policy Food security Massive intervention. government purchases and storage. EUMERCOSUR) Crisis of public research and extension services Ministry of Agrarian Development (MDA) Distributive programmes -land reform. 54 . rural retirement. About 25% (69mn ha) of the agricultural land is covered by arable and permanent crop land while the remaining 75% is covered by permanent meadows and pastures. PRONAF Macroeconomic conditions and policy Agricultural policy goals Proposed agenda Low inflation Structural reforms and fiscal balance Less volatile exchange rate Lower interest rates Sustained growth Investment in infrastructure Competitiveness Sustainability (economic and environmental) Price support and government storage Modest and selective intervention Rural credit Decreased government supply of credit Interest rates less subsidised Crop insurance Private instruments for agricultural finance Targeted credit lines to family farms Credit co-operative development Aggressive trade policies – negotiations etc Increased emphasis on non-tariff barriers – technical. price controls Commodity price support Government supply of credit financed by Treasury Negative real interest rates Uncontrolled inflation and low growth Debt crisis Lower government expenditure on farm policy Deregulation Liberalisation Lower intervention Agricultural commodity market deregulation 1995-2005 Control of inflation Volatile exchange rates High real interest rates Modest growth rates Privatisation Land reform programmes Family farming and social inclusion Modest and selective intervention Credit lines targeted to family farms (PRONAF) Specific programmes for investment credit (BNDES) Agricultural credit crisis and debt rescheduling Aggressive policy against agricultural trade barriers WTO dispute panels Leadership in G-20 Negotiation of regional agreements (FTAA. sanitary and social barriers Conclusion of regional and bilateral trade agreements Renewed public commitment to agricultural R&D including GMOs Increased role of public/private partnerships Intellectual property rights Policy evaluation and monitoring Retarget programmes to different types of family farms Farm co-operative development and modernisation Source: American Agricultural Economics Association Agricultural trade policy Closed economy High tariffs Import substitution model Export taxes on primary commodities High investment in public research (EMBRAPA) Development of public extension service network Unilateral openness to trade International integration (MERCOSUR) Elimination of export taxes Agricultural research and extension Levelling-off of public investment Social policies (family farms and land reform) Minimal Initial stage (Extraordinary Ministry of Land Reform) Land use Brazil enjoys several natural and market advantages including cheap and abundant land.public agencies. suitable climatic conditions and a large internal market to create economies of scale. “Bolsa Família”. Of the total land area (846mn ha) approximately 31% (265mn ha) is accounted for by agricultural land (crop lands and permanent pastures and grasslands).

In the North is the largely undeveloped Amazon rainforest where infrastructure is poor and agriculture is primarily subsistence. maize and wheat and accounts for about half of Brazil’s soybean crushing capacity. tropical zone. When various government incentives were implemented during the 1960s. reasonable infrastructure and generally efficient farms. the Cerrado lands provide the greatest potential for growth. It is estimated that in this humid. the South and the Central West. Proximity to major urban centres and access to three major ports (Santos. Santa Catarina. The Central West rivals the South as the principal region of agricultural production. Tocantins. western Minas Gerais. Within the Central West region. The South and South East regions. Piaui. 55 . good soils. modern inputs and technology. the industry expanded remorselessly in the Cerrado lands of Brazil’s interior states. The North East is part tropical and part semi-arid with limited potential. and Rio Grande) give producers in this region easy access to markets. The southern part of the country. Paranagua. The densely populated coastal states of Parana.Agriculture Global emerging markets Figure 64: Total land split Other 7% Agriculture 31% Figure 65: Agricultural land split Crops 26% Forest 62% Source: FAO Pastures 74% Source: FAO Production in Brazil is focused primarily on two regions. namely the development of the Cerrado land principally for soybean production. has a semi-temperate climate. and Rio Grande do Sul are the primary crop producing states in the region. The Central West region comprises Rondonia. there is at least another 90mn ha of potential new agricultural land. have traditionally been the dominant centres of agricultural activity. which are the most densely populated areas of Brazil. All of these states share a common feature of the Central West’s agriculture. and parts of the north eastern states of Bahia. This region is the primary grower of soybeans. and Maranhao. which accounts for between half and two-thirds of the country’s total agricultural area.

Figure 67: Land potential in Brazil’s Cerrado region (mn ha) Agricultural activity Estimated use Potential use Crop land 12 76 Irrigated 0. an integrated strategy developed by the Cerrados Agriculture Research Centre (founded in 1975) and the EMBRAPA. In the past. poor natural fertility in the soil limited both the extent and range of agricultural development across the region. The introduction of irrigation and soil correcting techniques contributed to its status as a key production centre for grains and oilseeds including soybeans. permeable and possess excellent water filtration and drainage. and oilseeds. Currently. However. The Cerrado’s soils are deep. The total area of the Cerrado region is 207mn ha.3 10 Dry land 10 60 Perennials 2 6 Pasture 35 60 Total 47 136 Undeveloped 64 10 50 4 25 89 Source: EMBRAPA (1999) 56 . thus making them suitable for mechanised access. soil and water management systems. grains. resulting in significant increases in agricultural and cattle production. Currently only 47mn ha are already involved in agriculture. raised the productivity of the Cerrado soils to world-class levels.Agriculture Global emerging markets Figure 66: Brazil by region Roraima Amapa Amazonas Para Maranhao Piaui Ceara Rio Grande do Norte Paraiba Pernambuco Alagoas Sergipe Distrito Federal Acre Rondonia Mato Grosso Tocantins Bahia Goias North Northeast Central West Southeast South Mato Grosso do sul Parana Minas Gerais Sao Paulo Espirito Santo Rio de Janeiro Santa Catharina Rio Grande de sol Source: Renaissance Capital The Cerrado lands The key difference between the South and the Central West regions of Brazil is the latter’s potential to add to its cultivated unused land. maize and rice. Cerrado soils are at a moderate elevation of 300-900 metres with only a slight gradient. the Cerrado region contributes over 70% of the country’s beef cattle production. focusing on natural resource evaluation. EMBRAPA has estimated that 136mn ha of interior Cerrado savannah are suitable for large-scale mechanized agriculture based on a rotation system of improved pasture. which accounts for approximately 25% of Brazil’s total surface area. leaving 89mn ha of land available for development.

There is also up to 10mn ha of degraded pasture or deforested land available in the Amazonian states of Rondonia. 68mn ha of land can still be given environmental protection. fruits and re-forestation).9mn in 1996. co-operatives.3mn ha are grain crops under irrigation. 57 . Most agricultural land in these hinterlands is situated far from markets and the infrastructure is underdeveloped. and government-owned farms. and Roraima. Every conceivable form of organisation is represented in size: individual farmers.. It is worth highlighting that the development of the Cerrado region as a key food producing area need not imply environmental degradation.2mn agricultural establishments covering a farm area of 330mn ha compared with 4. depends not just on the availability of land but the availability and cost of fertilisers and a transport infrastructure that can move both inputs and output to and from these internal producing areas. The USDA estimates that about 70-90mn ha of Brazil’s existing pasture acreage could be converted to cropping in the future. their levelled topography and favourable soil properties. driven by the desire to reduce costs and substitute capital for labour. In the long-term of course. 5. Development of other regions In addition to the Cerrado region.2mn farms may seem like a lot but it is 0. this tally could be nearer to 90mn. Acre. This produces almost 23mnt of food. In short.8mn registered in 1985. These lands could be converted owing to their proximity to existing crop production. This represents about 40-50% of the nation’s total pasture. These lands are already being targeted by agricultural researchers for restoration. that suggests that while 89mn ha is added to production. but is still below what could be achieved with the right mix of capital inputs. accounting for one-third of total Brazilian production. with the goal of developing viable grain and oilseed-based farming systems tailored to their unique conditions. Amazonas. 0. i. in an area of 204mn ha. The 2006 agricultural census preliminary results registered about 5. several other regions have been identified as potential agricultural centres.6m fewer than the 5.e. However. The present index of crop productivity in the Cerrado region is a little above the Brazilian average. demonstrate that it is theoretically possible to produce 350mnt of food production which could support a population of 250mn. It is also worth emphasising that none of these figures include the Amazon Basin. The economic feasibility of these solutions. Those that do have higher productivity. 35mn ha are pastures and 2mn ha are perennial crops (including coffee. it could be possible to produce around 350mnt of food in the area.Agriculture Global emerging markets Of the 47mn ha. If 136mn ha of the region can be incorporated into a sustainable production system over the medium term. The majority of Brazil’s existing pasture lands could readily support rain-fed crop production. for the Centre-West region to fulfil its potential infrastructure spending will remain critical. proposed by EMBRAPA in the late1990s. 10mn ha are grain crops under rain-fed conditions. The USDA believes that infrastructure development will lead to 5-12mn ha of additional land coming into production in the medium term. corporations. Consolidation has been a continuous theme since 1985. the Cerrado farmers who utilise the technologies already available. Amapa. Farm structure The Brazilian agriculture sector is highly fragmented.

0 4.500 1. these small farms continue to decline as a share of Brazil’s total output.0 1975 5.402 na 10 and under 100 ha 2. on the other hand.000 ha 517 470 na 1.8 1985 4. it is dominated by small subsistence farms and an average size of 31 ha.2% of farmers in the region run establishments with land area greater than 2. According to the 1996 Agricultural Census. The dense population and high cost of land in the Southeast hinder volume growth and the use of capital equipment.2 2006 Source: IBGE Figure 69: Breakdown by region . At the other extreme.175 Total area (mn ha) 1995 8 63 124 160 354 1985 10 70 131 164 375 2006 8 63 113 147 330 Source: IBGE 58 . establishments of less than 100 ha accounted for about 89% of the total number of farms in Brazil but account for only 20% of total farm area.Agriculture Global emerging markets The agriculture sector comprises small farms mostly in the range of 2-50 ha.065 2.9 Total farm area (RHS) 353. In the traditional agricultural areas of the Southern region (South and Southeast) small farms averaging 30 ha dominate. However.000 ha comprise only 1% of the total number of farms but account for 45% of total farmland in Brazil.000 ha compared to 4.1 4.793 4. Figure 68: Number of establishments (mn) and total farm area (mn ha) Number of establishments 6.916 na 100 and under 1.0 364.500 2.9 400 300 200 2.1% in the Central West region.0 Of total farmland in 2006.6 329. It is characterised by farms.0 294.9 374. which average some 327 ha compared with the Brazilian average of 64 ha. the South and Central West regions accounted for 44% of the total. Only about 0.000 ha and over 50 49 na Total 5.9 323.160 1.Number of establishments ('000) and avg farm area (ha) Establishments 2.838 5. The Southern region. farms of over 1. with continued agriculture expansion across the Cerrado. despite accounting for only 6% of the total number of farms.2 1980 5. The Central West region alone accounts for 31% of total agricultural land. Small farms in the south-east are more likely to depend on government-subsidised credit to finance their operations. The characteristics of agricultural enterprises also differ across the agricultural regions. indicating the degree of concentration in this region. accounts for 13% of total farm land and is made up of relatively small farms which average 41 ha.000 1.9 1996 5. The Northeast region dominates in terms of the total number of establishments and accounts for 47% of the nationwide tally. Figure 70: Number and area of holdings by size Number of establishments ('000) 1985 1995 2006 Under 10 ha 3.9 1970 5. Moreover.000 500 0 Northern Northeast Southeast Southern Central West Source: IBGE Average farm area (RHS) 327 400 300 200 115 31 59 41 100 0 100 0 0.

59 .4 27 25 15 19 100 501-2. as well as independence from government that places Brazil at the forefront of the farming revolution.000 ha 18. cooperatives and government-owned bodies. market-oriented management. It accounts for 7% of total farms and only 5% of total farm land. self-funded operations and are not dependent on government subsidies.2 15 11 7 48 100 Without statement 12 80 4 4 1 100 Source: IBGE Land tenure As previously noted. Farms in the Central West are much larger with more than 15% of farms cultivating in excess of 500 ha and 4% of farms cultivating more than 2. In terms of land tenure.1 27 26 13 13 100 201-500 ha 14. Corporations. This provides the primary cost advantage for Brazilian soybean producers relative to the US. the large commercial farms in the Cerrado have built their own research.Agriculture Global emerging markets Figure 71: Number and area of holdings by size % of total establishments 1985 1995 2006 Under 10 ha 53 50 na 10 and under 100 ha 37 40 na 100 and under 1. These projects are undertaken by single farmers or in collaboration with others. Farm managers and owners are highly educated and are at the cutting edge of agriculture. Unlike the South. utilising advanced mechanisation and state-of-the-art technologies such as global positioning systems (GPS) to exploit precision farming practices. cooperatives. Rented land is mainly rented by subsistence farmers. Unusually. in our view. Equally unusual is the fact that land values in the Cerrado are significantly lower than the southern states.3 32 22 29 6 100 101-200 ha 21.000 ha and over 1 1 na Total 100 100 na 1985 3 19 35 44 100 % of total area 1995 2006 2 2 18 19 35 34 45 44 100 100 Source: IBGE The Central West region differs significantly in its farm structure from the traditional farming areas in the South. It is this combination of modern technology. In several instances. corporations.000 ha 9 10 na 1. Figure 72: Regional distribution of landholding at each scale (1996) < 10 ha 10-100 ha Northern Northeast Southeast Southern Central West Total 5. These farms are market-driven. and the government play a smaller role in farming. respectively. Of the total number of farms over 2.6 65 12 16 1 100 11. Individuals still dominate the sector and account for 96% of total farms owned and almost 84% of total farmland. these farms are well capitalised.2 22 20 14 30 100 > 2.000 ha. management structures and transport infrastructure to compensate for the lack of funding from the central government. land in Brazil is owned by individuals. many of the large farms in the Central West are organised in family-owned holdings.000 ha 14.000 ha in Brazil. together accounting for the remaining 4% of total farms owned and 16% of total farmland. 48% are in the Central West. and financial viability. 76% of total farms are self-owned establishments and account for approximately 90% of total farm area.

Brazil ranked number one in the export of sugar. paddy 9 Coffee. The country also plays an important role in the global livestock market and is a major global producer and exporter of beef and poultry. tobacco. Harvesting in Brazil takes place in March to May as opposed to October to December in the US. Brazil has consolidated its position as a key producer and major supplier to international markets. whole. In common with Argentina. beef and poultry. It was also the global leading producer of sugar. In 2009.287 1. orange juice.Agriculture Global emerging markets Figure 73: Land tenure – split by farm area (2006) Other Rented 5% 5% Figure 74: Land tenure – split by number of establishments (2006) Other 17% Rented 7% Owned 90% Source: IBGE Owned 76% Source: IBGE Agricultural output Over the past decade.925 1. driving export growth. unmanufactured 13 Beans.727 13. The reasons for this have been outlined broadly in previous sections.053 2. orange juice and tobacco.439 1.261 3.552 1. Figure 75: Major agricultural commodities (2008) Rank Commodity 1 Indigenous cattle meat 2 Sugar cane 3 Soybeans 4 Indigenous Chicken meat 5 Cow milk.302 997 962 916 877 659 496 Source: FAO 60 .954 1.949 7.299 12. green 10 Cotton lint 11 Maize 12 Tobacco.258 3. dry 14 Hen eggs.523 2.361 11. The country is the hub for both sugar and ethanol production and is the leader in their exports globally. Overall production has exceeded the rate of increase in consumer demand. coffee. the country benefits from the commercial advantage of harvesting in seasons alternate to the Northern Hemisphere and so has few competitors. fresh 6 Oranges 7 Indigenous pigmeat 8 Rice. coffee. ethanol. in shell 15 Bananas 16 Cassava 17 Tomatoes 18 Wheat 19 Grapes 20 Potatoes Production ($mn) 18. Brazil is the world’s second largest producer and exporter of soybean and the leading producer of sugarcane.

the country produced 69mnt of soybeans. and the third-largest exporter of soy oil. 61 . accounting for 17% and 16% of total global production. respectively. where differential export taxes on soybean exports have been introduced. almost 64% of all soybean crops in Brazil were estimated to be genetically modified. This was primarily due to the introduction of genetically modified.4% of global soybean world trade. respectively. It is also the second-largest exporter of soy meal.5mn ha in 2008 – double the 11. 41% of which were exported. Brazil accounts for 27. In 2007. behind the US which accounts for 33%. This is primarily due to the expansion of production in the Central West region located far from most crushing plants and the transfer of crushing to Argentina. However. herbicideresistant soybean cultivation in Brazil which cut production costs by one-fifth and made it more profitable than other crops. Increased domestic demand for soy meal and soy oil and biodiesel production makes it more profitable than other crops in most areas of Brazil. accounting for 24% and 16% of the global export market. In 2009. reduced competitiveness and increasing producer indebtedness may reduce the more optimistic growth forecasts.6mn ha harvested in 1995. and the USDA forecasts that Brazil’s share will grow to 45% by 2015.Agriculture Global emerging markets Soybeans Brazil is the second-largest soybean producer and exporter in the world after the US. Figure 76: Soybean oilseed production split (2009) Other India 8% 3% United States China 35% 6% Argentina 21% Brazil 27% Source: USDA Figure 77: Soy meal production split (2009) Other China India 13% 23% 3% EU-27 6% Brazil 16% Argentina 16% Figure 78: Soy oil production split (2009) Other China India 12% 22% 3% EU-27 6% Brazil 17% Argentina 17% United States 23% Source: USDA United States 23% Source: USDA Brazil is also a major player in soybean products (soy meal and soy oil). In 2009 it was the world’s fourth largest producer of soy oil and soy meal. It is expected that the area harvested will grow by a further 10mn ha over the next decade. declining profitability. The EU and China are the primary markets for Brazilian soybeans and associated products and together they account for approximately 60% of total exports. Soybean crushing has also declined from 90% of output in 1995 to about 49% in 2009. The total area harvested was 23.

as we noted earlier. Close to half of soy meal production in Brazil was exported in 2009. with expanded soybean plantings in the Cerrado regions. this is dependent on profitability. Brazil’s rapidly increasing soybean area has allowed it to gain a larger share of world soybean and soy meal exports. However. and the mandatory blend has been steadily increasing from 2% in 2008 to the current 5%. which may have an impact. Soybean exports are projected to almost double in this period although. Figure 81: Soy meal and soy oil exports (mnt) and exports as a % of production Soy meal exports Soy meal exports/production (RHS) 14 12 10 8 30% 6 4 2 0 2006 2007 2008 2009 2010 E Source: USDA Soy oil exports Soy oil exports/production (RHS) 60% 50% 40% 20% 10% 0% 62 .5% pa. the growth rate for Brazil’s soybean planted area is projected to average nearly 3. competitiveness and producer indebtedness. Domestic demand for soy meal is driven by the expanding livestock sector. poultry. reaching about 31mn ha by 2017. Increasing industrial demand is the primary cause for this as bio-diesel blending with fuel became obligatory in Brazil from 2008. Soy oil exports have been declining in recent years. stocks (mnt) and stocks as a % of consumption Crush Stocks 54% 44% 30 20 10 0 2006 2007 2008 2009 2010 E Source: USDA Exports/production (RHS) 52% 60% 41% 47% 50% 40% 30% 20% 10% 0% 40 Stock/consumption (RHS) 60% 43% 50% 40% 30% 20% 10% 0% 53% 40% 42% 35% A large share of soy meal produced in Brazil is exported. despite increasing domestic feed use. Brazil is expected to shift from oilseed to corn production over the next five years in response to higher corn prices and more limited competition from US corn exports. with 22% of soy oil production being exported in 2009. in particular.Agriculture Global emerging markets Figure 79: Soybean oilseed production (mnt) and exports as a % of production Production 80 60 40 20 0 59 2006 61 2007 58 2008 69 2009 68 2010 E Source: USDA Figure 80: Soybean crush. which accounts for twothirds of its domestic consumption. down from the 2003 peak of 49%.

Sugarcane is currently the fastest-growing sector of the country’s agriculture sector with sugarcane production growing at a CAGR of almost 10% between 2000 and 2009. Average annual yield in the 1980s was 1. on the back of a substantial increase in yield to 4. due mostly to the introduction of double cropping (i. Sugarcane production is almost entirely located in the central south region. Due to the high prices for both products..e. More than two thirds of the cane grown in Brazil is sold domestically. Maize output in Brazil. a majority of which lies in the south eastern lands of São Paulo which accounts for approximately 61% of total production. Brazil uses about 8. Output reached a volume of 569mnt in 2008. Of the total corn produced in Brazil in 2009. is driven primarily by growth of the poultry and pigs sectors. sugarcane cultivation is still expanding and accumulating land diverted from soybean and citrus cultivation. Studies have suggested that up to 20mn ha of idle land in the Central West region could be used for sugarcane cultivation. in the form of either sugar or alcohol. and the third largest exporter after the US and Argentina. In 2006. Cane output is roughly split 50/50 between sugar and ethanol. Brazil is also the world’s largest exporter of both ethanol and sugar. accounting for about 89% of total production. Brazil’s corn exports should rise sharply in the years ahead in response to higher corn prices relative to soybean prices. Production in 2009 reached 56mnt.4 tonnes/ha in the 1990s and in has reached 3.Agriculture Global emerging markets Sugarcane Brazil is the world’s leading producer of sugarcane. Brazil is a net exporter of maize and the crop is grown primarily as domestic animal feed. 63 . If price signals are anything to go by.5 tonnes/ha in the current decade.1mn ha of land to grow sugarcane. therefore.34 tonnes/ha – crossing 4 tonnes/ha for the first time. Figure 82: Sugarcane production (mnt) 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 2007 2008 Source: UNICA Figure 83: Sugarcane production split by state (2008) 569 496 426 Alagoas 5% Goiás 5% Minas Gerais 7% Paraná 8% São Paulo 61% Others 14% 321 359 386 387 Source: Brazil’s sugar cane industry association (UNICA) Maize Brazil is the fourth-largest maize producer in the world after the US. only 16% was exported. Maize is one of the primary grains grown in Brazil. The entry of genetically modified sugarcane into the market after 2010 is expected to increase productivity sharply. which increased to 2. the growth of two crops in a single season). China and the EU.8 tonnes/ha. Brazil has seen dramatic increases in yields over the past two decades. accounting for about 13mn ha of land under cultivation. accounting for almost a third of global production.

swings in Brazilian supplies have a significant influence on market prices. Indonesia and Columbia.5 2. As the largest coffee producer.0 1.9mnt sent overseas in 2009. and a major exporter. followed by the US.2mnt of the stuff in 2009. Figure 85: Coffee production (mnt) and exports as a % of production 75% Production 64% 55% 68% 63% Exports/production (RHS) 70% 59% 65% 3.0 2004 2. Figure 84: Maize production.5 3. It is also the world’s leading exporter with 1. Its major competitors are Vietnam. Brazil is unlikely to become a major maize exporter in the future.5 0.0 0.2 2003 80% 70% 60% 50% 40% 30% 20% 2.8 2007 2.2 2006 2. consumption and stocks (mnt) Production Consumption 70 59 60 51 50 40 30 20 10 0 2003 2004 2005 2006 2007 2008 2009 2010 E Source: USDA Stocks 56 51 51 48 42 35 36 39 42 40 41 43 46 47 13 8 4 3 4 12 13 10 Coffee Brazil is the largest coffee producer in the world.5 1. having produced some 3.2 2009 2.0 3.3 2008 3. accounting for approximately 31% of the global trade.0 2. Given the rate of growth in the meat sector.7 2010 E 10% 0% Source: USDA 64 .Agriculture Global emerging markets the government provided subsidies in order to increase the price of corn to a minimum guaranteed price and to assist in the flow of grain from areas where it was produced to areas where it was consumed. The EU is Brazil’s biggest customer accounting for half its exports.6 2005 2.

4 7.9 9.1 7. consumption and exports (mnt) Production Consumption 10 8 6 4 2 0 2003 2004 2005 2006 2007 2008 2009 2010 E Source: USDA Exports 9. producing 8.4 8.3 7. The US does not allow imports of fresh beef despite being the leading destination for processed beef.3 6. In 2009. due to a competitive exchange rate. Figure 86: Beef production. with about 18% (1. Cattle production is fairly evenly spread across the country. Brazil was the world’s largest beef exporter. The region’s most extensive grazing lands are concentrated in the South and Southeast.2 1.8 2. rising global demand and the elimination of Foot and Mouth Disease in most parts of Brazil. The remaining 75% was used for domestic consumption Russia and the EU accounted for almost half of the beef export market by value in 2007.7 65 . The EU is the only developed market open to Brazilian fresh meat exports.1 7.0 9. To ensure continued growth in this sector through access to new export markets such as the US and Asia. The share of production exported jumped from 10% to 20% between 2002 and 2004. 75% of production is done on specialised farms of which approximately half are farms with over 500 cattle. Beef Brazil has the second-largest cattle herd in the world after India.Agriculture Global emerging markets Livestock Brazil has of one of the largest livestock populations (200mn+) globally.6mnt) of its production being exported. Brazil is a major producer and exporter of poultry and slaughters more cattle annually than the US. Brazil needs to address the key challenge of disease control. with a smaller but increasing share in northern states and frontier zones. such as Amazonia.6 1.8 7. Beef output has grown steadily since the early 1990s. and is the secondbiggest beef producer after the US. though over 33% is concentrated in the Central West due to the availability of cheap pasture.1 2.0 8.4 6.0 8.8 1. the sharp increase in production is a relatively recent phenomenon (since 2002) and is probably due to a more favourable exchange rate environment which delivered a sharp rise in exports.2 1.5 1.0 7. however.9mnt in 2009.6 1.6 9.3 6.

Brazil currently accounts for about 15% of total global production.0 11. driven by strong foreign and domestic demand.2mnt) was exported with the remaining 71% used domestically. The sector is modern and competitive and displays a high degree of vertical integration.0 11.0 10. of which about 29% (3. In 2008.9 3.4 6.1 2.4 7.0 6.4 Sugar versus ethanol Brazil’s status as the largest producer of sugarcane gives the country a strategic advantage that is possibly neither fully recognised nor wholly appreciated by most observers.9 7.0 0. 66 . It is also highly concentrated with a few large companies dominating the export market.8 8.9 2. Exports more than tripled from 0.4mnt in 2009.7 8. Unlike the US and Europe.2 3. and the largest exporter. it is still rapid and has the potential to expand still further in the years ahead.6 5.Agriculture Global emerging markets Poultry The poultry industry is another success story. consumption and exports (mnt) Production 12.0 2003 2004 2005 2006 2007 2008 2009 2010 E Source: USDA Consumption 10.7 2. making operations less volatile than its peers in the US. It is also the world leader in ethanol exports and ranks second in terms of global production (the US overtook Brazil as the largest producer in 2006).4 7. at 6% from 2004-2009. It remains the world’s largest producer and exporter of sugar (raw and refined).9mnt in 2000 to 3.5 2. accounting for 44% of world sugar exports.3 Exports 11. Production of broiler meat stood at 11mnt in 2009. Some 85% of ethanol plants are vertically integrated. The poultry industry in Brazil has been expanding rapidly with an annual growth rate of 13% throughout the 1990s.4 9. Brazil can switch sugarcane utilisation between ethanol and sugar production depending on demand and profitability as most of the ethanol producers are sugar mills. Brazil exported 21. Brazil recently became the world’s leading exporter of poultry meat accounting for approximately 38% of global poultry exports in 2009. This flexibility of feedstock utilisation insulates Brazilian producers to an extent from fluctuations in market demand.0 1.0 4.0 8.6 9. Figure 87: Broiler meat production. Brazil is the third-largest producer of poultry products (broiler meat and turkey) after the US and China.8 7.4 2. Developments in Brazil have a significant impact on world sugar prices.4 6.6mnt of sugar.The rate of growth has slowed in recent years but.2 3.0 6. Some commentators suggest that production will increase by about 50% over the next decade.

The sugar sector employs around 2% of the nation’s total labour force. Around 50% of Brazil’s annual sugarcane output is used to produce ethanol. Since 2002. The value of sugarcane production in 2007 reached $11. Figure 89: Sugar production (mnt) and exports as a % of production Production Exports/production (RHS) 35 30 57% 25 45% 20 15 10 5 0 17 2000 20 2001 24 2002 26 2003 28 2004 27 2005 31 2006 32 2007 32 2008 Source: USDA 80% 68% 70% 60% 50% 40% 30% 20% 10% 0% 64% 59% 58% 64% 66% 62% 67 . In 2008. more favourable expected returns to sugarcane producers. Figure 88: Split by use of sugarcane in Brazil 100% 80% 60% 40% 20% 0% 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Source: UNICA 49% 50% 50% 50% 54% 49% 57% 49% 50% 50% 50% 49% 54% 57% Brazil is the largest raw and refined sugar producer.Agriculture Global emerging markets Brazilian ethanol exports in 2008 amounted to 1.4bn. sugar production in Brazil reached almost 32mnt. As demand for Brazilian ethanol continues to rise. with the ratio tilting towards ethanol in the past couple of years. The other 50% goes to produce sugar for both domestic consumption and export. accounting for 24% of the world’s sugar production.2bn gallons. expansion in available land and technological advancement in new varieties of sugarcane. Brazil’s sugar-ethanol market has benefited from domestic and foreign demand. the production of ethanol is expected to continue to exceed that of sugar in the sugarcane utilisation mix.

0 6. As with so many success factors.0 6. deregulation and ethanol policies have been key factors in the evolution of the sugar-ethanol industry. F.500 1. It currently uses 57% of its total sugarcane production to produce ethanol. Most car manufacturers are now switching to the production of FFVs instead of gasoline vehicles.5 4. The policy provided incentives to ensure greater use of fuel alcohol in the aftermath of the oil crisis of the early 1970s. were introduced in Brazil in 2003 and accounted for 84% of all new light vehicle sales in 2009.6 Figure 91: Ethanol production split by country (2009) Others 12% 4. which can run on any combination of gasoline and ethanol. The policy also ensured that the ethanol content in the gasoline blend when ethanol supplies were low was reduced.2 Brazil 34% US 54% Source: Renewable Fuels Association.0 3. Brazil is working towards the adoption of greater amounts of renewable fuels in its vehicle fleet.O. Flex fuel vehicles (FFVs).0 1.0 5.0 4.500 2. Figure 90: Brazil fuel ethanol production (bn gallons) 7. hence raising exports.0 0.000 1. Licht's 6. Licht's The effective incorporation of ethanol in the transport system and rising oil prices are the obvious key demand drivers of the Brazilian ethanol market.0 2.6bn gallons in 2009. The percentage of new FFV sales in total new automobile sales is expected to rise to about 90% by 2015.000 500 0 2003 2004 2005 2006 2007 2008 2009 Source: Anfavea Flex fuel vehicles sales as a % of total light vehicles sales (RHS) 84% 90% 75% 69% 70% 56% 36% 50% 30% 10% -10% 15% 3% 68 . Brazil has the highest mandatory blending requirements globally. Brazil’s national alcohol programme launched in 1975. These vary between 20-25% of ethanol. With a production volume of 6. F.0 2004 2005 2006 2007 2008 2009 Source: Renewable Fuels Association. The original expansion of the Brazilian sugar industry was undertaken by the Proálcool programme (Programa Nacional do Álcool).O.0 4. Figure 92: Total light vehicle sales ('000) and flex fuel vehicles sales as a % of total light vehicle sales Total light vehicles sales 3. depending on the state of the global sugar market.5 5. Brazil is the second-largest fuel ethanol manufacturer in the world. it was a policy hatched three decades back that paid handsome dividends in the long term.Agriculture Global emerging markets Economic liberalisation.000 2.

means that funding costs are high. It does not follow that possession of a range of natural advantages and God-given inputs magically translates into an overwhelming range of outputs. the current level of non-performing loans in the sector is estimated at $7bn. Therefore. Brazil faces several challenges in the years ahead if it wishes to ensure that its position as a leading agricultural producer is elevated to a status more akin to that of an agricultural superpower. Any downturn. Lack of access to capital Brazilian producers are heavily indebted and access to credit is patchy. Environmental concerns will also play a part. The inherent riskiness of the sector. transport and marketing bottlenecks Infrastructure bottlenecks undermine the competitive position of Brazil in world markets. the lack of access to financial instruments and the inability to scale production means that the advantages flow only to those with access to capital. the amount of credit required to bring additional land into cultivation and to expand agricultural production is more than double the credit likely to be available in the current climate. However.. could have a lasting and damaging effect on the sector. we may have give the impression that the future success of the Brazilian agriculture sector is almost a given. In short. although the rate of expansion is likely to be high. around 10% of the value of annual agricultural production.e.000 miles or more over poor and highly congested roads to reach seaports.5% pa over the next 10 years (i. The availability of land. higher soybean volumes for export markets have weighed down loading docks at Brazilian ports resulting in long delays and additional costs. Even in the current benign market conditions. enormous investment sums will be required to make it work. roads and railways has not kept pace with the breakneck pace of growth in production and exports.8mn ha pa). This is not the case. The development of storage depots. Although the problem is a worldwide one. labour and capital and contrast that with the dire outputs the country achieved in the decades following 1917. high cereal prices. Argentina has seemingly spent the best part of 60 years learning how to mismanage its incredible array of resources to confirm the point that success is dependent on more than just the basic factors of production.Agriculture Global emerging markets Supply-side impediments Hitherto. Some farm commodities travel 1. perhaps driven by a re-emergence of protectionism. One only has to look at the incredible array of inputs the Soviet Union enjoyed in land. but they are insufficient. port facilities. the potential for expansion is three times this amount and includes 90mn ha in the Cerrado's tropical savannah region. Slower land expansion The forecast rate of expansion in land used for crop and livestock production is expected to be one of the world’s highest at 4. Infrastructure. Brazil has to address the following issues if it is to come close to achieving its longer-term goals and ambitions. While the current agricultural crop land area is 69mn ha. high oil prices. Less than one-quarter of national roads are deemed to be in 69 . 1. and a positive consumer environment are all necessary conditions to promote growth of the industry. Likewise. coupled with its fragmented status. In recent years.

5 2.3 2.1 1. which in turn attract dollar-denominated capital inflows. The restrictive monetary policy to keep inflation under control has resulted in rising interest rates.Agriculture Global emerging markets good condition in Brazil. the real again appreciated. These inflows have increased demand for the real. Figure 93: USD/BRL exchange rate 3.3 3. Brazilian exporters are expected to face a deteriorating competitive position in global food and agricultural markets. Less stable macroeconomic environment An ongoing continuous appreciation of the exchange rate does not help exports and is likely to put a brake on expansion plans in the years ahead. the real has been fairly steady.7 1.9 1. With the real expected to continue to appreciate. the cost of logistics for exporting Brazilian soybeans is estimated to be 83% higher than for the US and 94% higher than for Argentina. From then until Oct 2009.7 2.9 2. which appreciated steadily from June 2004 to September 2008. the global financial crisis ensured that the real depreciated and reached a relative peak in December 2008.5 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Source: OANDA 70 .1 2. To put these additional costs into perspective. Since then. However.

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