23 Jun 2011 | World

Harvest for the World 

No country has the potential to help the world’s
unstoppable demand for food like Brazil, writes
Nigel Dudley.

Plentiful natural resources, including potentially fertile land and water, and the government’s determination to modernise the agriculture sector by making previously unfertile land fit for crop production, means that Brazil is uniquely well placed to meet the rising global demand for food.

Brazil has resources that almost every other country in the world needs, from minerals to sugar and seed, and it has the ability to become the world’s largest food producer relatively soon. “In terms of net exports, Brazil comes first for sugar, meat, coffee and orange juice, while it is second for soya and corn,” said José Humberto Teodoro, head of acquisitions, commercialisation and strategic planning at arable land development company, BrasilAgro.

On a recent visit to Brazil, Julien Reynolds of Baillie Gifford’s Global Growth team spoke to equipment manufacturers; sugar producers; one of the largest farmers, AGCO – which sells agricultural equipment; and railroad company America Latina Logistica (ALL).

“Brazil’s potential is enormous,” said Reynolds. “It can meet any realistic level of future demand – and do so without going anywhere near the ecologically vulnerable Amazon river area. Brazil has an ideal climate and all the soft and hard commodities that it needs.  So long as it can improve its infrastructure and bureaucracy, it has every chance of becoming the world’s largest food producer.”
 

A RISING GAP

But it is the capacity for further growth which is attracting the attention of both investors and global organisations, who are monitoring the likely gap in coming years between the world’s ability to produce food and the rise in demand.

Global food supplies are already being stretched by increased growth – the Chinese economy has grown nearly 30-fold in the last 30 years while India’s economy is now five times the size it was when market reforms began in 1991. This means that the demand for all commodities from the growing middle classes is rising rapidly, while supply has been squeezed by crop failures caused by such events as droughts in Russia and the tsunami in Japan.

This has already had a dramatic impact on prices. Although the UN’s Food and Agriculture Organisation (FAO) food price index dropped for the first time in eight months in March this year, this was only a small downward blip; the increase was 37 per cent from March 2010. There is little optimism about prices in the short-term.

In the longer term, the FAO says the situation will decline more as global demand for food rises. The world’s population is likely to grow to 9bn from the current 7bn, which means grain demand is likely to rise by 50 per cent and meat output set to double. The problem in meeting this increase in demand for grain is that it is becoming harder to produce more from higher yields alone.
 

BRAZIL'S POTENTIAL

It is this factor that has focused so much attention on Brazil. According to the FAO, Brazil has more than 400m hectares of potential arable land. With high annual rainfall, its reserves of 8,000bn cubic kilometres of renewable water each year are also the largest in the world.

Yet only 30 years ago, Brazil was a large net importer of food. It has reversed the situation in some controversial ways, foregoing protectionism and by opening its markets to international competition and letting inefficient farms fail. It has also made a major investment in using science to improve agricultural conditions and to promote GM crops.

Brazil’s private sector farmers are focusing on the Cerrado which borders the Amazon rainforest in a remote corner of the North East of Brazil. Embrapa, Brazil’s agriculture research organisation, has played a key role in drawing up legislation to ensure the safe use of GM technology, pouring lime into the soil to reduce acidity and developing crops to grow well in the region’s sparse soil.

But actually Brazil’s performance with certain crops has been remarkable, particularly soya bean. Since 1990, output has risen from 15m tonnes to 60m tonnes, so it now accounts for a third of global exports. Brazilian companies have transformed land that had previously been unproductive and unprofitable.

The result is that companies like BrasilAgro and SLC Agricola have invested in farms in the region and are already delivering the sorts of returns that are likely to attract further international investment. “We have a portfolio of 175,000 hectares, all in the Cerrado region. We have sold one farm whose value has appreciated 113 per cent in 18 months and a valuation by Deloitte last December concluded that our properties had appreciated in value by 111.1 per cent since we acquired them,” said José Humberto Teodoro.

There are still problems. Brazil’s transport infrastructure is fragile and inadequate railways mean that crops have to be transported on poor roads by lorries for thousands of kilometres and then wait for many days in congested and inefficient docks. Until this problem is resolved, production costs in Brazil will remain higher than they need be.

However, sizeable infrastructure projects are underway in Brazil. For instance, railroad company America Latina Logistica (ALL), in which Baillie Gifford’s Scottish Mortgage Trust PLC has shares, operates railway lines in Brazil and Argentina and is investing in improving the logistics, intermodal transport, port operations, movement and storage that Brazil needs to deliver its produce to the ports. Foreign investors can also invest in companies exposed to Brazil’s agricultural boom; Scottish Mortgage, for example, holds shares in Deere, the tractor producer, as well as genetic seeds producer Monsanto.

The message from the new breed of farmers is clear. They believe that Brazil’s public sector has a long way to go before it reaches the efficiency of private companies. But, when the transport infrastructure is eventually modernised, there will be nothing to stop Brazil from exploiting its natural resources to the full.
 

BAILLIE GIFFORD IN BRAZIL
Baillie Gifford invests in a range of Brazilian companies.  The larger global trusts have investments in the following companies:
Scottish Mortgage	Monks	EWIT	SAINTS
America Latina	BM&F Bovespa	America Latina	BM&F Bovespa
Logistica	Brazil CPI Linked	Logistica	Brazil CPI Linked
Brazil CPI Linked	Cetip	Petrobras	Itau Unibanco Holding
Petrobras	Llx Logistica	Vale	OGX Petroleo
Vale	MercadoLibre		Petrobras
	OGX Petroleo		Vale
	Participa
	Odontoprev
	Osx Brasil
	Portx Operacoes Port
	Totvs
	Vale
Correct as at 30 April 2011

Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested.  Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.

Investing in emerging markets is only suitable for those investors prepared to accept a higher level of risk.  This is because difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of an investment.

Author: Nigel Dudley
Nigel Dudley is a freelance business and financial writer and broadcaster who specialises in writing about emerging markets in the Middle East, Africa and South America.