Brazil: Go North, Young Soybean Farmer

Brazil's agricultural frontier is giving U.S. markets a scare

After four generations on the move, Renato Joner's family is putting down roots. His great-grandparents left Switzerland in the 1850s in search of land. They settled in Brazil's southernmost state, Rio Grande do Sul, and started to till the soil. When the family outgrew its plot, Joner's parents picked up and moved north to Parana state. In 1984, it was Joner's turn to strike out on his own. So the 43-year-old father of three headed for western Bahia. "It was pretty rough and wild," says Joner, recalling his early days on Brazil's agricultural frontier. But the weather-beaten farmer reckons the move has paid off. "Life is a lot better for us here than it would have been in the south."

Thousands of families like Joner's have taken the same gamble over the past 20 years, and more will follow. They're mostly soybean farmers, descendants of European and Japanese immigrants who have abandoned Brazil's more developed south for the cerrado--the vast plains of scrub and scattered trees that stretch across the country's interior. Thanks to these pioneers, Brazil is now the second-biggest soybean producer after the U.S. This year's harvest, under way since March, is set to reach a record 35.7 million metric tons, up from a mere 1.5 million tons in 1970.

Commodity giants, such as Cargill, Archer Daniels Midland, and Bunge International are eager to cash in on this bonanza. The industry has invested heavily in new processing plants, silos, and ports to feed booming demand for soy-based products. White Plains (N.Y.)-based Bunge, the world's biggest exporter of soybean products with sales of $10 billion last year, has plowed $500 million into Brazil over the past decade. Bill Wells, Bunge's chief financial officer, expects a handsome return on that investment. Brazil has three-fifths of the world's 250 million hectares of land available for new agriculture--and this land does not need to be cleared of trees. Says Wells: "We're convinced there will be substantial advances."

Brazil's huge agricultural potential has a downside, however. This year's bumper soybean harvest "is having a tremendous impact on the global market," says Dick Loewy, president of AgResource Co., an agricultural research firm in Chicago. Prices are down to $4.40 a bushel, compared with an average of $6.20 during the past decade.

The U.S. shares some of the blame for the slump. The amount of American farmland devoted to soybeans has increased every year for the past decade, thanks in part to government subsidies that guarantee producers a minimum price of $5.26 a bushel. So although global demand for soy products--including animal feed, cooking oil, margarine, and other foodstuffs--has almost doubled in the past decade, supply has grown even faster.

That puts Brazilian farmers in a tough spot. In western Bahia, soybean growers get $7.50 per 60-kilogram bag, but costs can exceed $7 a bag. "Farmers are selling as little as they can while they wait for prices to rise, but they've got to honor their contracts," says Flavio Franca Jr. of Safras & Mercado, a local research firm.

CHEAP LAND. Production costs run higher on the new frontier, as the soil requires more fertilizer than in the south. But rainfall is reliable and land is, well, dirt cheap. A hectare of virgin cerrado goes for about $250, compared with upwards of $8,000 in the south. And because of better seeds and mechanized planting and harvesting, yields, at 2.4 tons of soybeans per hectare, now exceed the 2.3 tons achieved in the U.S., reports AgResource.

At Bunge's processing plant in Luiz Eduardo Magalhaes in western Bahia, the new harvest has started to trickle in. Joner, one of the many farmers the company buys from, claims he is on course to hit his profit target this year. True, margins are tight, but his volume is high: Joner owns 4,000 hectares, while many families in the south make do with just 200. That's why the Joner family is staying put.

By Jonathan Wheatley in Luiz Eduardo Magalhães

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