Why be International?


I have noticed some unusual commodity events in unlikely places. They confirm why we should all be global in our investment (and all) thinking.

I first wondered when a friend and reader (one of the largest distributors of popcorn in the USA) was travelling to Argentina to grow popcorn. Why would he go that far to bring popcorn to US theaters when we prodcue so much of the stuff right here? Then my son-in-law who works for the largest tomato growers in the US told how the Mexicans were wiping US tomato farmers away. Then our favorite shirt factory in Macon Georgia was moved abroad.

Living on a farm Merri and I have become more sensitive to this deepest level of commerce so the message below sent by a reader says as much to us. I think it will to you as well.

Dear Gary,

For some really sobering reading, the following notes taken during an evening with Iowa farmer Tim Burrack will leave you wondering about your future as a competitor on the world corn and soybean scene. In the spring of 1999, our trips to Brazil warned, “Here comes Brazil!” But we didn’t quite have the impact of a full-time farmer and a first-person report, speaking directly to farmers face to face.

We saw that impact last Saturday night, at a soybean association meeting in Bremer County. Burrack was the featured speaker for the evening. He was reporting on a recent extended trip to the “new territory” of Mato Grosso with his friend Bill Horan. He was there to “ground truth” the farming situation with Top Producer Editor Marcia Taylor, who is currently enroute on a return visit to the same region.

When he was done with his slide show and the applause died down, there was a lot of silent and wondering soybean farmers. Not many questions…. the audience was essentially too overwhelmed to figure out what to ask!

Here, with apologies to Burrack for glitches in interpretation, are our notes from the meeting, summing up the essence of what he said:

I went down to Brazil with some preconceived notions of how they farmed. I came back a different person.

We are not prepared for 20th century global economics. We’re not prepared as farmers. There are people in South America who will change the way we live up here.

We’ll start in Mato Grasso state of Brazil. This is the new frontier. They’ re doing the same thing your great-grandfather did: Clearing raw land and making it productive, then exporting the products out of the developing region.

The state of Mato Grasso is about the size of the entire Midwest. Think in a bigger perspective when you think of Brazil.

I went down there to Brazil thinking they didn’t have storage for their crop. They do have storage for all they grow.

We met an American, Chris Ward, who has farmed in Brazil for 22 years. He owns 26,000 acres. His grain bunker — flat storage– is 2.2 million bushels. All the grain is stored below ground level, with a curved Quonset-type cover over it, to keep the beans at a cool, even temperature in this warm, humid climate. The region gets 50 to 60 inches of rain between October and May.

We asked Ward how they could set up a soybean pit 25 feet deep, with the base of their dump pit 70 feet deep. He told us in the Cerrados, “Our topsoil is 150 feet deep. It’s porous. The water drains away.”

Bill Horan was the other farmer who went with me, accompanying Marcia Taylor, Editor of Top Producer.

All grain is cleaned with a modern screening and fanning mill before it leaves the farm. They are very quality conscious.

One farmer we visited Had six new IH 2688 combines this year. The Case financing made the decision for him; Case had the best deal this year for a region that has very little production credit and virtually no long-term credit.

In this region, a farmer first builds a home on the farm when he’s developing it. Then if he’s a big financial success, he moves his family to a new house in town. They live on the farm on the weekend. And if they get to be away in Rio too much, ignoring the operation, they may lose it!

The first farmer we visited has accumulated 30,000 acres. He has 80 employees at $200 per month. He provides housing and three meals a day. The dining hall for workers is as modern as any restaurant we have here.

The farms in this new area are so large their employees set up their own soccer teams, and they play other large farms.

Another farm we visited has 24 New Holland combines in the machine shed.

Keep in mind that Brazil will also get really strong in livestock. Hogs thrive here if you keep them clean and cool. Carroll’s Brand Foods, which has now been bought by Smithfield, will be setting up more hog facilities. We visited their experimental one.

Carroll’s wanted to see if they could raise hogs in Brazil, so they set up a small outfit — a 1,400-sow operation. I tried to find an electric auger or a fan in the facilities, but couldn’t. They use PIC genetics, as modern as you’ll find anywhere. The manager earns $13,000 a year, and has 30 employees. In the U.S., an outfit like this would have eight people, but here the workers do a lot more: They wash down the pens twice a day. There’s no smell, and no bugs.

Output was 23 pigs per sow per year. How does that compare with you guys, if there are any of you left in the hog business?

Their fear originally was that respiratory disease would be a problem. It wasn’t. They found they could be very successful raising hogs, especially in this really wide basis area with abundant feed. Now, since Carroll’s got bought by Smithfield, we heard while there that Smithfield may build a 54,000-sow hog raising facility in Mato Grasso.

We asked the manager where they put the effluent from all that washing out. He pointed to a lagoon behind the hill. We asked about permits, and what kind of a liner it had. He looked puzzled. “Permits? Liners? This is Brazil.”

In five years, say some of the experts and planners we met around central Brazil, “We want to export $2 bil. of meat.”

We went to meet with Blairo Maggi, who was the world’s largest soybean grower until his cousin topped his 400,000 acres or so.

Instead of spending three hours with us, he spent four days giving us tours of his farms, or having employees give us tours of his farm, and we rode in his private plane — he calls it his $5.2 million pickup — to see his barge unloading dock and ship loading dock on the Amazon River, at Itacoatiara, a couple of hundred miles downriver from Manaus.

Maggi’s family is the reason for the new town of Sapozel in the state of Mato Grosso, which means big.

The Maggi family bought 200,000 acres of raw Cerrados land in 1988.

They knew they could increase the value of the land if they brought in more people, and developed the infrastructure.

Blairo, as a young entrepreneur, started raising soybeans in 1969 on 11 acres. Today he averages 51 bushels an acre on 160,000 acres.

It’s a mind-blowing experience to stand in the middle of a 60,000-acre soybean field, which we did. And not a weed in site.

Blairo Maggi dammed up the local river, spending $7 million for the dam and power plant. Imagine damming up the Cedar river in Northwest Iowa, and putting in a power plant. When would you get out of jail to use the electricity?

The government is in the way down there. The entrepreneurs just try to get the government out of the way.

Another myth is that they are clearing rain forest for soybeans. That’s not true They are clearing scrub bush, grass and snakes. Even so, the government requires them to leave 20% of the land in its original state. They leave this along the rivers and riparian areas of smaller streams.

If you are an investor and you buy land for farming, you have five years to clear it and begin generating a crop. If you don’t, the taxes go from $2 an acre to $30 an acre. If you do clear it and raise a crop, the government gets a percentage of the crop value — about 6.5%.

Farther north, in the real Amazon, there are some acres of rain forest being developed. But up there the environmental rules are tougher, and you must leave 50% of the original land in its original state.

The Cerrados, or savannah region, is a soil that’s very consistent, especially on the northern part where the land is less rolling. They have learned how to convert it from a raw tropical soil with high aluminum and very little organic matter to cropping. Essentially, it’s 600 lbs. Of lime, 300 pounds of phosphate and micronutrients, and raise a crop of rice the first year to get some fibrous root systems going. Then, it’s generally continuous beans, or rotation with corn.

Blario divides his vast open fields into 500-acre units. He staggers the planting and harvest by using different varieties. Of course we studied the fields. Bill Horan, my traveling companion, pulled one bean plant and counted 153 pods.

Another myth is that their soybean genetics are inferior. In fact, their bean genetics are superior to ours. Some of them hit 65 bu in the field, and 88 Bu in small test plots. Maggi developed an indeterminate variety that’s excellent.

Now they are developing corn hybrids that do well in these tropical regions. There, corn has always come second until now. They are going to be producing top corn hybrids. Much of the research comes from just 34 farmers in the state — big farmers — investing 50 cents a bushel.

From a production standpoint, they plant 15-inch rows for soybeans, wide rows in corn. They harvest beans at 20% and then dry them The reason is that they get so much rain here they can’t let beans dry down in the field.

But drying costs aren’t severe: They use wood cleared off the Cerrado. Typical log is six inches, cut four feet long. When you’re clearing lots of land, you can use the wood for drying beans.

A neighboring farmer — a neighbor to Blairo Maggi — invited us out to his cotton farm. They have to spray cotton 10 to 11 times. The farmer who’s raising beans and cotton moved out here in 1984, and he bought his land for $4 per acre. When he built a house out here, the nearest town — not city, but small town — was 250 miles away. Now he says, “Today, I can see the town of Sapozel from this house.”

He owns 7000 acres now. The Maggi family helped these neighbors along.

Brazil is bypassing a whole land-line communication system. The satellite dishes everywhere are “Brazilian flowers.” Of course they’re pointed nearly straight up because we’re so close to the equator. Every Brazilian farmer has a digital cell phone on his belt — or up to his ear.

When Blairo Maggi showed us when we flew to the Amazon River city of Manaus and on downriver from there is his system for barging grain downriver and loading it on his floating dock. The technology for this was borrowed from Finland, mostly. Blairo saw in Finland a new icebreaker design which would work to cope with logs on the Madeira River. This is a logging river, and ships can get punctured from trying to navigate around 200-foot logs six feet in diameter, floating down the river.

Maggi put up $60 mil. Of his own money to begin building barges and towboats to move them. The state of Amazonas put up $40 mil. because that makes the main port at the head of the Madeira — Porto Velho — a lot more valuable as an export point. So far the barge building firm has 30 of them built. They have 250 men working 7 days a week.

We saw some of these in drydock. One new lime boat can haul beans downriver and lime or phosphate back. The barge has a draft of 15 feet and carries 130,000 bushels. On the Mississippi, our typical barge has a draft 9 feet and carries about 50,000 bushels. They can do it because where the Madeira feeds into the Amazon, the Amazon is 7 miles wide and 130 feet at this point. It gets bigger and deeper on the way down.

At the Amazon river floating port at Itacoatiara, the river rises and falls 40 feet between the dry season and monsoon season. The floating dock brings a big barge in under cover, so they can work in the rain, and the Finnish grain vacuum technology moves 75,000 Bu out of a barge in 65 minutes. Then, the same system can pump this grain onto a Panamax vessel, 60,000 metric tons, which has sailed up the Amazon from the Atlantic, about 700 miles away.

At Porto Velho, about 1700 river miles inland from the Atlantic, they load barges and push 9 barges at a time. They check out the river channels regularly, and use GPS satellites to determine the position of the sounding ship. The “mapping” boat uses a sonar-like device to map the channel bottom. Then this computerized map is used to steer the towboat with barges. No towboat pilot has to steer it at any time as they move nine of those huge barges 700 miles down the winding Madeira river. Blairo quipped that he uses our U.S.-launched satellites to move his beans down to his port, and he thanked us for the technology.

Here are the soybean economics of Mato Grosso’s new lands —

Brazil’s beans versus Iowa Mato Grosso Iowa On-farm production costs $2.98 $5.89 Shipping to port $1.09 $0.48 Total FOB port $4.07 $6.47 And these costs don’t include the new infrastructure now going in to haul or eventually rail beans to another new port at Santarem, close to the mouth of the Amazon. Shipping from the Amazon — the northern route out of Brazil — cuts eight days off the trip for a Panamax ship, compared with shipping out of the main shipping point for soybeans, Paranaqua, which is south of Sao Paulo.

Another infrastructure lifeline for northern Brazil: They plan to build a railroad from Belem, near the mouth of the Amazon, to Brazilia.

This could be a $1.6 bil. Investment. Along that railroad alone, farming just the land on 60 miles either side of the railroad all in soybeans would raise more beans than the US does. That would be a 120-mile-wide strip a thousand miles long.

They’re also finishing up, finally, a railroad from the port of Santos north into soybean country, into the states of Goias and Mato Grosso. The thing that held this up is an aborted promise by the government to build a bridge across the Parana River. Now that’s being done. Rail shipment of beans from the interior will cut delivery cost to the port from $1 per bushel to 50 cents. Is there anything in your immediate future that will cut your costs 50 cents a bushel?

There’s talk of poor track quality, and can use only 60-ton cars. But they will get those problems worked out, and they will be able to rail soybeans from Mato Grosso to Santos for export.

Blairo told us he also was looking at the Amazon River port at Santarem, about 350 miles up the Amazon. But he told us, “I think the big guys will buy it.” By that he meant a grain company. As we understand it, Cargill bought that facility.

Meanwhile, what about our own river system, primarily the Mississippi? Blairo Maggi came to look at it a few years ago, and went away convinced that our Midwest barging system, which carries some 300 million tons of goods a year, is how America captured such a large share of world grain export markets.

However, we have been embroiled in a battle to improve the lock and dam system on the Mississippi for eight years. There has been study after study. We learned that fish get out of the way of barges. Ducks don’t get nervous when tows go past. We spent $50 mil. on a navigation study to learn essentially that. Meanwhile, Blairo Maggi built a shipping system to compete with us. He spent about twice that, and knew that by 2002, he will have recovered all of his $100 mil. investment. And he will be able to compete with us for years.

Our locks on the Mississippi are 600 feet long, half the length needed to handle a modern tow of grain barges. It takes 5.5 hours of delay to disassemble and reassemble tows at a 600-foot lock. It’s farmers who pay that bill, at a minimum of $500 per hour for that delay. If we started building new locks today, it would take 17 years to get it done.

Now, Blairo has bigger barges. And he tells us, “I don’t need one lock and dam on the Madeira or the Amazon. Can you compete with me?”

We have a lot of work to do, if we want to capture markets instead of becoming wards of government farm programs.

What’s Blairo’s intent, his plan, his philosophy? He says, “If I could just capture the markets you have!”

We asked him why he wants to expand production. “You already have 400,000 acres of land,” we asked him. “You don’t need the money.”

He said that’s true. “But have you seen all the poor people in Brazil? If I can capture your markets, I can clear more land. And if I can clear more land, I can employ more people and raise the standard of living of my nation.”

So it’s clear that we American farmers are up against a patriotic, nationalistic philosophy on those Brazilian producers.

And the fact is, competitively, we are not even in the ball game. They have 200 million acres yet to develop, and they are developing more every year.

What about new genetic technology? Blairo Maggi said he doesn’t want to go with Monsanto’s Roundup Ready. We heard that Monsanto offered the 34 farmers in that region $350 million to develop and promote the system.

I think the facts are that those farmers, or Brazilian researchers, will develop their own form of herbicide-resistant soybeans.

We’re already slipping against this kind of competition In 1980, we controlled 28% of world ag export trade. Today, the figure is 18%.

We are in danger of losing everything, unless we wake up. Down there, they are entrepreneurs. They tell the government to get out of the way. They do it themselves. In the US, we farmers are going to the government and ask for more. So, based on those payments, we have built a cost structure in land and rents and other inputs that makes us uncompetitive on the world market.

The only restraint on those farmers in Brazil is the currency turmoil, and the lack of long-term capital. They want capital.

Of course there are risks. All kinds of risk. Many farmers going broke down there, just as they are here. Land prices bounce around depending on what soybeans are worth. Around Maggi’s farms, land is roughly $50 per acre in its uncleared state, and there’s a lot of it.”

This is a sobering report. Is this bad news for American farmers. For some, (those who fail to adapt) yes. Is this bad news for investors? Not global ones. this is extremely good news. With that thought I wish you good global investing!

Gary


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