Country Report: Brazil
November 18, 2010 In the world of cotton, Brazil is the very definition of “a sleeping giant.” Already a major player as the fifth largest cotton-producing country in the world, the South American nation has a wealth of arable land, plentiful rainfall, a large group of professional growers using the most advanced technologies, and a strong network of cotton industry associations.
It’s no wonder, then, that many experts believe that Brazil could more than double its cotton production within the next five years. An increase of that magnitude would vault it past Pakistan on the list of top producers worldwide, behind only China, India and the United States. Yet impressive as it is, some believe that prediction sets the bar too low.
“The future is bright. We have the land, the water and the rainfall, but we need to find a way to lower the costs of production,” says Marcelo Escorel, president of ANEA, the Brazilian Cotton Exporters Assn. “If the world needs cotton, Brazil will be there. We could double our production in as little as two to three years and become the first- or second-largest exporter in the world—and that could happen sooner rather than later.”
Despite its many advantages—some of which can’t be matched anywhere else on the planet, including its wealth of available land and water—Brazil does have several significant obstacles to overcome before it can take its cotton production to the next level. Foremost on that list are logistics and transportation. While the nation has a vast amount of rich cropland yet to be farmed, most of it resides in the central parts of Brazil. It’s a huge country—10 percent larger than the continental United States—but its road and rail systems are either nonexistent or underdeveloped, and it’s a journey of more than 1,500 km from the one of the major growing regions, Mato Grosso, to the major shipping ports in the southeastern part of the country.
Another major challenge—one which affects the global cotton industry, not just Brazil—is the spiraling price of cotton. Already at 15-year highs, some experts predict the price could rise to as much as $1.25 per pound. That’s already causing headaches for most textile companies, and it couldn’t come at a worse time for Brazilian spinners and weavers. Originally expected to total 1.28 million tons, Brazil’s production has been revised downward to 1.07 million tons. With worldwide stocks at all-time lows and adverse weather conditions causing a decrease in production for some of the world’s top producers such as China, India and Pakistan, textile companies are scrambling to acquire whatever material they can find.
In July, ANEA, The Brazilian Textile and Apparel Industry Association (ABIT) and the Brazilian Association of Cotton Producers (ABRAPA) asked the government to permit the importation of 150,000 tons of cotton, and have since asked for that amount to be increased by 40 percent. The organizations also asked for a temporary reduction or elimination of import taxes between October and May.
“The industry has no way out and will need to import cotton to cover the monthly demand between October and June,” says Haroldo Cunha, ABRAPA president. Brazilian officials responded to the crisis by suspending a 10 percent tariff on 250,000 tons of imported cotton lint between October 2010 and May 2011.
Nonetheless, industry experts think the challenges will be more than offset by the Brazilian cotton industry’s technical expertise, boundless natural resources, and favorable weather and growing conditions.
“We will be competitive because we have high technology, economies of scale, and large, educated cotton producers,” says Ivan Wedekin, Commodity Product Officer with BM&FBOVESPA, a Brazilian company formed in 2008 through an integration of the São Paulo Stock Exchange (Bolsa de Valores de São Paulo) and the Brazilian Mercantile & Futures Exchange (Bolsa de Mercadorias e Futuros). “In certain areas, farmers can produce soybeans in the summer and then plant cotton or corn, giving them two harvests per year. Our competitors don’t have that advantage.”
Brazilian Cotton Industry Overview
Cotton was first discovered by Europeans shortly after Pedro Álvares Cabral reached Brazil’s shores in April of the year 1500. It became an industry when Brazilian growers began planting long-staple cotton in the northeast regions of the country during the 1930s. Cotton cultivation spread south to São Paulo in the 1940s, but then cotton farms started disappearing during the 1950s. Competition from sugar, oranges, and cattle prompted many farmers to shift away from cotton cultivation. Because it was labor intensive, and the costs of inputs and transportation remained high, it simply became cheaper and easier for Brazil to import cotton than to grow it.
Throughout the 1970s, cotton farming in Brazil took place mostly in São Paulo, Parana and some northeastern states, with total acreage consisting of approximately 2.5 million hectares. There was a dip in production in the following decade, to about 2 million hectares, when growers had to combat an infestation of cotton’s old nemesis, the boll weevil. To this day, about 60 percent of all pesticide spraying in Brazil targets the boll weevil.
The enormous amount of time and money spent on pest control further eroded profitability, and cultivation took a turn for the worse in the 1990s. By the 1996-97 season, cotton acreage in Brazil was just over 650,000 hectares. Farmers struggled to turn profits due to those states’ less-than-ideal weather conditions and poor yields. The farmers at the time were not as organized, educated or technologically advanced as they are today, so crops fell prey to droughts during growing season, flooding during harvest season, and pests and diseases throughout the year.
“When cotton cultivation began taking hold in the midwestern parts of Brazil in the 1970s, it happened because farmers had become very high-tech and started experimenting with cotton,” according to Antonio Esteve, who was the first president of ANEA and is now the president of Empresa Interagricola. “Brazil was the biggest cotton importer in the world in 1995 (600,000 tons), which is a paradox for a large, agricultural country, and while farmers had some struggles in the beginning, they came up with solutions for them and cotton really took off in 1997.”
“The cotton boom was built by big growers in Mato Grosso, who introduced a variety of new technologies and new seeds,” says ANEA’s Escorel. “In the mid-to-late 1990s, production in Mato Grosso went from 50,000 hectares to 500,000 hectares in just two to three years.”
For some companies, developing a solid working relationship with those growers has been a key to success. Multigain SA, an agricultural commodities company, has made it a point to be close to growers, both literally and figuratively.
“The Brazilian market is very concentrated, with 50 percent to 70 percent of production in the hands of about 20 firms,” says Multigrain’s Alexander von Erlea. “When you have groups of growers planting as many as 70,000 hectares, maintaining good relationships becomes very important.”
When the company says it wants to maintain close relationships with growers, it isn’t just a figure of speech. Multigrain keeps its branch offices, management and warehouses in the field to maintain close ties and be in constant communication with its important business partners.
Nothing, however, takes precedence over doing things “the right way,” von Erlea says. “All of our contracts, regardless of which commodity they are for, have clauses that aren’t removed under any circumstances,” he says. “We do not accept any product that is generated through slave labor, or any crops that are planted in the Amazon region. We’d rather lose business than break those rules, so we write them into all of our contracts.”
That type of solid business practice is paying big dividends. The country that produced a mere 1.4 million bales of cotton in 1996 saw its output increase by more than 400 percent, reaching 7.3 million bales in 2007. The figure has slumped a bit in the last few years to 5.4 million bales in 2009-10, but expectations are that overall output will continue to make significant strides in coming years.
Experience and Technology Drive Growth
While having technologically savvy growers is a major driving force behind Brazil’s cotton comeback, the biggest reason the country is poised for an even higher position among cotton producers is its vast amount of available land and abundant rainfall. Experts estimate that Brazil could begin cultivating cotton on as many as 800,000 hectares of farmland—roughly the same amount of land used in the United States for all of its row-crop production.
Today, the country’s principal export markets are South Korea, Indonesia and Pakistan, and to a lesser degree, Japan, Taiwan, Vietnam, Thailand, Turkey, and Argentina. Brazil does export some cotton to China, but the percentage is small because Brazilian producers often sell their crop one to two years in advance. “That’s how the growers finance their future crops,” Esteve says. “They don’t like to plant if they don’t have an idea of what they’re going to get for their crops. China is not a reliable trade partner beyond two to three months, whereas the other partners Brazil works with will buy a year forward. China is more of a spot market because most of the cotton has already been committed, and the excess that’s left goes to the domestic market. Overall, about 1.4 million tons stay in Brazil and 400,000 are exported.”
Perhaps the single biggest factor in the country’s cotton resurgence was a change in location. A new generation of cotton growers began farming in the central regions of the country, including what is known as the Cerrado, a vast tropical savanna ecoregion. The soil and topography in this area were ideal for high yields and lower production costs, and the weather conditions were excellent for cotton cultivation. The heaviest rains occur between October and May, which aligns perfectly with the primary cotton growing season (November to April). Furthermore, there is little rainfall from June to September—dry conditions that are ideal for the harvest months of May, June and July.
Interagricola’s Esteve says, “We still have an abundance of farmland available. Over the next 10 to 20 years, as arable land becomes scarcer across the globe, Brazil will be sitting pretty because it has the room, the growers, and the water resources. Water is a big issue worldwide, but not in Brazil.”
Another development that has helped the cotton industry in Brazil is a lessening of the government’s onerous bureaucracy over time. “India today is like Brazil was 20 or 30 years ago, but Brazil has eliminated some of the bureaucracy and regulations over the years,” Esteve says. “The government no longer interferes as much as it once did.”
Cooperation Paves the Way for Growth
Much of the industry’s growth has come as the result of the hard work and cooperation of Brazil’s extensive network of industry associations. Many of them came into existence in the late 1990s, providing a unified voice for the cotton industry and coordinating efforts to improve conditions for every step of the value chain, from growers through exporters. The associations are both well organized and—just as important—well connected with government officials. There is a grower’s association in each state, and taken collectively, they present a strong and unified front for the industry.
“No matter what meeting you go to, wherever it was in the world, someone was there to represent Brazilian cotton,” said Joe Nicosia, CEO of Allenberg Cotton Co., during his keynote presentation at ANEA’s 10th Anniversary celebration in Rio de Janeiro this past June.
Part of that process involves the improvement of international relations, including maintaining the sanctity of contracts. To facilitate that effort, ANEA created an Ethics Council in 2007 to resolve contract disputes.
“One of our greatest accomplishments was the creation of the Ethics Council, which enables us to uncover and resolve problems between cotton industry professionals,” Escorel says. “Sometimes the problems arise because the rules are broken intentionally, but sometimes the problem is just miscommunication. When that happens, ANEA can step in and restore communication between the parties. We’ve been able to resolve many of those issues before they went to arbitration, which is a significant accomplishment.
“We have a close relationship with ABRAPA and coordinate our messaging to the government to ensure we are consistent and productive. The textile associations are a part of that community as well, so all of the market players in Brazil have a good and productive relationship. Most of the associations were founded around the same time, so we’re all about the same age (10 or 11 years old) and growing at the same pace, which has allowed us to present a more unified Brazilian market to the world.”
Nothing Beats The Home Field Advantage
Brazil’s favorable climate has been a major factor in transforming the country from a net cotton importer into one of the world’s top five exporters. Brazil has the highest yield per hectare in the world for rain-fed cotton, and its growing conditions allow farmers to plant rows of cotton closer together than in most other parts of the world. That offers several advantages, including a reduced need for watering (shade keeps moisture from evaporating quickly), pesticides and fertilizer—not to mention the fact that it more than doubles the number of plants that can be grown on a hectare.
Roughly 10 percent of the cotton acreage in Brazil utilizes this narrow row planting method. “The ability to increase our density, from 90 cm between plants to 45 cm, increased the number of cotton plants we grow per hectare from 100,000 to 220,000,” according to Gilson Ferrucio Pinesso, a cotton farmer since 1997 who has farms in three Brazilian states. “In addition to the greater yield, it lowers the cost of our inputs,” says Pinesso, who is also president of AMPA, the Mato Grosso State Assn. of Cotton Producers.
“Our costs have also been reduced due to less use of chemicals,” according to Sergio de Marco, who has grown cotton in Mato Grosso since 1998. “Today, we use 50 percent less fertilizer than we used to because when plants are closer to each other, they share the nutrients. The reduced usage of fertilizer led to an overall production cost reduction of 25 percent.”
Brazilian growers made an equally important realization in the late 1980s, when farmers began planting cotton after harvesting their soybeans (a method known as the safrinha, or “second crop”). Not only does cotton consume the excess nitrogen left in the soil by soybeans, it reduces the crop cycle by more than eight weeks.
“The greatest advantage we have is the environment,” Pinesso says. “Because the crop cycle is shorter, it has less of an impact on nature, and we also require fewer applications by moving from a 210-day cycle to a 150-day cycle. That’s two months of reduced herbicide, fungicide and insecticide applications. It’s a very environmentally correct practice.”
Having such sophisticated, professional, and technologically savvy growers is a huge boon for Brazil, according to George Vidor, editor with the newspaper O Globo. “I know a Brazilian businessman who has been investing in agribusiness and engineering,” Vidor says. “His company worked on the assembly of Angra 2 [Brazil’s sole nuclear power plant, located near Rio de Janeiro]. He told me: ‘It was easier to build the nuclear power plant than it is to develop technology to produce cotton.’ The technology from the USA or India typically doesn’t work in Mato Grosso. But many farmers overcame that challenge and they now produce high-quality cotton.”
“Cotton farmers in Brazil are typically large, growing anywhere from 3,000 to 20,000 acres, and a few groups are close to 100,000,” Escorel says. “Some land firms buy [cotton farmland] because it’s a real estate investment, but everyone who has land is a producer—otherwise, there is no profit.
“Growers are increasingly professional, and increasingly large. The necessity and size of investment in cotton is huge, and they normally gin their own cotton, so they need to have scale to produce cotton in Brazil. The appreciation of our currency, the real, is not helping exports, and hurts our competitiveness in the international markets. We have to compensate for that via technology, investment, lower cost of production, and only professional, large producers can do that.”
Price Spike Could Impact Grower Behavior
Spiraling prices affect the entire cotton industry, and Brazil is no exception. At press time, the price of cotton in Brazil is up to US$1.25 per pound, for a basis of 3,500 to 4,000 points (“basis” refers to the difference between local market prices and the price listed in the New York futures market). In other words, cotton in Brazil is selling for US$0.35 to US$0.40 per pound more than the US$0.80 December 2010 New York futures price—the highest basis Diego Ruiz, a risk management consultant with FCStone, an integrated commodity risk management company, has ever seen.
Part of the reason that the basis is so high is because Brazilian growers often sell their cotton one to two years in advance. The money they generate from these future contracts helps them finance the inputs they need to produce the crop. While that removes some of the risk if prices drop, it also hinders their ability to take advantage of price spikes like the one the industry is going through.
“Many growers sold their crop a year or two ago at US$0.65, and now they see the domestic market paying as much as US$1.20 or more,” Ruiz says. “Farmers in Brazil were already very professional and knowledgeable about how to grow cotton, and now they are learning more about the way the market works as well.”
The result of that knowledge, Ruiz believes, is that some Brazilian growers likely will start to hold onto portions of their crop rather than sell it through a forward contract. Of course, there is always the risk that prices will decrease rather than rise and the grower will lose money when they ultimately sell the cotton they reserved, but they will learn how to account for that over time, as well.
“Growers aren’t going to completely stop selling cotton through forward contracts, of course, but they are starting to realize that they can often get a better basis by holding onto some of their cotton and selling it in the spot market,” Ruiz says. “I think that will continue to happen more frequently as they learn about mitigating their risk through hedging tools. The better-funded and more financially stable companies are already learning how to do that.”
Farmers in Brazil are quite aware of the spiraling prices, of course, and that could lead to increased cotton acreage next season, according to Peter Graham, former ANEA president and now with Sao Paulo-based cotton brokerage Metasul.
“However, things are not always as simple as they seem,” he warns. “Brazil has, in the recent past, produced crops as large as 1.6 million tons, so we know the seeding, picking, ginning, storing and shipping capacity is there to handle a significant increase from the current crop totals of slightly more than 1 million tons. A 50 percent increase is, therefore, achievable. Increases beyond that, however, are not so easy.”
That’s because the crops in the states of Bahia and Goias are not able to increase their production by much more than their current levels, so any increase beyond 1.5 million tons will have to come from increased acreage in Mato Grosso. Most of the growers in that region take advantage of double cropping. That second crop depends on the rainy season starting early so soybeans can be planted and then picked, while still allowing enough time for cotton to then be planted within the safe period.
“I have always believed that higher prices tend to be better that lower prices for the whole industry, even mills,” Graham says. “However, it would seem logical that this is only the case while the cost of cotton can be passed along the chain. A point will eventually be reached when the mills will start to reduce the amount of cotton they use and resort to synthetic fibers. That will lower the demand for cotton and eventually cause a decline in prices.
“However, it is quite possible that the weakness of the U.S. dollar compared to currencies in the large, emerging markets—such as Brazil, China, India and Russia—could well mean that we are moving into another price range. Competition for land in many cotton-growing countries could also mean that the increase in supply will be limited.”
Getting from Point A to Point B
The difficult journey from field to port is by far the biggest hurdle for Brazilian cotton to overcome, according to Nicosia. He listed several of the challenges facing Brazilian cotton, and logistics wasn’t just the top challenge—it’s so significant, he identified it as the top two challenges.
“Brazil needs to become more efficient to export cotton,” he said. “You can’t grow your business if you can’t grow your export business. [Transportation in Brazil] is very tedious, cumbersome and difficult. The length of execution time is too long, it requires laborious documentation, there are volume constraints at ports, and there is a lack of infrastructure and transportation.”
Escorel agrees, adding that logistics “is a big problem because 100% of the crop is moved by truck. The expense associated with moving cotton by truck is enormous. In addition, multiple products compete for space in our ports, which aren’t that big, so we don’t have a lot of shipping containers available.
“The cost of getting cotton from the grower in Mato Grosso into the shipping container at the port is probably twice as expensive as the actual cost of shipping it from Brazil to China.”
Some are optimistic that the situation will improve if the outgoing president, Luiz Inacio Lula da Silva, is replaced by ruling party candidate Dilma Rousseff. She has vowed to invest more than US$550 billion in the country’s infrastructure between 2011 and 2014, a significant amount of which will go to improving Brazil’s agricultural export capabilities.
The investment is desperately needed, since only 12 percent of Brazil’s roads are paved. Many agricultural experts, however, believe that roads aren’t the future: trains are. Government officials seem to agree and have planned to cut the country’s reliance on roads in half by 2025, while simultaneously increasing rail transport from 25 percent to 35 percent and doubling river and ocean freight by expanding the capabilities of its ports.
Some private companies, perhaps made skeptical by the government’s inability to make these types of infrastructure investments for the last few decades, are taking it upon themselves to improve the country’s transportation network. Brazil’s largest diversified steel group, CSN, is investing US$2.6 billion in a project that includes a 1,080-mile rail line across the northeast.
Despite the unpaved roads and congested ports, it’s a good time to be in the cotton industry in Brazil, ANEA’s Escorel says—and even if you aren’t in Brazil, that doesn’t mean you can’t take advantage of a good situation. ANEA recently announced that it would allow foreign companies to become members of the association.
“Foreign traders can be members of ANEA and participate in our meetings, although they can’t join the Board if they don’t have representation here in Brazil,” he says. “If a trading company deals in Brazilian cotton, it has the opportunity to join ANEA and take advantage of the benefits we offer.”
“Over the last decade, Brazilian cotton producers, associations, research institutes and the government have made giant steps in promoting their cotton,” says Metasul’s Graham. “They have also improved the product itself: packaging, grade, performance, et cetera. That’s expected to continue in coming years, which will solidify the country’s image even more as a major and reliable supplier of cotton to the world market.”
SIDEBARS
1. Sometimes, Bigger Really Is Better
SLC Agrícola, an agricultural producer focusing on cotton, soybean and corn, was founded in 1977 by SLC Group in the State of Rio Grande do Sul. It was the first enterprise in the world in the sector of grains and cotton whose shares were traded in the stock exchange market. Since its Initial Public Offering in June 2007, SLC has grown 91% in terms of total planted area and 100% in its cotton planted area. It has 11 production units strategically located in six Brazilian states, totaling 223,000 hectares of planted area in the 2009-10 crop-year, more than 64,000 hectares of which is cotton.
The company’s business model is based on large-scale, industrial-model processes, modern production technology, a crop rotation system, with standardized production units, thoroughly up-to-date technology and rigorous cost controls, all underpinned by social and environmental responsibility. SLC Agrícola regards the respect for the environment as one of its essential commitments, combining the utilization of cutting-edge agricultural technologies with the adoption of environmental conservation practices. The company has received the Social Cotton Institute (IAS) seal for social responsible production of cotton. It also has a Sustainability Committee that was created with the mission of defining SLC Agrícola’s operating strategies, taking into account the best social, environmental and economic practices, policies and guidelines in order to foster sustainable development.
A Bright Future for Cotton
In Brazil, cotton has waged a back-and-forth battle with man-made fibers (MMFs) like polyester, and while cotton has been losing share in the last few years, it doesn’t dim Aldo Tisott’s outlook for the natural fiber.
“There has been a clear downward trend of cotton’s share in total textile market in the last few decades, especially for industrial applications,” says Tisott, SLC’s sales director. “We don’t think this downward trend will change in the next few years, although it should level off. From 2004 through 2008, cotton traded about 15 percent lower than polyester. But things have changed and cotton has been trading significantly higher than polyester for the last year or more.
“As a result, any mill that produces polyester/cotton blends will have already switched their ratios to the extreme amount possible, so their ability to use more MMFs at the expense of cotton is severely restricted,” he says.
The fact that the middle class in growing also portends good things for cotton’s future. “As the middle class grows in developing countries like Brazil, China and India, people will want to use more cotton because they prefer the comfort and breathability of natural fibers relative to MMFs.
“So, as total textile demand grows, cotton consumption will also continue to grow around the world. Brazil is already a very competitive cotton producer, but we believe that our cotton production will continue to grow as more investments are made in our cotton sector.”
Brazil has the largest farmland reserve in the world, even though it already has 71 million hectares dedicated to agriculture. “Brazil has 14 percent of the world’s fresh water, stable rainfall and temperatures, extensive land with very flat topography, good soil, and very professional farmers.
“In addition, we have just started using GM cotton, so we do believe that in a few years, it will be possible to produce cotton with higher yields and lower costs, further enhancing our competitiveness. Currently, the main bottleneck of Brazil’s agricultural sector is logistics. Past economic crises and inflation were responsible for the small amount of investments that were made in the infrastructure of many parts of the country, especially in the new agricultural regions of central west and northeast. However, that has changed over the last 10 years because the country has relatively low and stable inflation and a growing economy. Many new projects are being developed in order to improve our logistics.”
If the world wants more cotton, Brazil will be able to answer the call. “We have the potential to double the size of our farming area without touching any single square meter in the Amazon Forest,” Tisott says.
2. Fallout from WTO Ruling Still Unknown
The World Trade Organization’s ruling in the case of Brazil vs. the United States might already have been handed down and subsequently upheld, but the long-term implications are still unclear. There are also those who believe that the U.S. government, in making the agreement, is leaving itself vulnerable to similar challenges from other nations.
The issue of agricultural government subsidies has long been a point of contention between nations, and it came to a head in the world of cotton in 2002, when Brazil filed a complaint with the WTO, alleging that the United States provided its farmers with excessive subsidies. That unfair advantage, Brazilian officials alleged, resulted in overproduction, the lowering of worldwide cotton prices, and upsetting the global community’s competitive balance.
While the United States countered that its subsidies were well within the legally permissible limits, the WTO reviewed the evidence and in 2004 supported Brazil’s claim, marking the first time ever that a country was challenged over its domestic agricultural subsidies.
The United States filed an appeal, again on the basis that its agricultural subsidies were within the limits of international law, but it was ultimately denied in 2009. As compensation, Brazil was permitted to impose US$295 million in sanctions on U.S. goods and intellectual property rights and services.
Although it was a victory for Brazil, the amount awarded by the WTO was far less than the US$2.7 billion it sought in its original complaint. However, just before Brazil imposed the sanctions, the two nations came to an agreement in which the United States would pay the South American country US$147.3 million per year via a technical assistance fund. Under the Memorandum of Understanding that the United States and Brazil signed on April 20, 2010, the fund would continue until passage of the next Farm Bill or a mutually agreed solution to the Cotton dispute is reached, whichever is sooner.
The U.S. cotton industry has viewed the agre
ement in a positive light, believing it is a meaningful way forward for the two nations. “The agreement provides a roadmap for the two countries to come to a long-term solution regarding this trade dispute without resorting to harmful retaliation,” said National Cotton Council Chairman Eddie Smith when the decision was announced. “The U.S. cotton industry is committed to work with the U.S. and Brazilian governments over the course of their discussions on this issue. The two critical aspects of the agreement are that it avoids the immediately harmful economic effects of trade retaliation and it puts the serious discussion concerning changes in the U.S. cotton program before Congress in the 2012 farm bill, which is where that discussion belongs.”
Others, however, believe that by refusing to cut subsidies to its farmers, the U.S. government has left itself vulnerable to India and many West African nations, which could take up similar claims in the hopes of getting settlement payments of their own.
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