United States and Brazil Soybean Transportation Cost Comparison From 2006-17

This article is reprinted from the USDA's August 3 Grain Transportation Report.

The United States and Brazil are the two leading producers and exporters of soybeans in the world.

During the 2016/17 marketing year (MY), the United States Department of Agriculture (USDA) estimates U.S. soybean production and exports to be 117.21 and 55.79 million metric tons (mmt), respectively.

In June, USDA?s World Agricultural Supply and Demand Estimates report estimated Brazil soybean production at 114.0 mmt and exports at 62.40 mmt.

China is the largest oilseed importer in the world, importing 61 percent of the total world exports and 59 percent of the U.S. soybean exports during the 2015/16 MY (FAS, GAIN Report #: CHI7012).

China imports about 75 percent of Brazil?s total soybean exports.

Consequently, China is a major soybean buyer from both countries.

While these two leading producing and exporting countries have different production practices and transportation infrastructures, they compete for the same markets.

The differences in production practices and transportation structures translate into different cost structures, which ultimately affect the competitiveness of each country in the world market.

In the U.S., the Midwest produces most of the grains and oilseeds.

U.S. shippers rely on extensive highway, rail, and inland waterways networks to reach end markets.

Widespread access to quality rail and barge systems by is unique in comparison to other exporters around the globe.

Brazil?s agricultural production, including soybeans, is focused primarily in two regions?the South and Center-West.

However, unlike the United States, Brazilian soybean exports move primarily by trucks along highways to export ports.

This article examines soybean transportation costs in the United States and Brazil to illustrate relative competitiveness between the two major soybean exporters.

For data consistency, the analysis in this article uses data from 2006 and 2017.

The data were previously analyzed for the period between 2006 and 2010 (see October 21, 2010 Grain Transportation Report (GTR)).

In this article, we reexamine the additional updated data to account for changing production practices, transportation infrastructures, and other variables in both countries.

The analysis uses two of the leading soybean producing and exporting
States from each country, with Iowa and Minnesota chosen for the United States, and North Mato Grosso (North MT) and South Goiás (South GO) for Brazil.

Shipments from Iowa originated from Davenport while Minnesota shipments originated from Minneapolis.

More than 60 percent of U.S. soybean exports shipped out of the Gulf ports in 2016.

For comparison, both Iowa and Minnesota shipments move through the U.S. Gulf for export to Shanghai, China, the main importer from both
countries. Soybean shipments from North MT in Brazil move through the port of Santos for export overseas.

Santos is the largest soybean export port, accounting for roughly 28 percent of Brazilian soybean exports in 2016 (see Soybean Transportation Guide: Brazil 2016).

Shipments from South GO, Brazil go through the port of Paranaguá for export.

In general, transportation costs from the U.S. locations were much lower than those from Brazil (figure 1).

However, there were periods in which the costs from one or both of the U.S. locations were higher than the costs of shipping from South GO to Shanghai.

It is worth noting that the gap between the United States and Brazil? transportation costs are becoming increasingly smaller and tighter (see figures 1, 2 and 3).

Analysis: The cost of shipping from North MT has always been above the cost of shipping from the U.S. locations in Iowa and Minnesota because of higher trucking rates, due to longer distances between North MT and the Port of Santos (see October 21, 2010 GTR).

Figure 2 shows the spread between transportation costs from North MT and Davenport and Minneapolis.

The spread is wider between North MT and Davenport rates than North MT and Minneapolis rates.

The relative proximity of South GO to Paranaguá makes the transportation costs from South GO sometimes competitive to those of the United States, especially during periods of relatively high ocean freight rates (as seen during 2007 and the early part of 2008).

Figure 3 shows the spread between South GO and Davenport and Minnesota rates.

When both U.S shipping costs are less than the shipping cost from South GO, the spreads between South GO and Davenport rates are wider than South GO and Minneapolis rates.

When the U.S. shipping costs are more than the cost from South GO, especially during the first quarter, the spreads between South GO and Davenport rates are narrower than the spreads between South GO and Minneapolis rates.

That makes sense since rates from Davenport to Shanghai are very competitive to rates from South GO to Shanghai.

However, the costs of shipping from North MT to China are becoming
increasingly competitive to U.S. transportation costs due to generally falling truck and ocean freight rates in Brazil.

Brazil?s truck rates have been falling partly due to improvement in transportation infrastructure and relatively lower diesel prices compared to historical averages.

In addition, the ocean freight rates are falling faster or increasing at a lower rate in Brazil than the U.S. Gulf as grains are competing with other bulk shipments out of the U.S. Gulf.

Ocean shipping rates increased worldwide to a record level in 2007.

Rates increased during this period due to increased global demand for bulk commodities, congestion in major ports around the world, and tight bulk vessel supply (see April 10, 2008 GTR).

In shipping grains to China, the U.S. more acutely feels the effect of high ocean freight rates because it faces relatively longer ocean-shipping distances.

Shipments from the United States mainly pass through the Panama Canal and the toll charges are a significant portion of the ocean freight rates.

In addition, transportation costs of shipping from the United States are higher during the first quarter due to the closure of the upper segment of the Mississippi River.

During the winter, the closure of the river requires rerouting shipments to St. Louis, MO, by rail, and then transported by barge to New Orleans for shipment overseas (see May 25, 2017 GTR).

The inability to use barge service throughout all the segments of the Mississippi River system during the winter season slightly increased the U.S. transportation costs.

As the global recession kicked in and ocean rates plummeted to record lows in 2008, U.S. transportation costs fell again and were significantly below those of Brazil until first quarter 2014.

Conclusion: In comparison to the United States, Brazil enjoys a low-cost resource base for agricultural production.

In addition, it has raised its output by expanding acreage and increasing productivity.

Production expansion has exceeded the rate of increase in domestic demand, leaving surplus production for more exports.

Although the Brazilian soybean producers generally receive lower farm prices than their U.S. counterparts, the total landed costs are not always lower than shipments from the United States.

The United States enjoys a competitive advantage in overall transportation costs because of its extensive highway and rail networks and relatively unique access to inland waterways.

However, this advantage is affected when ocean freight rates are high or when the Upper Mississippi River is closed for the winter.

In addition, Brazil has been investing heavily lately on infrastructure improvements.

Because farmers in the United States receive higher farm prices, the
U.S. total landed cost tends to be higher, especially compared to shipments from South GO in Brazil.

This makes it imperative to keep the U.S. transportation costs low to maintain a competitive edge in soybean exports.

Presently, ocean freight rates for shipping bulk commodities, including grains are at moderate level due to the excess capacity in
the bulk shipping market.

Ocean freight rates may increase in the future as excess capacity narrows.

This consequently affects the U.S. competitive advantage.