Brazil – New Agro Industry Opportunity – Changing Economic Scene

 Perhaps it is time to reconsider the Brazilian farming opportunity.

There are some cracks forming in the BRICK economies. While business cycles are a common occurrence and one should avoid viewing this as an impending doom, it can be viewed as an indicator of a potential entry point in to the Brazilian Agro scene. At some point undulations in the economy at large will effect change in pricing of agricultural land. One needs to remain vigilant, so as to optimise entry into the agricultural land market.   

  Excerpts from 2006 business concept.

          Discussion Scope:           

In 1993, Brazil came to the view of the writer via an article in a magazine. The article chronicled an agricultural land arbitrage at work in the world market place. The North America farming and agro business communities had become widely aware of the presence of Brazil as a place of relative advantage for agriculture. The article spoke of Canadian and US farmers buying large tracts of land in Brazil. Events have transpired since 1993 that cast a very positive light on Brazil. One might regret missing entry at a more nascent state, however, the present circumstance, now more mature, provides a stable and tested environment. There is now a substantial breadth of experience to draw on when choosing to access the Brazilian agro business stratum that replaces adventurous risk with greater certainty.    

The writer’s present thought modality has formed in the context of the present Brazilian circumstance, as agricultural production emanates from a 300,000 acre block of Cerrado land. While this provides expansive subject matter, the land base is virtually limitless as it would relate to an agro enterprise. The vast, virtually limitless quantity of contiguous land provides an expansive pallet from which to scale at will.

To bring this expansive pallet into full view consider this quote; “It took some 10,000 years to expand food production to the current level of about 5 billion tons per year. By 2050, we will likely need to nearly double current crop production again.”  Norman E. Borlaug Nobel Prize winner. The United Nations is reporting the likelihood of food shortages over the next 10 years. Other literature exposes the reality of industrial competition with agriculture for water in China, advocating China will choose to spend it’s “1,000 tons of water required to produce 1 ton of grain” on the more lucrative industrial use and import food products. “When wheat prices within China started climbing in the fall of 2003, the government dispatched wheat-buying delegations to Australia, Canada, and the United States. They purchased 8 million tons, and overnight China became the world’s largest wheat importer.” Wheat is only one commodity and China is only one country. This bodes well for agro enterprise in the coming decade and beyond. As these and other factors all merge, agricultural production in a comparatively competitive setting like Brazil is an exceptional opportunity for the well supported creation of an agro enterprise. While one recognizes the cyclicality of agricultural commodities, contemporary world events have certainly lent support to the aggressive pursuit of the opportunities agro enterprise is going to offer.

As all events the world over conspire to bring food production to the fore and as Brazil offers nearly limitless acreage in a competitive environment to unitize land and as every acre offers profitability; what limits scope?   

               

Brazilian Farming Opportunity.

Brazil contrasts positively with all areas of the world for agribusiness opportunities: still abundant supplies of well valued agricultural land trading at prices related to productive capacity as opposed to other values. Government policy has been conducive to development of the agricultural potential the vast landscape offers. There has been an emergence of a substantive and booming agricultural industry that seems to have captured all levels of government’s support, based largely on the industry’s sheer magnitude as a contributor to GDP. The positive business climate is further substantiated by an impressive array of new entrants over the past decade, Nestle, John Deer … the list is extensive, and these are all organizations that understand the world agriculture market and have deep insight into the long term political picture, which bodes well for the Brazilian operating climate. The government, recognizing a deficiency of capital in Brazil to develop the vast tracts of arable land, has permitted substantive foreign investment, as well as direct foreign development. There have been many “hands on” farmers from every corner of the globe start operations in Brazil and even the most brash and culturally miss-attuned have found success. While the nature of the Brazilian opportunity has certainly matured over the past decade (land values have increased substantially) the general environment has gained greater predictability and healthy returns on capital are in the offing. In the spirit of doing good while doing well, there are plenty of opportunities in the course of lucrative business, to accentuate the social surplus with conscientious action.

There are vast quantities of land available in expansive acreages, contiguous lands in the magnitude of 300,000 acres well situated by running water, and flat – every acre counts. These lands, known as the Cerrado, while in their native state are unproductive, respond well to remedial treatment, a proven set of practices are now employed with consistent success. The past decades of agricultural activity have provided a high degree in predictability in economic outcomes in farming developed Cerrado lands and opening new Cerrado lands.

Brazil’s primary asset, its excellent work force, offers relative advantage to other jurisdictions. There is availability of human resources to permit strong operational support in the form of labour cost advantage, even while extending remuneration in the context of world parity – or rather Canadian life style parity.    

In an atmosphere of just beyond nascence and with a proven track record, there exists a substantive opportunity for profitable farming in Brazil, unleveraged return on assets of 10% to 20% on production, and land assets are appreciating by substantial measure every year.

          General Operational Vision

Brazil, in the present world circumstance of open trade and with a domestic burgeoning middle class offers opportunity to pursue expansive agricultural operations. In a world commodity driven business, where cost advantage and scale are rewarded, Brazil gives the means to respond with vigour. Every facet of operations can be scaled to optimum performance due to the availability of land with values rationalized to production. Couple the market, the land’s nature and availability, plus the labour advantage, with all other inputs more or less equal in world terms, and grand scale means grand returns. Grand scale, in and of itself is exciting, comes in this circumstance with sound economic imperative. The first element of operational vision is the pursuit of grand scale.

Resting on a foundation of grand scale, the next element of operational vision is diversity. The “mixed farm” takes on special value in the Brazilian context, given the geo climatic reality and access to scale, the full farming spectrum can be pursued. The full breadth of livestock and cropping are available, and given the provisions of scale, they achieve a fungibility in a magnitude that permits access to fully exploited synergies and market response.

As with all mature industries in a commoditised environment, the aggressive pursuit of marginal gain is imperative, and agribusiness is no exception, even in a favourable environment. As is regularly the case, the pursuit of margin in mature commoditised industry leads to the occupation of as much of the supply gain as possible. To ensure the full benefit the Brazilian opportunity offers, the next element of the operational vision is to pursue, wherever and extensively as possible, a product’s full supply gain opportunity. From seed to market, penetrating any given channel as far as practically feasible.

Human capital is the key ingredient to operational success in any environment; the evolving Brazilian human resource atmosphere comes with special opportunity and the need for conscious effort to build goodwill with the indigenous participants. A key operational element will be to invest a substantial share of the labour arbitrage in the development and retention of Brazilian people willing to commit to the venture. The region comes with a recent and socially salient history of reduced human state and displacement in the wake of aggressive business strategies; naturally fostering some ill will. This operational element seeks to address good business sense, by the aggressive branding of the company as an entity that recognizes the business imperative of good human relations and, more importantly, has at it’s core the desire to extend companionate human consideration. This element promises immediate operational benefit, and benefit for broader acceptance by all facets of the Brazilian society.       

The large tracts of Cerrado lands in many cases come with challenges accessing markets. Presently, the region this document advocates accessing, has poorer infrastructure relative to competing regions in the rest of the world. Depending on the final selected location, this reality has varying degrees of affect.  An important operational element will be to pursue the highest value goods for transport possible. Integration and mixed farming practices will be deployed to meet this challenge. A tonne of whole powdered milk at a value of $2200 mt offers a better transportation return than a tonne of Soya Beans at a value of $290 mt.

The Brazilian Cerrado lands in their natural state support a broad range of flora and fauna. There are policies by local governments that require retention up to 25% of any given land base in it’s natural state. Far from a detriment, this provides opportunity for bringing tourism to the mix of enterprises. The subject property has some 138,000 acres of non–arable land, while suited to some degree for grazing this land is largely unproductive for agriculture. This land base, properly integrated with other lands to provide wildlife corridors and protected area will provide a perfect setting for people to observe the breadth of wildlife the Cerrado region has to offer. In the interest of deriving maximum benefit from the land base, this use of land is worthy of consideration as an operational element.    

While the primary focus of this document is to create a profitable agro enterprise, utilization of the land in a manner consistent with best practices relating to environmentally congruent stewardship warrants regard as an operational element. Fortuitously, many environmentally sound practices contribute to operational efficiency, by example, zero tillage practices both contribute to environmentally beneficial stewardship as well as profitability. Through operational rightsizing, companion enterprising, tailoring various enterprises resource harmonisations, the environment operational element can be satisfied. This is exemplified by the advent of closed loop ethanol plants that utilise animal waste, digestive processes for by-products to generate ethanol, methane generated electricity, and the production of agricultural products in a manner that reduces the overall negative effect of human activity; the synergistically combined effect is smaller than the sum effect of the separate operations. The Brazilian bioclimatic circumstance in conjunction with the acceptance of grass finished beef by the Brazilian market offers an environmental surplus relative to North America beef by the reduction of carbon intensive inputs. This same advantage extends to the pasture based dairy operation discussed below, cattle live full time on pasture with small amounts of non forage supplemental feed, the only energy input being used to irrigate the pasture. In this way livestock operations are contributing to environmentally sound agro practices by reducing carbon intensive cropping, and providing for fertilizer and pesticide reducing crop rotations.      

            Business Entrance to Brazil

The review of several accounts of startups of agro-enterprises in Brazil, exposed a cultural imperative to construct relations of substance with established organisations in the country. Agro-Plane will seek to ascertain via an ethnographic assessment what expectations are, beyond superficial or just top level interaction, but the deep routed ethno political requirements as determined by cultural imperatives and contemporary concerns. Then, with good information and local direction, Agro-Plane will immerse itself in the Brazilian business ecosystem as harmoniously as it is able.

All literature, and hence conduct, will be imbued with the clear purpose of the company’s desire to “do well while doing good”. In the context of a grand scale strategy, the aggressive effort to amplify the social surplus generated by the very act of doing business, will serve to secure the long term security of the business as well as satisfy the western ethic of fair exchange. It is the writer’s belief, that the active cultivation of social equity, ergo brand equity, has the promise to find residence in business equity in the form of goodwill. This principle applies in all realms of action, it gains prominence in environments where extended deprivation is gaining saliency through the full spectrum of society. A very small investment as a gesture of legitimate extension of recognition of an underserved population, serves to communicate good intent.

While pursuing all the avails of modern agriculture, including all recognized seed types, crop varieties and modern husbandry practices, Agro-Plane will seek to conduct itself in a manner that satisfies the perceived imperatives of progressive elements in Brazilian society. Popular literature offers some insight into to societal risks to operations such as the one Agro-Plane is proposing, large scale acquisition of land is finding conflict with elements of Brazilian society who see foreign development as an obstruction to their rightful access to the land. This element is presently subdued as the government is eager to have enthusiastic foreign involvement; however, people ultimately determine outcomes in any given endeavour. These elements require keen attention and to be embraced as a part of the operating environment, and then brought into the ambit of Agro-Plane’s fair minded conduct, if successfully executed, what appears as a liability may quickly become an asset.          

Agro-Planes entrance to Brazil will begin with study. Instituted as a cultural and integrally constituted facet to the company, will be a constant responsiveness to societal dynamics conducive to Agro-Plane’s ongoing acceptance within the country’s establishment.

           Operations Exemplified

Brazil offers one of the most competitive locations for a dairy operation. Initial investigation indicates that Brazil compares favourably to New Zealand in terms of production attributes. New Zealand has established itself as the most dominate player in world of export milk products, with very nearly the lowest production cost in the world it competes aggressively. Brazil, having now established ties with China and other countries is positioning itself well to challenge New Zealand’s present position.

In Brazil, Agro-Plane can take comfort in knowing exports are growing, but they hold only partial significance as the domestic market is burgeoning. The Brazilian dairy market grew by 8.7% in 2007 to reach a value of $19.2 billion. In 2012, the Brazilian dairy market is forecast to have a value of $26.8 billion, an increase of 39.5% since 2007. The Brazilian dairy market generated a compound annual growth rate of 8.1% since 2003 and is predicted to generate a compound annual growth rate of 6.1% from now through 2012. While the growth is trending down, growth is still substantive. The strength of the Brazilian domestic market provides strong support for the inclusion of an integrated dairy operation.

In satisfying the Grand Scale operational element, and to address scale that maximises efficiency, and in recognition of the abundant land resource with the resulting feed supply, the dairy milking operation can seek to scale to the maximum end of reported efficiency band. The best economies of scale, as indicated by the evolution of the United States dairy industry and recent scale analysis, are found at 2000 head and remain intact until 10,000 head. The writer’s present level of awareness of documentation related to dairy milking operations and the Brazilian circumstance provides a rational basis for pursuing the upper end of the efficiency band of 10,000 head. If dairy offers the most beneficial production regime and the rational suggests development of dairy operations beyond 10,000 head, observations of the industry suggest developing additional 10,000 head production pods as opposed to developing a single operation larger that 10,000 head.

To satisfy the “expanded presence in the supply chain” operational element, integrating the dairy milking operation with processing offers opportunity to extract greater margin from the milk product. The nature of processing and the extent to which Agro-Plane chooses to penetrate the milk supply channels will be determined by the situation of the farming enterprise in relation to population and the access or barriers to the final market. The larger tracts of land are located in more remote areas which often face product transportation challenges. In these cases a product with high value per tonne offers considerable advantages, and milk powder maybe the product of choice. If however, site location finds Agro-Plane closer to a substantive retail market that seems readily penetrable, a UHT / Tetra packaging process may offer greater opportunity.

To bring the breadth of opportunity for dairy in to the Brazilian context, milk sales had total revenues of $10.1 billion, equivalent to 52.8% of the market's overall value. A 10,000 head operation integrated with a UHT / Tetra packing plant producing 80 MLitres annually represents between .2 - .5% of the domestic market or 4-7% of the annual growth in the domestic market. In any circumstance the market’s ability to absorb Agro-Planes production is evident. The domestic market value alone and the production dynamics of an integrated dairy operation could easily provide sound rationale to add an other 10,000 head production pods, add to that the overall world market and export opportunity, dairy operations require thorough contemplation in Agro-Planes design process. 

This brief review of the dairy opportunity in the Brazilian context sheds light on the operational spirit the writer wants to bring to Agro-Plane’s organizational culture, the pursuit of the full opportunity, maximum rationalised scale and occupy as much of the supply chain as any given circumstance practically permits; in the context of responsible environmental and human concern.         

          People In Action

One of the most prominent advantages that Agro-Plane has in the context of a 300,000 acre operation is the ability to bring elevated expertise to a concentrated geophysical, bioclimatic, economic circumstance. Inherent in this enterprise format are resources capable of attracting maximally beneficial intellectual capital in the context of operational continuity. Traditionally, even in the large scale Brazilian context, agro enterprise environments have management in a largely “hand’s on” capacity, garnering management information and direction from professionals outside the working operation. The operational environment Agro-Plane creates, will generate resources plenty enough to offer remuneration that is sufficiently attractive to bring in house, through the critical development period and beyond, highly developed personnel who will maximise the application of science in concert with the best management judgment.

Agro-Plane as an enterprise accesses the most challenging of management demands, a commoditised market, complex biological systems, complexity in the geo political realm, cultural adjustment and others. This environment, although complex, offers great opportunity if properly managed and with that opportunity comes the resources to facilitate the collection of skilled and adventurous people to address the challenge. 

Ethnographer

Ethnographers will be deployed to frame the operational and market environment that Agro-Plane is intended to function in. Ethnographic study can examine the macro picture first to gain a thorough understanding of the various affecting narratives and artefacts, their context and methods to address them. Once prospective sites for Agro-Plane’s enterprise are identified a finer filter can be placed on ethnographic assessment. Assessment can then take place under a well informed set of criteria that provides insight to the best culturally dispositioned local, seeking an optimum atmosphere of pliant acceptance and support.     

Assessment Team

Raw land conversion efficiency is a key component to Agro-Plane’s success. Regardless of the ratio of land in production to land needing development at the start of operations, accessing large quantities of contiguous land will require converting land from its native state to a productive state. The net benefit under present practices, of purchasing a piece of developed land over non-developed, is approximately $825.00 over five years, that is to say, developed land will generate $825.00 more than undeveloped land over the first five years. Raw land conversation efficiency needs to be thoroughly explored.   

The land can support a multitude of different crop productions which it can send; direct produce to market, or through some process, or to livestock production. All production options need to be inventoried under the consideration of: return per acre, value or requirement to facilitate production, marketability, opportunity for companion enterprise, overall opportunity to facilitate synergies and all other matters of pertinence. Out of this process will flow operational opportunities that offer profitability in other settings but are unproven in the Brazilian operating environment, these can be listed as potential research projects, and benefit can be quantified as current awareness permits.           

The data collected to inform action in the Cerrado context will then be directed to the task of determining the optimum location for operations, land quality, location in the context of transportation, availability of inputs, geo physical, bio climatic specifics, geo political influences and risk, and other influencing factors will be quantified by effect on profitability.

The assessment process can then inform the design and creation of an enterprise specifically targeted to all the influencing factors, in this specific circumstance on a specific location in response to the most advantageous market. Please review below for an initial listing of people and events related to the creation of Agro-Plane.

            The Concept of Agro Plane’s Genesis

Agro-Plane finds its genesis in the advantages a given landscape provides in response to the world market. Contemplation of the breadth of an agro endeavour as it relates to the opportunity of millions of acres of Brazilian Cerrado land, provides the scope of thought from which to launch the design process. In the absence of size constraint, the organizational design process as it occurs in the Brazilian context is a much broader forum than any other comparable exercise in any other jurisdiction in the world. The ability to appropriately apply scale, by virtue of the land dynamic, offers the prospect of developing a powerful business model to aggressively and precisely address the contemporary market circumstance. Of significance is the ability to create an operation absent of the traditional siloed modes of action presently entrenched in agriculture in conjunction with the volume of land to bring it to a single management regime, provides the environment where land scale constraints of other environments are lifted. In this environment the design process can seek to fracture traditional enterprise boundaries, as defined by evolutionary forces constraining existing single entity land based agro enterprise, and meld as many agricultural pursuits as informed choice indicates offer maximal synergistic benefit.

This unique circumstance permits integration in type and scale unfound in the predominate practice of agriculture. Presently the opportunity is being pursued from the traditional perspective of crop growers as opposed to the perspective of food creators. A crop grower’s thinking stops at the farm gate; a food creator’s view extends along the complete food chain. The volume of land in a single block enables production volumes of scope and variability, which contributes to tailoring product supply to facilitate the pursuit of the full food supply chain; oft times, agricultural operations have inadequate product volume to address the market effectively.

To clarify, examine the evolution of agriculture to date. Land boundaries have been determined by a single entity utilizing the land in a point in time. In Europe land parcel size evolved constrained by medieval agricultural practices and they are very small. In North America 160 Acre parcels reflected the dominant operational regime of the time of land allotment. Over time consolidation of land ownership reflected the contemporary organisational body and it’s ability to respond to a given production capacity. Then, as agricultural processes evolved to greater capacity, capital requirements of acquiring land which were driven by dynamics exterior to agricultural enterprise, created barriers to optimal scaling. The present situation with Brazil’s Cerrado lands is free of these evolutionary constraints.

This non-traditional land magnitude allows the congregation of a plethora of agro enterprises to find existence in intimate proximity and by virtue of unorthodox intimacy new modes of interaction will present themselves. The design process needs to be cognisant of this special circumstance. Consider how many places in the world where a million proximal acres of land have the potential full under the management of a single entity: this is a rear occurrence and offers unparalleled potential for an eminently apportioned and profitable enterprise to be created. The key point of contemplation in the design process is the unique circumstance the Cerrado lands provide to deploy a panoply of agricultural knowledge and technology in a manner hitherto unexplored. The access to the base ingredient of food production, land, in a proximity and volume sufficient to supply superior productive capacity relative to the norm, gives rise to special enterprise design considerations, and access to what the writer believes is exponential comparative advantage.

The reality of optimal scaling absent other jurisdictions evolved operation constraints is apparent in contemporary Brazil. The state governments are in fact encouraging scaling and integration as part of their development platform. There are many examples of large scale farming operations that reflect the unique opportunity large scale agriculture offers. What is missing in many operations as described in related literature is adequate capital to address these opportunities optimally. In a capital rarefied environment, equipment is often smaller than competing jurisdictions would use and important investment in irrigation is omitted, thereby failing to optimally utilize the land’s potential. 

To bring into context the Brazilian opportunity for scale consider the primary implement of agriculture, the tractor. In the Canadian farming environment a $350,000 tractor is utilized weeks of the year due primarily to seasonality and remains idle the rest of the year. In Brazil one is able to manage the cropping cycles and garner large volumes of contiguous land sufficient to see that tractor working 24 hours a day 365 days of the year, or at least utilized to a far greater extent. In designing an enterprise, this opportunity for scaling in accordance with full asset unitization is able to be optimally addressed in the Brazilian Cerrado region.