Food Inflation Lures Phosphate Producers to Brazil

Agriculture Investing

The rising cost of food is both a gift and a curse for Brazil. As a commodity-heavy economy, the country’s agricultural expansion is a driving force supporting the expansion of several phosphate producers in the area.

Brazil’s agricultural sector continues to animate the phosphate market. Rising incomes in the predominantly commodity-based economy have increased the quantity of food consumed by millions of Brazilians at the same time as the country is leading the world in production and exports of coffee, beef, sugar and poultry.

But Brazil’s economy has hit the skids of late, with the country’s GDP growth slowing to 1 percent in the first half of 2012, the lowest of all BRIC nations and a sharp fall from last year’s 2.7 percent and 2010′s 7.5 percent. Beyond its slow growth, food inflation rates are creeping higher and are reducing domestic consumption in a country where more than 26 percent of the population lives below the poverty line.

Phosphate producers believe they can be of help to Brazil as it seeks to expand its agricultural production while bringing more land under intensive cultivation.

Food inflation

Brazil’s statistical agency, IBGE, reported earlier this month that production in the country’s agro-industrial sector fell 3.9 percent in the first half of 2012 compared with the same period the year before.

Sugarcane and soybean crops have been most affected this year, with refined sugar and sugar-based ethanol production falling by 32.4 percent thus far, adding to the impact of global corn prices, which increased by as much as 15 percent in the second quarter.

The net effect, reported Carlos Hamilton, Brazil’s central bank director of economic policy, was that food prices rose by 0.88 percent in July alone.

Brasil Foods (NYSE:BRFS), one of the country’s largest food retailers and the world’s largest poultry exporter, saw revenues rise by 9 percent over last year due mainly to higher domestic pricing. The company’s CEO expects to raise prices by another 5 to 10 percent in order to account for rising animal feed prices.

This inflationary impact, coming through corn and grain prices, is particularly acute for citizens in emerging markets, who spend 25 to 50 percent of their income on food, compared to 7 to 10 percent US citizens spend.

Brazil’s solution to this challenge is to try to grow incomes while unleashing the country’s agricultural capacity. Brazil’s natural assets — 14 percent of the world’s fresh water and 11 percent of its arable land — have already played a large part in the country’s growth, and it currently stands behind only the US in corn and soybean production and exports globally.

Recently, corn production and exports have increased in the wake of drought in US corn markets, with significant corn exports flowing to the world’s largest corn producer, the US. Exports to that country are not expected to be sustained.

Land values have also increased steadily over the last year, with Brazilian farm operator SLC Agricola seeing an 18 percent increase in the value of its 220,000-hectare holdings, reported.

The combination of rising food costs, variable production growth and increasing land values continues to entice phosphate producers seeking to supply Brazil’s expected agri-business expansion.

Brazil’s phosphate expansion

Following recent months of crop and price volatility, Bert Frost, senior vice president of sales and market development at CF Industries, predicted that increased phosphate application will follow this fall.

“[W]e’re anticipating an increase in fertilizer, both nitrogen and phosphate in South America to one, achieve higher yields and two, due to higher acres planted,” Frost said earlier this month.

Both major and junior phosphate producers are gearing up for continued phosphate demand.

Vale (NYSE:VALE), Brazil’s largest mining company, increased its phosphate rock production by 8.5 percent this year, and has sought both domestic and foreign sources to supply Brazil’s growing phosphate demand.

The majority of this production output has come from overseas, specifically the company’s Peruvian Bayóvar project, which posted a 10 percent increase in rock phosphate production, topping 2 million tonnes in the second quarter.

Vale has also targeted 9.6 percent of its total US$21.4 billion planned budget for 2012 on both phosphate rock and potash in Brazil, targeting 8 million tonnes of phosphate rock production in 2012.

Eagle Star Minerals (TSXV:EGE) has also grown its presence in Brazil, reporting a $750,000 private placement earlier this month, which it plans to put toward developing its phosphate projects — Bomfim, Ruth and Samba.

Rio Verde Minerals Development (TSX:RVD) is also focused on developing Brazil’s internal phosphate reserves after acquiring the Fosfatar phosphate project from Fosfatar Mineração on September 12, 2011.

All three companies will likely benefit from this week’s announcement that Brazilian President Dilma Rousseff will earmark approximately US$66 billion for an infrastructure investment strategy aimed at developing roads, ports and rail infrastructure to connect the country with global markets.


Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company or commodity mentioned in this article.

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