Analysis: Brazil’s Northern Arc could catalyse export boom in next decade

This article was first published to Agricensus.com on May 11, 2021

The investments are being made concurrent with traditional southern export hubs nearing full capacity, investors and analysts told Agricensus.

The trend is already visible, sources said. In 2020, beans originating in Mato Grosso – the main producing state in Brazil – and exported through the Northern Arc reached 11.9 million tonnes, surpassing the total shipped from the south/southeast at 10.4 million tonnes for the first time in history.

The corn and soybean-planted areas in Brazil have expanded by 43% and 60% respectively over the past decade and are set for record-breaking output again in 2022, United States Department of Agriculture (USDA) data shows.

That dynamic has boosted bean and corn exports from Brazil’s Northern Arc over the last decade to more than 37 million tonnes in 2020 from 2.6 million tonnes in 2010, Brazil customs data shows, with market participants expecting that growth trend to continue.

“There is great interest in the Northern Arc from infrastructure investors, the agrobusiness and, especially, trading houses,” coordinator of the group of research and extension in Agroindustrial Logistics, Thiago Péra, told Fastmarkets Agricensus.

Soybean and corn shipments from the Northern Arc have increased consistently and were at 37.3 million tonnes in 2020 – comprising 23.2 million tonnes of beans and 14.1 million tonnes of corn – which is 65% higher on the year and equates to 31.9% of Brazil’s total exports of both commodities, USDA data shows.

The export level in 2020 is, in fact, almost four-times higher than the bean and corn exports that left Northern Arc ports in 2017, when volumes shipped reached 7.7 million tonnes – representing 10% of the country’s total.

Historically, Brazil has exported its soybean and corn mostly through ports in the south and southeast coast, a region better equipped with the necessary infrastructure to get the grains from inland farms to the seaborne market.

But infrastructure investments in recent years have been connecting the main producing regions to northern ports – using highways, waterways, railways and ports – and have enabled producers to ship progressively higher volumes through this route.

Southern ports are close to their nominal capacity while those in the north have more growth potential, sources said.

The average capacity utilization was 81% for southern ports and 44% in the Northern Arc, according to a 2017 study from Brazilian crop research company Embrapa.

“[But] the Northern Arc will not ‘steal’ cargoes from more traditional routes that use southern ports – its growth potential is backed by ‘frontier’ production areas that are not financially viable through traditional routes,” Péra said.

Still, other analysts think some volumes may shift from traditional southern export hubs toward the north.

“I believe the Northern Arc will reduce shipments from the south/southeast, both in terms of percentage and volumes,” Daniele Siqueira of local consultancy Agrural said.

Siqueira agrees that Brazilian bean and corn production growth prospects are robust and that, if infrastructure links between producers and ports improve, higher output from frontier states will be a major factor underpinning exports from the north.

“Based on forecasts from Embrapa and [Brazilian food statistics agency] Conab, soybean and corn exported from the Northern Arc should grow by around 62% between 2020 and 2025,” Paulo Salvador, executive director of Grão-Pará Multimodal told Fastmarkets Agricensus.

“If we factor in the start-up of operations at the Centre-West Integration Railway (FICO) and of the Alcântara Port Terminal (TPA), the growth potential is as much as 100% within that time frame,” Salvador said.

Grão-Pará Multimodal owns the construction and exploration rights of the TPA port project in Maranhão.

Another major concern is whether higher crop production will drive increased deforestation and illegal occupation of areas under the protection of environmental laws. But Siqueira told Agricensus that illegal deforestation is not necessary to underpin production growth over the coming decade.

“In states where production is consolidated, such as the centre-west, most of the increases in planted areas occupy degraded pasturelands, while in frontier states new areas are to be cleared,” Siqueira said. “But that can be done using the legal deforestation allocations that follow the Forestry Code.”

Improved cost competitiveness

Pivoting exports out of the north could also enable major competitive advantages for Brazilian producers in global markets, sources said.

In 2020, shipping beans from the centre-west of Brazil to China through the Northern Arc cost 13% less than through the south eastern Santos port, which would be equivalent to a cost reduction of over $10 per tonne, estimates from Agroindustrial Logistics show.

“Integrated logistics, including the use of cheaper waterways, is a major advantage of the Northern Arc route,” Péra said. “Infrastructure is not expected to be a bottleneck [in the future because] new investments in the region are attracting interest in projects that are starting up in the next 10 years.”

Capesize soybeans coming

Many market participants expect a progressive increase in the use of larger vessels to transport beans and potentially corn into China and thereby reduce freight costs will be another trend to emerge in Brazil over the next few years.

Capesizes, which are commonly used to transport iron ore, can carry up to 170,000 tonnes of grain while the more common panamax-sized vessels have capacity of around 60,000 tonnes.

Using capesize instead of panamax vessels can reduce overall freight costs to China by 14% and emissions by more than 30%, a recent study from ESALQ-LOG said.

But the shallow draft of most ports has capped the increased use of larger vessels to transport Brazilian bean and corn, sources told Fastmarkets Agricensus.

A fully loaded capesize vessel will typically need a minimum draft of 18 metres, which is too deep for many of the domestic port terminals in Brazil that export grain – the deepest port in the south/southeast is Tubarão in the state of Espírito Santo has a 15m draft.

“Draft is a major bottleneck at present and there’s a lot of market interest in ports with deeper drafts, [which demonstrates that the reliance] on larger vessels is a clear future trend worldwide,” Péra told Fastmarkets Agricensus.

This can be another competitive advantage of the Northern Arc-based ports where there are deeper drafts, including in some projects that are already in the pipeline. The TPA project in Maranhão, which is due to come online within the next five years, is one example.

“With a 25m draft, the TPA project will reduce freight costs by $10 per tonne. [This will be achieved by] not only loading grains directly into capesize vessels but also through the transhipment of Panamax vessels from nearby regions into capesizes,” Salvador said.

By Eduardo Tinti