Soybean development in Brazil and Argentina

The world market for oilseeds and oilseed products has expanded rapidly since the early 1960s with increased demand for low-fat vegetable oils and for feeds/feed-supplements for livestock production. Soybeans and soybean products are the most important oilseeds, accounting for one-half of total oilseed production and nearly three-fourths of world oilseed trade. Over the 1962-86 period, world imports of whole soybeans, soybean oil, and soybean meal had growth rates of 7.7%, 8.9%, and 11.5% respectively.

While world soybean production and especially trade was once dominated by the United States, over the past two decades soybean production and trade has expanded rapidly in several EEC and developing countries. The most substantial increases in production and trade have taken place in Brazil and Argentina, which in 1990 accounted for nearly 30% of total world soybean production and one-half of world trade in soybean oil and meal. Table A2 indicates the growing world market shares of these two countries, compared to those of the United States.

Table A2: Shares of World Exports for Soybeans and Soybean Products (Percentages)

Sources: U.S. Department of Agriculture, Foreign Agriculture Circulars

Brazil

While dating to before World War I, commercial soybean production in Brazil really first developed during the 1950s with large farmers in the State of Rio Grande du Sul double-cropping soybeans with wheat. At the time, wheat was the focus of a major import substitution program, involving price supports and subsidized infrastructure development. Wheat and soybean had complementary growing seasons, benefitted one another from an agronomic sense, and could share the costs of farm and postharvest infrastructure. With the production of traditional vegetable oilcrops lagging behind local consumption, there was a ready market for soybean and soybean products.

Although soybean production grew steadily during the 1950s, it still covered only 171,000 hectares in 1960 (0.60% of Brazil's arable area), was largely confined to one state, and reached only 205,000 metric tons, well below domestic vegetable oil consumption. During the 1960s and 1970s, however, the soybean subsector would undergo a boom, leading Brazil to become a major world producer and exporter of whole soybeans and particularly soybean products. By the early 1980s, the soybean subsector would be a major force in Brazil's economy, accounting for nearly one-fifth of the planted arable area and surpassing coffee as the leading export industry. Since then, Brazil's soybean plantings, production, and exports have continued to edge upwards, despite consistently high levels of direct and indirect taxation.

Several factors contributed to the initial boom in soybean production and trade, covering the period from the mid-1960s to the early 1970's. First, there was technical and financial complementarily between soybeans with wheat. Soybeans fixed nitrogen which enhanced wheat production while wheat production provided residual nutrients for soybean to thrive. Capital investments could be amortized over the two crops. The huge infrastructure developed under the wheat support scheme could also (or alternatively) be used for soybeans. Second, technical and market problems within the coffee industry led to the development of a coffee eradication program which brought soybean production to other parts of the country, particularly the State of Parana. Third, soybean varieties were imported from the United States and successfully adapted through a local breeding/testing program involving U.S. collaboration. These efforts resulted in considerable increases in soybean yields during the 1960s and 1970s. Fourth, soybean growers benefitted from the large increase in subsidized agricultural credit and subsidies for fertilizers and tractors which occurred during the 1960s and 1970s. Fifth, soybean production and trade benefitted from an already well-established system of cooperative marketing in the primary areas where soybeans were grown. Sixth, the government's adoption of a 'crawling peg' in 1967 (which led to a slow devaluation of the Brazilian currency) and the introduction of export tax rebates provided favorable incentives for exports. Seventh, the collapse of the Peruvian anchovy catch resulted in a large substitution of soybean meal for fishmeal in animal rations. And finally, the U.S. soybean export embargo in 1973 resulted in efforts by Japanese firms to diversify their sources of supply--efforts which included direct investments in Brazil and loans to the Brazilian government to expand rail and port facilities.

Although Brazil entered into a period of macroeconomic instability in the mid-1970s and government policies with regard to agricultural pricing, taxation, and exports would undergo frequent changes, the soybean subsector continued to thrive, with production spreading to new locations (especially Mato Grosso do Sul), with the introduction of better-adapted varieties developed within Brazil, and with an annual increase in yields of 2.2% during the 1970s. Soybean production and soybean product trade levels continued to climb through to the early 1980's. With favorable domestic and international market conditions (especially during the mid-1970s), with periodic Brazilian government controls placed on the exports of whole soybeans, and with subsidized credit and other financial incentives, a huge expansion in Brazil's soybean crushing capacity took place between the mid-1970s and the early 1980s. This investment outpaced even the rapid growth in local soybean production, leading some crushers to import whole soybeans and reducing capacity utilization in the industry.

During this period, a boom was experienced in domestic consumption of soybean oil and meal, with part of the later supporting the development of the local poultry industry. Brazil increased its world market share for soybean oil and meal (Table A2 above). The industry developed a market strategy whereby 90% of export supplies are made by September (following spring harvest) so as to precede the U.S. October harvest and developed more sophisticated market information and trading arrangements, making use of futures and mercantile markets.

Soybean production and trade grew more slowly and was more variable during the 1980s than during the prior decade as a result of high rates of effective taxation, a reduction in subsidized credit, soil erosion problems in several areas, periodic drought, and increased competition from other countries, notably Argentina. However, despite direct and indirect taxation and high rates of inflation, Brazilian soybean production remained cost competitive compared to its main competitor-- the United

States. This, together with the industry's large installed crushing capacity and well-developed marketing links has enabled it to grow, despite a poor macroeconomic and uncertain policy environment. As the figure below indicates, recent macroeconomic and sector policy reforms have had a noticeable positive impact on soybean production and exports.

Brazil Soybean

Sources: Soskin (1984), McGarry et al. (1992)

Argentina

While soybeans were first introduced into Argentina in the 1950s, soybean production and processing did not take off until the early-to-mid-1970s following the experience in Brazil and following the development and adoption of short-cycle wheat varieties which allowed for wheat- soybean double cropping. With favorable international prices and with Argentine farmers achieving good yields, the wheat/soybean rotation became highly profitable, leading to a rapid expansion in plantings, production, and eventually, exports.

The initial boost to soybean production occurred despite rather than as a result of government policy. The government which came to power in 1973 raised export taxes on cereals and oilseeds to 4050%, destroyed the private grain trade (and imposed the Argentine Grain Board as a monopoly exporter), maintained an overvalued currency, and imposed a value-added tax on domestically marketed soybean products. Nevertheless, between 1972 and 1976, soybean production increased nine-fold from 78,000 metric tons to 695,000 metric tons. By 1979, production would increase to 3,700,000 metric tons and exports would reach 2,800,000 metric tons, placing Argentina among the leading world producers and exporters. While Argentine agriculture experienced an annual growth rate of 2.5% during the 1970s, the annual growth rate for soybean production was a very impressive 30%.

Several factors contributed to the rapid expansion and strong competitiveness of Argentine soybean production and trade. First, Argentina's extensive lands with high natural fertility and flat topography rendered land costs relatively low and reduced the need for chemical fertilizers for soybean production. Second, Argentina's farm structure consisting of mostly medium-to-large scale producers, facilitated the rapid adoption of new technologies. Third, such technologies were readily available in the forms of new soybean varieties from the U.S. (which required little adaption to Argentine conditions) and improved tractors whose use was subsidized by the Argentine government. Third, soybean production and marketing benefitted from an already well established farming and marketing infrastructure for cereals. Soybeans were initially double-cropped and marketed along with wheat, taking advantage of already developed on-farm infrastructure, an effective system of seed production and distribution, and welldeveloped infrastructure for grain storage and transport. Once the private sector was once again permitted to conduct grain exports from Argentina, soybean sales were facilitated by the extensive market contacts and other resources of the major international companies operating in the country.

By the late 1970s, average Argentine soybean yields approached those of the United States, the highest in the world. With such high yields and with little use of fertilizers, the costs of soybean production in Argentina were the lowest among major world producers. Despite very high domestic inflation, this production cost advantage was retained through the 1980s. This can be seen in Table A3.

Table A3: Cost Comparisons Among Major Soybean Exporters (US $ 1985 Per Ton)

Source: Ortman et al. (1986)

After a period of slow growth between 1979 and 1983, Argentine soybean production and exports accelerated once again. By the end of the 1980s, Argentine production had reached over 10 million metric tons, experiencing an annual growth rate of 8.8% during the decade and a continued growth in Argentina's share of world trade in soybeans and soybean products. This growth occurred despite very high rates of inflation, generally unstable macroeconomic conditions, and high rates of direct and indirect taxation on soybean (and other cereals/oilseeds) production through much of the decade. With little further improvement in soybean yields, most of the expanded production has derived from an extension of planted areas, with soybeans displacing corn, sorghum, improved pastures, and other crops. In most years, soybean production has been much more profitable than these crops, reflecting in part the declining world markets for cereals. Soybean production, with a DRC ratio of 0.24 (over the 1981-85 period), has also had the lowest DRC ratio among major cereal and oilseed crops.

The greatest change during the 1980s was the development of a large soybean crushing capacity within the private sector and a switch from a predominance of whole soybean exports to exports of soybean meal and oil. While in 1979, only 17% of production was locally crushed, by 1986, this share had increased to 61 %. This shift was in part induced by a change in government policies in 1982 which applied lower export taxes on soybean oil and meal than on whole soybeans. The shift was also a response to differential market prospects, with increased demand for soybean oil and meal coming from Eastern Europe and developing countries and with a reduction in USSR purchases of whole soybeans. The leading soybean crushers, many of whom are major multinational grain trading companies, also undertook the processing of other oilseeds so to maintain year-long operations. Unlike Brazil, there has been little domestic market development for soybean products due to consumer preference for sunflower and peanut oil and the limited development of poultry production in the face of a dominant beef industry, based on grazing on improved pastures.

Argentina Soybean

Sources: Williams and Thompson (1984); Lacroix et al. (1992)