Weekly Insights: Impacts of a Brazil Trucking Strike on Ag Markets
Impacts of a Brazil Trucking Strike on Ag Markets
“We will protest within the law. We have the right to raise awareness about the category. We are a democratic country and the right to freely protest is enshrined in the Constitution,” said the chairman of the National Council of Road Freight Transport Carriers (CNTRC) earlier this month.
The independent truckers went on strike on February 1, 2021. To date, the independent truckers have not shown the desire to pass up work during the most profitable time of the year. Of course, if a truck were full or the driver was in line to be loaded, he would complete the run to cover expenses already incurred. As a result, it takes about six days to see how serious the strike will be for agriculture. Eight days into the trucking strike and the impact is minimal. The seriousness of the strike should be monitored because two weeks of closed roads could divert two MMT of business to the U.S.
The Brazilian Report, a service consisting of journalists that specialize in Latin American markets, provided some interesting insight comparing the 2021 truck strike with 2018:
Truck drivers’ unions had scheduled a nationwide strike on February 01, 2021 to protest fuel prices and demand higher rates for cargo transportation. Unlike in 2018, when truckers stopped working for 11 days and strong-armed the government into caving to many of their demands, unions are split this time around.
Still, we have monitored the first reported protests. At 1 a.m., truckers partially blocked the BR-116 highway (which crosses Brazil from North to South), at Vitória da Conquista (Bahia).
On the outskirts of São Paulo, truckers have also blocked two lanes of the Castello Branco highway, which links São Paulo to the interior of the state.
Fueling the protests. Among truckers, an audio file of Infrastructure Minister Tarcísio de Freitas has gone viral. On it, he says that it is impossible for the government to meet current demands, as well as monitor whether promises made in 2018 are being met. Despite unions’ divisions, this could galvanize more protests.
Why it matters. The 2018 truckers’ strike created food and fuel shortages in multiple regions and had an economic impact of 1.2% on the national GDP. This time around, a strike could disrupt vaccine distribution, break up trade routes, and hurt the revenue of millions of families who can no longer count on government aid after the expiration of the coronavirus emergency salary program.
Hearts and minds. In 2018, 87% of Brazilians supported the strike, according to pollster Datafolha. As a congressman at the time, Jair Bolsonaro was an outspoken enthusiast of the movement.
Now, it is hard to imagine a strike drawing such massive popular support — which could hinder unions’ ability to make this a protest as large as what we saw in 2018, which was key to their leverage.
The Brazilian Report also stated:
Truckers hold immense power in Brazil, as they are responsible for moving close to 60% of all cargo around the country—90% if we exclude iron ore and crude oil, which are not transported on roads. Moreover, the segment is highly decentralized, making any kind of collective negotiation very difficult.
Back in May 2018, Brazilian truckers disgruntled by rising fuel prices went on strike for 11 days—generating fuel and food shortages in several urban centers and causing tens of billions of dollars in losses. The then-Finance Ministry—since rebranded as the Economy Ministry—estimated the losses at nearly BRL 16 billion, caused by drops in industrial output and tax collection. The agribusiness sector was one of the worst-affected, with millions of livestock starving to death and millions of liters of milk being left to spoil.
Agricultural producers and industrialists are adamantly against the minimum freight table—as it increases their costs on cargo transport, expenses which are then passed on to the consumers. A survey by the National Confederation of Industries shows that, since the first version of the freight table was approved, industrial goods have gotten 5% more expensive for consumers. Moreover, big transport companies have started to increasingly rely on their own fleet—reducing job opportunities for self-employed truckers. Meat giant JBS, for instance, announced in August 2018 that it had purchased 360 trucks to transport its products. Commodity producer Amaggi Group, meanwhile, has 300 trucks of its own. Truck sales have spiked 47% over the past 12 months.
How the U.S. Benefits from a Brazil Truck Strike
The Brazilian Supreme Court decision concerning the constitutionally of the Minimum Freight Rate Table (MFRT) has not occurred. A trial date has not been settled as the case’s rapporteur, Justice Luiz Fux, was waiting for a “definitive solution” between the government and truckers before starting to judge the merit of the rules. The MFRT has been in effect since August of 2018. The Brazilian Supreme Court wanted the carriers and shippers to work out a compromise. Under pressure from the MFRT being ruled unconstitutional, a new interpretation of the MFRT was established, which in July cut transportation rates by 6.5% when the National Association of Autonomous Transport in Brazil (ANTB) calculated costs had increased from 15% to 18%.
Higby Barrett acknowledges fuel prices collapsed in the first half of 2020, but with a steady decline in the Brazilian currency over the last three years, it is difficult to envision the cost of living decreasing 6.5%. A Brazilian trucker strike seems imminent. In January, a new MFRT should have been published. With fuel prices rebounding in the second half of 2020, the trucker freight rate increase should be well over 10%. Between no new MFRT and the Supreme Court not ruling, it appears a political impasse is in full force, which often results in a strike. The issue is February is a very profitable month for truckers hauling agriculture. Striking in February would cause the most pain for truckers and the agriculture industry. Of course, the big winner would be the U.S.
The U.S. begins harvest in August and production flows into the marketing chain. Brazil begins harvest in February and production flows into the marketing chain. So, from October through January, Center Gulf monthly export volume is 150-200% greater than the average monthly volume. From April through July, Center Gulf monthly volume is less than 50% the average monthly volume. From February to March, Brazilian crop supplies replace U.S. volumes. A Brazilian trucker strike for the first two weeks of February would force buyers who were counting on Brazilian supplies to switch to the U.S. for their needs. With tight supplies, an unexpected boost to U.S. exports could be quite positive for the markets.
U.S. Soybean Export Volume Seasonality by Port
Figure 1. (source: USDA)
Brazil Truck Strikes — Historical Perspective
In May 2018, Brazilian truckers held a strike that severely hurt Brazilian manufacturing supply chains. To end the strike, the Minimum Freight Rate Table (MFRT) was established as a base for truck rates. One of the most contentious items in determining the MFRT is it must provide a “livable just wage” for the truck driver. Every six months the National Land Transportation Agency (ANTT) analyzes the MFRT and adjusts freight rates based on driver profit, types of cargos, number of axles, and distance traveled. Driver profit involves all the expenses of operating a truck including backhauls for trucks that are prohibited from transporting different products, such as tankers transporting fuel.
The Brazilian National Land Transportation Agency (ANTT) new minimum freight rates in January 2020 are 11-15% higher depending on the type of cargo being transported. The rates will be in effect for the next six months. Not surprisingly, Wallace Landim, the president of the Brazilian Association of Motor Vehicle Operators (ABRAVA) does not believe the increase covers the added costs of operating a truck and is already lobbying for an additional 15-18% increase in freight rates in July.
Although the truck drivers want a higher MFRT, the belief the new system was more equitable was avoiding the almost annual truck strike. On the flip side, the weaker currency does offset the higher truck rates but also increases the cost of imports, which will result in higher expenses that will require the truck drivers needing more money to maintain a “livable just wage.” If speculators expect a 15% increase every six months in truck rates, this assumption will drive speculators to assume more inflation and devalue the currency. Once that cycle starts, the built-in minimum wage concept becomes self-defeating.
Approximately 60% of corn and soybeans in Brazil are transported by truck from origin to destination. As a result, truck freight rates play a major role in the price the farmer ultimately receives, especially for farmers over 1,000 miles from port. For the exporters, the higher value dollar is more than offsetting the local increase in trucking rates as shown in table 1.
Long-term, for the rest of the world, the return to the Brazilian farmer determines how many new acres are added, which impacts the soybean price everywhere. For example, if a higher soybean price is required to encourage the Brazilian farmer to plant more acreage that is over 1,000 miles from port, the U.S. farmer stands to make more money with a higher MFRT. Obviously, with the Brazilian corn and soybean crop size continually increasing, the importance of the MFRT is also increasing. For example, a 15% increase in the MFRT would basically increase U.S. soybean prices a quarter per bushel.
For Brazilian farmers, the weaker currency is encouraging production by resulting in very high domestic soybean prices. Many of the inputs Brazilian farmers use are imported, so the weaker currency increases input costs. For Brazilian agriculture in general, the domestic market is getting hammered by higher feed costs, higher freight cost and higher energy costs.
Freight Costs for Brazilian Soybean Export Transportation Routes, 2020
The weighted average to truck soybeans to export locations is over $15 per metric ton less expensive. As stated previously, the truck drivers are already expecting a 15% MFRT increase in July 2020. At some point in time, if the Brazilian currency stops falling or increases, the cost impact of delivering crops to market will be profound.
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