6. Case Examples
Agriculture Co.: Exporting Agricultural Products from Brazil
Agriculture Co. is a global agribusiness that relies heavily on Brazil for its raw materials. Moving goods across Brazil’s huge land area and widely dispersed agricultural production regions requires efficient transport and communications infrastructure, which is lacking today. The resulting bottlenecks in Agriculture Co.’s supply chain and increased complexity of exporting to other markets are exacerbated by bureaucratic customs procedures at Brazil’s borders. The barriers increase operating and working capital costs and constrain sales opportunities.
Agriculture Co. is a global agricultural and food company. The company operates in 40 countries, with a significant proportion of raw materials sourced from Brazil. Its local facilities in Brazil are extensive, including several sugarcane mills, a fertilizer blending operation and one of the world’s largest wheat mills. In Brazil, Agriculture Co. exports over one-third of its several million metric tonne volume, relying on independent trucking as well as on rail and waterway transportation companies to transport goods to coastal areas where they are then shipped mainly to the EU and Asia.
Like other large exporters, Agriculture Co. depends on a high-quality transport infrastructure to navigate Brazil’s continental-sized territory to move goods from its inland facilities to coastal ports. But road, rail and seaport transportation networks in Brazil today rank among the lowest in the world (see figure).
- Roads – The country’s poorly maintained and often flooded roadways reduce trucks’ weight capacity and speed and increase maintenance and repairs.
- Railways – Brazil’s rail network is old and poorly maintained, with 10% of its 28,000 kilometres of track out of commission. Only about one-quarter of the network operates productively. Because rail lines were originally drawn to serve political rather than economic ends, shippers are often forced to rely on trucks to carry longer haul cargo where rail transportation would typically be more efficient.
- Ports – Port use at some of the main ports is high (e.g. Santos operates at some 80%), which puts year-round pressure on export flows. This pressure can be especially high from March to June, the height of the harvest season. Capacity chokepoints also occur when cargo is unloaded from trucks at port sites. As a result, cargo “dwell times” between its arrival in port and when it is cleared for departure are significant – some five to ten times longer than in Chile and developed nations.
Inadequate transport infrastructure and resulting delays drive up Agriculture Co.’s operating costs. The poor-quality rail system forces Agriculture Co. to resort to less-dependable truck transportation to move the bulk of its goods. Sixty-four per cent (64%) of the volume of the company’s shipments travels by road and only 36% by rail. Beyond the inherently higher costs of moving goods by truck rather than train, delays also occur due to traffic on Brazil’s congested highways.
Wait times at ports result in Agriculture Co. incurring demurrage costs of one Brazilian real (BRC 1.00) per hour for each tonne of freight delayed beyond five hours. For trains, delays at ports cost Agriculture Co. 40 Brazilian reals (BRC 40.00) for each hour after 18 hours of waiting. Agriculture Co. also incurs costs of as much a US$ 25,000 per day for each vessel on which the company’s goods are carried that is held up in port. These delays require Agriculture Co. to maintain a buffer stock of inventory and extra warehouse capacity which sits idle when harvest season ends.
Beyond the onerous transport costs that tie up working capital and hit Agriculture Co.’s income statement, Brazil’s unreliable communications and technology infrastructure adds disruptions and unpredictability to the company’s supply chain. The government’s electronic freight invoice system lacks the capacity to hand all transactions. Agriculture Co. estimates that it encounters five or six hour delays about twice a week when government servers crash. In one instance, according to Agriculture Co., an accident involving one truck occurred at a time when fibre optics communications were down, preventing Agriculture Co. Brazil headquarters from learning about the incident. Agriculture Co. estimates that unreliable information and communication technology systems and processes cut the annual operating efficiencies of its truck fleet by about 4%.
Beyond the logistical complexities and costs of moving its goods from the agricultural interior to ports, Agriculture Co. must contend with border administration challenges and customs processes that add to delays. Agriculture Co.’s exports require customs clearance from no fewer than five government authorities – from the health and agriculture ministry to the federal police and the tax agency. Together the Brazilian paperwork can consume up to 24 hours compared with just one or two hours in Europe. When workers at one of the government agencies go on strike – an occurrence that Agriculture Co. estimates happens about once a year and lasts for as long as a full month – Agriculture Co. must go to court to clear its cargo, a process that can take up to a week. Meanwhile, Agriculture Co. incurs additional warehousing costs.
Agriculture Co. pays a larger price for its supply chain inefficiencies in the form of opportunity costs of lost sales, missed trades, and customer dissatisfaction. Also, the need to maintain high inventory levels even when commodity prices are high prevents Agriculture Co. from trading to capitalize on low market prices.
Source: A decade of transformation in infrastructure, Brazilian Association of Infrastructure (ABDIB) report, 2011.