Brazilian ferts companies await freight rate decision

A law setting Brazil's minimum road freight prices is increasing the bulk transport costs for fertilizer distribution, leading market participants to wait for clearer definitions before making long-term plans.

The law that establishes the Minimum Road Transport Price Policy was forwarded to President Michel Temer for approval on 25 July. Temer and the National Land Transport Agency (ANTT) created the measure on 27 May as a concession to truck drivers at the height of the national strike that paralyzed the country for eleven days.

The new law prohibits transportation agreements below the minimum prices set by the ANTT every six months, setting fines equal to twice the difference between the freight paid and the minimum price set. In addition the new document stipulates a readjustment trigger for minimum prices if diesel prices vary by more than 10pc in the six-month period.

Updates to the Provisional Measure are nothing new. In June, the ANTT created a new minimum freight price list that was withdrawn hours later under threat of further strikes by truck drivers. The ANTT also opened a public hearing until 3 August for suggestions to be made about the methodology to be used to calculate minimum prices. Meanwhile, the Federal Supreme Court (STF) is assessing about 50 lawsuits against the adoption of minimum prices and will open a public hearing to discuss the matter on 27 August before ruling on the cases.

Until then, market participants say they are not sure what to do.

"We are waiting for the final ruling by the STF to assess the real impact on freight prices and to decide on our long-term strategies," said a market intelligence specialist at one phosphate-based fertilizer producer that operates nationwide.

The supply of vehicles to transport grain and fertilizer has fallen since May as other segments, such as metals and food, are paying more for the service. Fertilizer freight rates have therefore gone up and limited new deals.

"We can only transport our cargoes if we increase our offers, but we will not pay the minimum prices," said an analyst at a blender in the Central-West.

Transport companies that have accepted rates below the minimum price fear punishment in the future, which has further limited the supply of trucks to transport fertilizers.

"Transport companies are responsible for getting drivers but a lot of customers are not paying the minimum rates," said a representative of a national transport company. "We risk subcontracting truck drivers below the amount required by law and having to respond to lawsuits later."

If the law is approved, market participants must adapt to the new business environment.

"Large agricultural companies will internally adjust their logistics sectors to reduce costs," said the manager of a large transport company. Paulo Sousa, grain and processing director at US agribusiness giant Cargill, added, "The company is considering investing in its own fleet of trucks and drivers if it has to obey the new minimum freight rates."

Railways and cabotage are also being looked at as alternatives to road transport. Investment has been made in these alternatives in recent years but capacity is limited. In April, Rumo opened a rail terminal with a capacity to transport 7.5mn t of bulk cargoes. "We will make more use of railways and waterways integrated with roads to supply our blending units," said an analyst at a blender in the Central-West.

In an environment that has been legally troubled since May, grain and agricultural input distribution is suffering. Fertilizer deliveries fell by 27.3pc in May, leading to an annual fall of 2.3pc in the first half of this year, according to data from Brazil's national fertilizer-industry association, ANDA.