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The Impact of the 1999 Brazilian Devaluation on the Delivered-In Costs of Oranges Produced in Sao Paulo, Brazil1 Ronald P. Muraro, Thomas H. Spreen, and Fritz M. Roka2 1. This is EDIS document FE 213, a publication of the Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Published November 2000. Please visit the EDIS website at: http://edis.ifas.ufl.edu 2. Ronald P. Muraro, professor, Department of Food and Resource Economics, University of Florida, Citrus Research and Education Center, Lake Alfred, FL; Thomas H. Spreen, professor, Department of Food and Resource Economics, University of Florida, Gainesville, FL; and Fritz M. Roka, assistant professor, Department of Food and Resource Economics, University of Florida, Southwest Florida Research and Education Center, Immokalee, FL. The Institute of Food and Agricultural Sciences is an equal opportunity/affirmative action employer authorized to provide research, educational information and other services only to individuals and institutions that function without regard to race, color, sex, age, handicap, or national origin. For information on obtaining other extension publications, contact your county Cooperative Extension Service office. Florida Cooperative Extension Service/Institute of Food and Agricultural Sciences/University of Florida/Christine Taylor Waddill, Dean. Introduction The Sao Paulo (Brazil) citrus industry is in a period of adjustment. Uncertainty as to how to manage disease problems such as CVC and citrus canker and lower grower prices for much of the 1990s have resulted in decreased bearing and non-bearing tree inventories. Although grower fruit prices for the 1997-98 harvest season were very favorable in Sao Paulo State, expanded new plantings, and re-plantings, have primarily been realized by the larger citrus growers. [Production Season refers to the time period when cultural practices occurred for growing fruit (e.g., 1998-99).] The corresponding time period for when the fruit grown is harvested is referred to as the Harvest Season (e.g., 1999-00). In addition, alternative uses of the land (e.g., sugarcane) have been limited due to low prices for raw sugar. Mandarin and lemon/lime varieties are grown in Sao Paulo; however, oranges for FCOJ export production and fresh domestic consumption is the most important commercial citrus variety in Sao Paulo. Approximately 70% of all oranges produced in Sao Paulo are processed into bulk FCOJ for the export market. The total area planted to oranges in Sao Paulo is estimated at 1.52 million acres, which is 13.3% less than in 1996-97. Total bearing orange area is 1.43 million acres, which is 9.3% less than two years ago. Total orange trees planted is estimated at 174 million trees of which 162 million trees are bearing. This represents a 12.5% decrease since 1996-97. The 12 million non-bearing trees represent a decrease of over 50% from two years ago. Declines in tree acreage and total trees have been influenced by lower grower returns, the impact of CVC, and other citrus tree diseases. Orange production forecasts for the 1998-99 harvest season were initially estimated to be 330 million boxes (90 pound boxes), which was about 22% below the record 1997-98 harvest season production of 420 million boxes. The expected lower production resulted in the major processors contracting with growers (mostly large growers) for their orange production. Most of these grower contracts were two to four years in duration, with delivered-in prices ranging between $2.80/box and
The Impact of the 1999 Brazilian Devaluation on the Delivered-In Costs of Oranges.... 2 $4.50/box ($US). A few contracts were five to 10 years with a guaranteed minimum price. End-of-season spot cash prices exceeded $4.50/box. As the 1998-99 harvest season progressed, however, total realized production was about 342 million boxes, with 280 million boxes being processed into FCOJ. This resulted in large FCOJ inventories and lower grower and export prices. With higher delivered-in prices for growers in the 1998-99 harvest season, better grove care (fertilizer and spray/pest control) was provided by the smalland medium-size growers. Along with good rainfall and growing season, the improved grove care resulted in a rebound in production to about 389 million boxes. However, with large FCOJ inventories, lower export prices, and about two-thirds of the orange crop committed to processors in either "owned fruit" or long-term contracts, the delivered-in spot cash prices for oranges plummeted between $0.83/box and $1.06/box. At these price levels, the spot cash price will not cover total growing and harvesting costs for most smalland medium-size growers. Devaluation of Brazilian Currency (REAL) In late January/early February 1999, the Brazilian government decided to discontinue the artificial support of the Brazilian currency (REAL). The REAL was allowed to "float" in the world monetary markets, which resulted in a major devaluation of the REAL to the U.S. dollar. Before the devaluation, the REAL and the U.S. dollar exchanged close to a one-for-one rate. By late February 1999, the REAL had plummeted to a 1.95 exchange rate with the U.S. dollar. The REAL strengthened slightly in May 1999 to a 1.67 exchange rate with the U.S. dollar, but slipped to between 1.80 and 1.90 by September 1999. Overall, average value of the REAL to the U.S. dollar for the 1998-99 production season was estimated at 1.46, or a 29.6% decrease from the 1996-97 production season. This devaluation has had an impact on Sao Paulo's citrus grove care and harvesting costs. With an almost two-to-one currency devaluation of the REAL and most of the fertilizer, chemical, and energy inputs being imported, the initial expectation would be for these input costs to double as well. However, since part, or all, of the inputs used in citrus production are manufactured into commercial products in Brazil, the actual impact of the devaluation on specific cost items are reduced in terms of U.S. dollar equivalents. The effects of the devaluation on specific inputs are discussed below: Fertilizer costs. Most active fertilizer ingredients are imported into Brazil. Part of the manufacturing of the ingredients into commercial products is done in Brazil. Therefore, actual price increase in REALs is about 70% to 80%. Chemical/herbicide costs. Most active ingredients are imported into Brazil. The ingredients are manufactured into commercial products in Brazil. Therefore actual price increase in REALs is about 30% to 40%. Machinery costs. 1. Equipment/parts costs. Most parts and equipment are made/built in Brazil. Therefore the devaluation in REALs has little, if any, impact. 2. Fuel/gasoline/diesel costs. Since most of the petroleum products are imported (especially crude oil for refining), the devaluation results in price increases (in REALs) of 80% for gasoline and 50% for diesel fuel. 3. Machinery operating costs. The combined impact of equipment/parts costs, fuel/gasoline/diesel costs, and labor costs on machinery operating costs is a 35% increase in REAL value. Labor costs. Labor costs remain unchanged since workers continue to be paid the same (in REALs) before and after the devaluation. In U.S. dollar equivalents, however, "real labor costs" decline. The net effect of the REAL devaluation has been to lower Brazilian production costs relative to U.S. production costs. The details of how costs have
The Impact of the 1999 Brazilian Devaluation on the Delivered-In Costs of Oranges.... 3 changed and how current Brazilian production costs compare with Florida are discussed in the next section. Cultural and Harvesting Costs for Sao Paulo Orange Production As described above, the devaluation affected each cultural cost item differently in terms of Brazilian currency (REAL) since most of the commercial manufacturing of these production items are performed in Brazil. This section will discuss how the Brazilian currency devaluation affected both the cultural and harvesting costs in Sao Paulo. All costs are reported in U.S. dollar monetary values. Cultural/Production Costs The 1998-99 average orange yields and cultural costs for Sao Paulo are shown in Table 1. The average yield for the 1998-99 production season was 244 boxes/acre, compared to 240 boxes/acres for the 1996-97 season. Average pound solids yield was 5.95 pound solids per box. Cultural/production costs are presented as a cost per acre and cost per pound solids. Cultural costs refers to labor, fertilizer, chemicals, and machinery operating costs incurred in the production of an orange crop. Also, included in labor costs is a social tax similar to the U.S. Social Security and Medicare taxes. Other costs incurred by Sao Paulo citrus growers are machinery depreciation and interest/financial costs. Direct labor costs for 1998-99 was $17.52/acre. The social tax on wages may range between 70% to 90% of the total direct labor costs. The social taxes for 1998-99 were $15.61/acre. Therefore, total labor costs were $33.13/acre (a 25% decrease from the 1996-97 season). Fertilizer, chemicals, and machinery operating costs were $90.74/acre, $88.12/acre, and $54.04/acre, respectively. Total cultural costs for 1998-99 was estimated to be $266.03/acre (a 14% decrease from the 1996-97 season). The 1998-99 total cultural cost per pound solids was $0.1832. Interest/financial costs increased significantly (in REAL terms) after the devaluation, with interest rates increasing from 20-25% to 40-45%, which discouraged growers from borrowing for operating/production loans and/or loans for replanting or expansion of citrus acreage. For the 1998-99 season, the interest/financial costs were $27.73/acre, total specified costs were $311.28/acre (about 12% lower than the same costs in 1996-97), and total cost per pound solids was $0.2144. Harvesting Costs Average harvesting costs for Sao Paulo are shown in Table 2. The 1998-99 (1999-00 harvest season) picking and loading-on-transport costs averaged $0.325/box. This devaluation resulted in a 38% decrease in picking and loading-on-transport costs from the 1996-97 season. Part of the decrease in labor costs, however, was influenced by a high unemployment rate in Brazil, which has increased the supply of labor available to all agriculture production regions. Transportation/hauling costs to the processing plant averaged $0.219/box, total harvesting costs averaged $0.544/box (a 30.7% decrease from 1996-97 to 1998-99), and average harvesting cost per pound solids averaged $0.0915. Comparative Delivered-In Costs for Oranges Produced in Florida and San Paulo A comparative summary of all the costs associated with delivering oranges to processors in Florida and Sao Paulo is shown in Table 3. Costs are presented on a cost per pound solids basis. Both grower costs and harvesting costs comprise the delivered-in costs to a juice processing facility. Grower costs consist of cultural costs, interest on cultural costs (financial costs), and capital investment costs (i.e., interest on average capital investment). In addition to these cultural costs, land taxes and regulatory fees are included in Florida's costs. Total 1998-99 grower costs per pound solid were $0.4861 and $0.3393, respectively, for Florida and Sao Paulo. When the harvesting costs for Florida ($0.2901/pound solid) and for Sao Paulo ($0.0915/pound solid) are added to the grower costs, the total delivered-in costs per pound solids were
The Impact of the 1999 Brazilian Devaluation on the Delivered-In Costs of Oranges.... 4 $0.7762 and $0.4308 for the two respective states. Total delivered-in costs approximately represent a 2% increase for Florida and an 11% decrease for Sao Paulo, when compared to the same costs in the 1996-97 season. Conclusion The initial impact of the 1999 devaluation of the Brazilian currency (REAL) against the U.S. dollar appears to have decreased the citrus production and harvesting costs of oranges grown in Sao Paulo State since the 1996-97 production season. Labor costs in U.S. dollars after the devaluation had the largest decrease. Lower labor costs were partially influenced by a larger than usual supply of workers in the citrus growing region as a result of a slow down in the manufacturing sector in Brazil. Even though most active ingredients for chemicals and fertilizers used in Brazil are imported, the final product used by citrus growers is manufactured in Brazil. Also, most of the farm equipment and parts used are manufactured in Brazil. Although, in Brazilian currency (REAL), there was a cost increase after the devaluation, the impact in U.S. dollars was reflected in a slightly lower cost. As Brazil's currency stabilizes against the U.S. dollar and Brazil's manufacturing sector rebounds, competition for labor supply may result in higher costs to Sao Paulo citrus growers.
The Impact of the 1999 Brazilian Devaluation on the Delivered-In Costs of Oranges.... 5 Table 1. Estimated orange cultural/production costs in the state of Sao Paulo, Brazil 1998-99 with 1996-97 comparisons in U.S. dollars ($US). Item 1998-99 1996-97c 1996-97 to 1998-99 $US/aa $US/p.s.b $US/p.s.b % Change Cultural/Production Costs Labor Wages and salaries 17.520.0121 0.0161 -24.8 Social taxes 15.610.0107 0.0143 -25.2 Total labor costs 33.130.0228 0.0304 -25.0 Fertilizer and lime 90.740.0625 0.0714 -12.5 Chemicals and herbicide (roundup)88.120.0607 0.0690 -12.0 Machinery (operating costs) 54.040.0372 0.0423 -12.1 Total cultural/production costs266.030.1832 0.2131 -14.0 Other Costs Depreciation (machinery) 17.520.0121 0.0144 -16.0 Interest/financial costsb 27.730.0191 0.0159 20.1 Total other costs 45.250.0312 0.0303 3.0 Total all specified costs 311.28 0.2144 0.2434 -11.9 Boxes per hectare/acre (box = 40.8 kg or 90 lb) 244 boxes Pound solids/box (p.s.) 5.95 p.s.5.95 p.s. Trees per hectare/acre 105 trees a For cost per hectare, multiply by 2.47 acres. b Assumes an interest rate increase from 25% to 45%, or a 60% increase (in REALs) from 1996-97 to 1998-99. c Refer to Spreen and Muraro, September 1997. Source: Ronald P. Muraro, and discussions with Dr. Antonio Amaro and Sao Paulo citrus industry growers and representatives. Table 2. Estimated orange harvesting costs in the state of Sao Paulo, Brazil 1998-99 with 1996-97 comparisons in U.S. dollars ($US). Item 1998-99 1996-97c 1996-97 to 1998-99 $US/boxa $US/p.s.b $US/p.s.b % Change Picking/collecting oranges from trees and Loading oranges on trasnport truck/trailer 0.3250.0547 0.0891 -38.6 Transport oranges to processing/juice factory0.2190.0368 0.0430 -14.4 Total harvesting costs 0.544 0.0915 0.1321 -30.7 a Box = 40.8 kg or 90 lbs. b 5.95 p.s./box (p.s. = pound solids). c Refer to Spreen and Muraro, September 1997. Source: Ronald P. Muraro, Fritz Roka, and Thomas H. Spreen from discussions with Sao Paulo citrus industry growers and representatives.
The Impact of the 1999 Brazilian Devaluation on the Delivered-In Costs of Oranges.... 6 Table 3. Comparative delivered-in costs for oranges produced in Florida (USA) and in Sao Paulo (Brazil), 1998-99 in U.S. dollars ($US). Florida Sao Paulo Boxes/Acre 370 244 Pound Solids/Box 6.55 5.95 $ Per Pound Solids Grower Costs Production/cultural costs, machinery depreciation, and social taxes 0.2932 0.1953 Interest on operating (cultural) costs 0.0147 0.0191 Florida grower taxes and regulatory fees 0.0247 Capital investment costs 0.1534 0.1249 Total Grower Costs 0.4861 0.3393 Harvesting/Hauling Cost 0.2901 0.0915 Total Delivered-In Cost 0.7762 0.4308 Source: Ronald P. Muraro, University of Florida, Citrus Research and Education Center, Lake Alfred; discussions with, and information provided by, Dr. Antonio Amaro, Economia Agricola (IEA), Sao Paulo, Brazil; and discussions/interviews with Sao Paulo citrus industry growers and representatives.