Institutions and supply chains help shape Brazil’s soybean boom

Soybean production has become a significant force for economic development in Brazil, but has come at the cost of expansion into non-protected forests in the Amazon and native savanna in the Cerrado. Over the past fifty years, production has increased from 26 million to 260 million tons. Area planted to soybeans has increased from roughly 1 million hectares in 1970 to more than 23 million hectares in 2010, second only to the United States.

A new study out of Stanford University examines the role of institutions and supply chain conditions in Brazil’s booming soybean industry and the relationship between soy yields and planted area. With the demand for soybeans projected to increase far into the future a better understanding of the economic and institutional factors influencing production can help policymakers better manage land use change.

Using county level data the researchers found that soy area and yields are higher in areas with high cooperative membership and credit levels, and where cheap credit sources are more accessible. Cooperatives help producers secure lower prices for inputs or higher prices for outputs through group purchases and sales. They also enable producers to store their grain past the harvesting period and sell it when prices are higher.

“This suggests that soybean production and profitability will increase as supply chain infrastructure improves in the Cerrado and Amazon,” said lead author Rachael Garrett, a PhD student in Stanford’s Emmett Interdisciplinary Program in Environment and Resources.

The authors did not find a significant relationship between land tenure and planted area or land tenure and yields. But found that yields decline and planted area actually increases as transportation costs increase. More importantly, the study showed counties with higher yields have a higher proportion of land planted in soy.

“Policies intending to spare land through technological yield improvements could actually lead to land expansion in the absence of strong land use regulations if demand and per hectare profits are high,” said co-author Rosamond L. Naylor, director of Stanford’s Center on Food Security and the Environment.

The current Forest Code requires rural land users in the Amazon to conserve 80% of their property in a ‘Legal Reserve’, and landowners in the Cerrado to conserve 20%. Historically, illegal clearings have been common and enforcement of the Legal Reserve requirements remains poor.

While this study focuses on Brazil, the results underscore the importance of understanding how supply chains influence land use associated with cash crops in other countries. Future demand for soybeans, as well as for cash crops like Indonesian palm oil, will continue to grow as demand for cooking oil, livestock feed, and biodiesel increase with income growth and changing dietary preferences in emerging economies.