Special report: Brazilian agriculture. The harnessing of nature’s bounty

Make way for the beef from Brazil

The inexorable rise of Brazil as an agricultural superpower forms an important backdrop to world trade negotiations

IF GOD is Brazilian, as national folklore would have it, His hometown must be Petrolina. That, at least, is the belief of Arnaldo Eijsink, head of agri-business in Brazil for Carrefour, a French supermarket chain with lots of Brazilian stores. Nature made this district in Brazil's poor north-east an open-air greenhouse, with persistent sun, fertile soil and low humidity, a natural barrier to disease. With the arrival of irrigation, drawn from the Sao Francisco river, in the early 1980s Petrolina became a horticultural prodigy. Grapes mature in 120 days, compared with 180 in the rest of the world, allowing two harvests a year, says Mr Eijsink. Asparagus can be cut twice as often as in temperate climes.

Other Brazilians might disagree with Mr Eijsink, but only to assert their region's claim to being agriculture's paradise. The state of Sao Paulo, in the south-east, produces the world's cheapest sugar and orange juice. The endless savannahs of the centre-west are ideal for growing soya, by far Brazil's biggest agricultural commodity. Brazil is the world's largest exporter of beef, coffee, orange juice and sugar, and it is closing fast on the leaders in soya, poultry and pork. Unlike its competitors, Brazil is not running out of land. Agriculture occupies 60m hectares now; it could stretch out to another 90m hectares without touching the Amazon rainforest, says Silvio Crestana, director of Embrapa, the main agricultural research institute.

If rich countries suddenly demolished trade barriers and zeroed out subsidies, Brazilian farming would really shift into overdrive. Full liberalisation would boost the real value of agricultural and food output by 34% and real net farm income by 46%, according to calculations by the World Bank. Under a more realistic scenario, Brazil's income would rise by $3.6 billion a year. That is why the Doha round of multilateral trade talks, which Brazil hopes will dramatically lower barriers to agricultural trade, are so important. Brazilians fret that the round may merely cut "water", that is, deliver impressive-sounding reductions in maximum tariffs without lowering much the ones actually applied. "A 50% cut can mean nothing," says Marcos Jank of ICONE, a pro-liberalisation think-tank. This will be a major topic of conversation when George Bush visits his Brazilian counterpart, Luiz Inacio Lula da Silva, on November 5th-6th.

At the moment, Brazil's farmers are feeling more cursed than blessed. The early 2000s were miraculous years, withbuoyant international prices for several of the main export commodities and a competitive exchange rate, which gave exports an extra push. But prices have retreated and, more damagingly, Brazil's real has surged against the dollar. Drought struck farmers in the south during the latest growing season. The value of agricultural output (not including ranching) is expected to drop in local currency terms by 16% to 80 billion reais ($35 billion) in 2005. Exports of beef, one of the most promising sectors, have been hit by an outbreak of foot-and-mouth disease in the south. Brazil's real interest rates are the world's highest; its system for transporting commodities befits a third-world backwater, not an agricultural superpower.

In the short run, output is likely to grow slowly, if at all. Agroconsult, a consultancy, forecasts a "strong reduction" in the amount of land to be planted with cotton, rice and, for the first time in six years, soya. In June 20,000 farmers and 3,000 tractors descended on Brasilia, the national capital, to demand financial relief from the government, the third such demand in little more than a decade. If the government does not comply, "Brazil will lose important markets," warns Homero Alves Pereira, head of FAMATO, which represents growers in the centre-western state of Mato Grosso.

Brazil's vocation for agriculture will outlast this crisis. It has enhanced its natural endowments with decades of investment in research and development, creating the world's "first competitive tropical agriculture", in the words of Jose Roberto Mendonca de Barros, head of MB Associados, an economic consultancy. China's growing appetite for Brazil's produce, sharpened by urbanisation, seems as inevitable as its rise to superpower status.

Yet the pace of Brazil's development is uncertain. It will be determined partly by foreign exchange, interest rates and economic growth. The willingness of producers and the government to grapple with deficits in transport and management will play a big role. Some types of small farm will be left behind. Other obstacles lie in the rich world, whose subsidies and trade barriers undermine Brazil's exports. Within Brazil a debate over what to concede in return for liberalisation of farm trade has revived an old suspicion that the export of commodities is a second-class activity for an ambitious country. Free farm trade by all means, say the doubters, but not at the expense of industry. Through farm trade Brazilians are arguing about what sort of country Brazil should be.

Nature the provider

Agriculture is the Cinderella of Brazil's economy. Brazil's dictators thought industrial development the mark of an advanced country and until the late 1980s exploited agriculture to provide resources for industry and cheap food for the urban masses. Exports and prices were controlled. Cotton farmers, for example, faced quotas on exports, obliging them to supply their product cheaply to the textile industry. The government compensated partially for such restrictions by guaranteeing minimum prices to producers. In the 1990s subsidies shrank and restrictions were abolished. At the same time, Brazil cut tariffs for imported inputs, improving terms of trade for agriculture.

Foreign investors, some of which had been biding their time in Brazil, seized the opportunity. Trading houses like Cargill, Bunge and Archer Daniels Midland brought relatively cheap finance, infrastructure and international connections to the soya beans and grains. Multinationals like Danone of France and Nestle of Switzerland snapped up distribution of milk and other dairy products. In 1997 the government eliminated export taxes on commodities, cutting costs by 10-20%, "maybe the biggest stimulus to agriculture in Brazil," says Sergio Barroso, head of Cargill's local operation. A sharp devaluation of the real in 1999 gave another push.

This coincided with an epic migration that began in the late 1970s from the south, the traditional breadbasket, to the savannahs of the centre-west. The movement is still in progress. Land is cheap, so ranchers and farmers can trade in small southern properties for large spreads in the cerrado, and the climate is more reliable. The establishment is joining the pioneers. Brascan, a Brazilian-Canadian company, is shifting its beef production from expensive Sao Paulo to Mato Grosso. The biggest producer of poultry, Sadia, is concentrating new production in the same region. The attraction, says Luiz Murat, the company's financial director, is "the lowest grain cost in the world". It makes much more sense to ship high-value chickens via Brazil's inefficient transport network than low-value chicken feed. The frontier is spreading to the western fringes of Brazil's impoverished north-east, creating boom towns in Bahia, Piaui and Maranhao.

This has been an undeniable boon for Brazil's economy. At 8.8% of GDP agriculture's share is no higher than in comparable economies, notes a new report by the OECD. Unusually, though, that share has not declined as development advanced. More important, trade in agriculture and related industries accounts for 40% of Brazil's exports and in 2004 for 100% of the $34 billion trade surplus, a vital prop for an indebted economy still vulnerable to crises of confidence. Rural success is not merely a stop-gap, shoring up the economy until industrial development kicks in. "Knowledge applied to nature" can be a foundation of Brazil's development, as it was for Nordic countries, argues Mr Mendonca de Barros. Nokia, Finland's mobile-phone star, was once big in wood pulp.

Brazil has yet to produce a Nokia, but farming provides the outstanding examples of Brazilians inventing technologies rather than importing them. Since the late 19th century agricultural research has "received special attention from the state," observes Guilherme Leite da Silva Dias, an economist at the University of Sao Paulo. While planners carved out "market reserves" to defend local industry from competition during the 1970s, Embrapa underwrote the education of its scientists at American and European universities. The conquest of the cerrado is the fruit of breakthroughs like the invention of soya varieties that thrive in tropical conditions.

In sugar, a 1970s programme to fuel cars with sugar-based alcohol rather than gasoline combined with Brazilian brainpower to create a high-tech cluster based in the state of Sao Paulo. In addition to producing the world's lowest-cost sugar and alcohol the state is developing spin-offs that lower the cost further and extend the product line. Bagasse, the crushed dregs of sugar cane, is being burnt for energy and mixed with urea to feed cattle. Eventually it could yield more alcohol and provide the raw material for biodegradable plastic. The top of the sugar chain is flex-fuel cars, which burn alcohol and gasoline in any combination and account for nearly two-thirds of the new cars sold in Brazil.

Worst foot forwards

Nordic sophistication sits alongside decrepit infrastructure, spotty adherence to the law and lax sanitary practices that are more reminiscent of the third world. Brazilians were rudely reminded of this in October when foot-and-mouth disease broke out in the southern state of Mato Grosso do Sul, prompting the main importers of Brazilian beef, including Russia, Egypt and the European Union, to impose partial bans, marring what had been shaping up as a record year for exports. Ranchers were quick to blame neighbouring Paraguay, which may have been the origin of the infected cows, and the government, which has cut funding for monitoring animal health. But part of the fault apparently lies with ranchers themselves, some of whom ignored some of the regulations requiring the vaccination of their herds.

Ranchers are traditionally a headstrong breed with little patience for the niceties of the law. Some, especially in the north, do not hold clear title to their land, which makes them reluctant to invest; they often hire labour from shady contractors called gatos, who sometimes abuse their workers, exposing ranchers to charges of using slave labour. "What we have are good rural producers; what we lack are rural entrepreneurs," says Frederico Diamantino, a director of the Associacao Brasileira dos Criadores de Zebu, the world's largest group of ranchers.

Ranching is a notorious case but not an isolated one. Brazil's world-beating soya farmers have flouted contracts to sell beans to trading companies when they could fetch better prices elsewhere. Southern farmers routinely sow genetically modified soya seeds smuggled in from neighbouring Argentina. Seed piracy has undermined the local industry and lowered the quality of crops. Weak institutions and feeble contracts constitute "the most important challenge to the agricultural sector," argues Decio Zylbersztajn, another economist at the University of Sao Paulo.

If so, a close second is Brazil's shaky infrastructure, which blunts much of its edge in the cost of land and labour. Just 10% of the country's roads are paved, compared with 29% in neighbouring Argentina, according to the OECD report. Brazil has neglected its railways, a more sensible way than road to transport grain. Its navigable rivers do not traverse the heart of the country like America's Mississippi but veer off into the Amazon rainforest. Agriculture's march to the cerrado has been a march away from consumers. Despite the larger scale of farms in the centre-west, their break-even point is 12% higher than that of southern farms, calculates Fernando Pimentel of AgroSecurity, a consultancy, due largely to higher transport costs. This is also where ranching and agriculture impinge on the Amazon rainforest, the gravest threat to Brazil's image abroad.

The customer is always right

Brazil is addressing these failings, though fitfully rather than systematically. Consumers, both foreign and domestic, are taming agrarian unruliness. Foreigners make their expectations known through chains of enterprises joining retailers in importing countries to farmers in Brazil. With soya, the vital links are the big foreign trading houses along with a few Brazilian firms, such as Incopa. In poultry and pork Brazilian multinationals such as Sadia and Perdigao supply feed and veterinary services among other things to thousands of small farmers, then kill, package and ship the mature animals, often under their own brand. At Sadia's abattoirs in the southeastern state of Parana some 50m chickens a year face Mecca for slaughter.

In sectors where the processors are small, weak or sloppily run they are becoming less so. The intertwined requirements to export, invest in technology and food safety and raise external finance are encouraging the emergence of big companies that are transparent enough to withstand public scrutiny and strong enough to take over competitors.

Beef abattoirs are coming round. A decade ago Sadia withdrew from the business because it could not compete with tax-dodging firms. After a doubling of beef exports in the past five years, slaughterhouses are seeking respectability and scale, a trend that will accelerate after the shock of the foot-and-mouth outbreak. More than 20 large and medium-sized slaughterhouses have been sold or rented in the past year, says Marcus Vinicius Pratini de Moraes, head of Brazil's association of beef exporters. Among the acquirers is Friboi, which recently bought the Argentinian operations of Swift Armour. Sadia has re-entered the market.

Foreign investors will join in. Nordzucker, which will close two of its 15 sugar mills in Germany after a tribunal ruled against export subsidies, is scouting for mills in Brazil. Louis Dreyfus, a French company, has bought three sugar mills since 2000. Cargill recently acquired Seara, a poultry and pork company. According to the UN Conference on Trade and Development, $3 billion of foreign and domestic investment is poised to enter the alcohol sector. Beef processing will be another target.

The ideal is "farm-to-fork" food security, which would govern producers as well as processors, but is still some way off. Poultry processors already bring discipline to the "integrated producers" which supply them. Fruit is making progress. Mexican inspectors, familiar with the ins and outs of the United States' customs requirements, help pre-clear Brazilian mangoes for export. Some 500 growers of apples, grapes and mangoes participate in Brazil's "Integrated Fruit Production" programme, which is accepted in the EU. Many ranchers had imagined that their grass-fed beef, thus protected from mad-cow disease, needed no other credential. But the foot-and-mouth outbreak has imparted new urgency to Brazil's project of tagging and tracing each animal from birth to slaughter. About a third of Brazil's 200m-head herd meets this requirement. Friendliness to the environment is another demand with growing weight.

Transport is inching forward. The funnel for grain from the centre-west widened a bit earlier this year when Brasil Ferrovias, an ailing railway company, had its finances reconditioned, clearing the way for the expansion of Ferronorte, a line running from Mato Grosso to the port of Santos in Sao Paulo state. At its full capacity of 15m tonnes it will cut by 20-25% the cost of shipping out soya compared with the traditional route, through the port of Paranagua, says Paulo Fleury of COPPEAD, a business school in Rio de Janeiro. Santos itself is more efficient. Three years ago lorries queued up for 60 hours; the outsourcing of traffic management to a private consortium has cut the wait to 18 hours, says Mr Fleury. Santos has now eclipsed Paranagua as the main outlet for Brazilian soya. Much more needs doing. A new law allows private-public partnerships for infrastructure projects, but investors are still awaiting its implementation.

Farms v factories

Will the Doha round bring down barriers sufficiently to create new trade? America's recent proposal, which is aggressive on tariffs and export subsidies but timid on domestic subsidies, would create more trade than the EU's position, which leans toward slashing domestic support but would limit additional market access. This should somewhat lighten the atmosphere at this week's Bush-Lula talks.

But Brazil has its own inhibitions about the haggling ahead. Farmers fume that by pandering to competition-shy industries the government is spoiling prospects for a free-trade agreement between Mercosur, a trade grouping of four South American countries of which Brazil is by far the biggest member, and the EU. A proposed Free Trade Area of the Americas, to encompass all 34 western-hemisphere democracies, is in cold storage. Farmers fear that protectionist countries will exploit Brazilian defensiveness to stymie the Doha round.

Trade talks have also set industrial interests based in Sao Paulo and Manaus, seat of the electronics industry, against the agrarian centre, which is "gaining political weight," says Marcelo de Paiva Abreu, an economist at the Pontifical Catholic University in Rio de Janeiro. Free trade would hurt some industries. But thanks to sun, soil, science and water, Brazilian agriculture should be a sure winner.

Feature describes the growing importance of Brazilian agriculture and says that its inexorable rise as an agricultural superpower forms an important backdrop to WTO world trade negotiations;

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