Brazil Economic & Commercial Report Jan 2013

ECONOMIC &COMMERCIAL REPORT

Number 03 | January 2013Embassy of India

Brasília

Agriculture

2 | Economic and commErcial rEport

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Index

Editorial Board

Economic and Commercial Report

Number 01November 2012

Published by Embassy of India

BrasíliaSHIS QL 08 conjunto 08

casa 01 - Lago Sul Brasília-DF

Editor:Raj Srivastava

Texts:Yatin Patel

Layout:Hadassah Levyski

04 Brazilian Economy

12 Focus Story: REal-ity Check

14 2012 at a Glance


The first phase of the auction for some

7,500 Km of federal highways (seven

parcels) for private concessions

(toll roads) will be held on 30th January. Six

competing groups : CCR, Odebrecht, Invepar,

Ecovias, Triunfo and Acciona. Some “new rules”

will be part of this process: 1) if the lines of

vehicles at toll stations exceed 200 meters or

if takes longer than 15 minutes to go through

a toll station – these toll stations would have

to be “opened” (no tolls collected). The seven

parcels are 1) BR101 (Bahia) 772 Km; 2) BR262

(MG/ES) 377 Km; 3) BR50 (MG/GO) 426 Km;

4) BR153 (GO/TO) 814 Km; 5) BR060/153/262

(DF/GO/MG) 1,177 Km; 6) BR163/262/267

(MS) 1,423 Km; and 7) BR163 (MT) 822 Km.

Another auction is planned for April for 5,700

Km of federal highways. This auction will also

have some “new rules” - the bidders must have

net assets of between R$ 40 million and R$ 870

million depending on the parcel – to impede that

mid-sized firms assume several concessions.

The case in point was in 2007 when the Spanish

firm OHL (alone and not in a consortium) won

five of the seven concessions up for bid and

was unable to perform the needed investments

and had to “sell out” to a larger firm - Abertis.

New highway auctions in Brazil

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Brazilian Agency responsible for

auctioning of oil/gas blocks (ANP) now

plans to hold its 11th round of auction

for 172 blocks of oil/gas exploration in mid-May

2012. To this end, a detailed map of these areas

was published on 11th January – 120 days

before the auction is to take place. Of these

blocks, 87 are on-shore and 85 are off-shore.

The last auction was in 2008 and the same “local

content” rules will apply in this 11th round.

11th Round of Oil & Gas Blocks Auctions


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Amazon.comAmazon.com Inc and

Google Inc both opened their digital

bookstores in Brazil on Dec. 6,

hot on the heels of e-book offerings by local

booksellers in a fast-growing online retail market.

The simultaneous introduction of the

two services highlighted the wide-open

nature of Brazil’s US$12 billion e-commerce

market. Low Internet penetration and

a swelling middle class have spurred

bets on strong growth for years to come.

Amazon will begin selling its Kindle

e-book reader in Brazil in coming weeks for

R$299 (US$140), ending months of speculation

that it could arrive by acquiring a major

competitor. Brazil’s biggest bookstore chain,

Saraiva, is trying to sell its online busi¬ness.

In Brazil, the Kindle will take on Samsung

and Apple tablets that often cost as much as

twice their U.S. retail prices due to import tariffs,

steep taxes and inflated local produc¬tion costs..

The rival Google Play service will

offer e-books and movie rentals on

computers and mobile devices running

Google’s Android operating system.

Amazon Starts Brazil Operations


I The Spanish logistics firm OHL sold its

assets in Brazil and Chile to Spain’s

Abertis and Canada’s Brookfield.

Starting in 2007, OHL has captured

operating concessions for five federal highways

and four state highways in the state of São

Paulo, totaling 3,226 kilometers (2,004 miles).

These will now be controlled by the

Abertis-Brookfield joint venture in which

the Span¬ish firm holds a 51% stake.

Spain’s OHL Sells Brazil Assets

The government released the terms for a

Sept. 19 auction in which a concession

to operate a bullet train running from

Campinas to São Paulo to Rio de Janeiro will be sold.

The winning bidder will capture a

40-year concession to operate the train,

supplying the technology and the equipment.

Total investments have been estimated

at R$7.7 billion (US$3.7 billion) with the

government’s National Development Bank

(BNDES) providing 70% of the financing.

A second auction will be held to choose

the group that will construct the track with costs

estimated at R$27 billion (US$13 billion).

Bullet Train

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President Dilma Rousseff on Dec.

20 announced that airports in Rio

de Janeiro and Belo Horizonte will

be privatized at a September 2013 auction.

“International experience shows that

airports are good business,” Rousseff

said, recall¬ing that last February, 20-year

concessions were granted to manage three

airports, two in São Paulo and one in Brasília.

Rousseff said Thursday that any private

entities participating in the September auctions

will have to include at least one international

partner “with experience in running an airport

handling at least 35 million passengers a year.”

This operator must have “at least a

25% stake” in the consortium. Companies

with majority stakes in the operations of the

three airports already privatized will not be

allowed to take part in next year’s auction.

State company Infraero will have a 49%

stake in the new airport operators, the same

condition that was established for the February

privatizations despite Infraero’s poor reputa¬tion

as the current operator of Brazil’s largest airports.

Civil Aviation Minister Wagner Bittencourt

said the new operators will have to invest US$5.7

billion through the life of their concessions: US$3.3

billion for Rio’s Tom Jobim airport and US$2.4

billion for Belo Horizonte’s Confins airport. The

rules for the public tender will be announced in April.

Bittencourt also announced that the

government is creating a new state company,

Infraero Serviços, whose function will be to develop

regional airports. In an initial phase, the government

plans to invest US$3.6 billion to modernize

270 small airports. The longer term objective

is to upgrade 689 public airports, he added.

Airports of Rio and Belo Horizonte to be Privatized

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Taiwan, South Korea, Saudi Arabia

and Egypt joined Japan, China

and South Africa who had already

an¬nounced suspensions of imports after

it was learned that a cow in the southern

state of Paraná in 2010 had died with the

protein believed to cause mad cow disease.

Government officials on Dec. 21

warned these countries that they have until

March to lift their bans or else Brazil will file a

complaint at the World Trade Organization.

According to Agriculture Ministry officials,

these countries have no grounds for their bans.

“March is the deadline,” said Enio Marques

Pereira, Secretary for Animal and Plant Health,

after a meeting at the World Organization for Animal

Health (OIE) headquarters in Paris on Friday.

Brazilian officials have insisted that the

disease never appeared in the cow but the country’s

delay in reporting the case has raised suspicions.

The seven countries that have suspended

imports account for 15% of Brazil’s beef exports

but in the case of Egypt, the suspension applied

only to beef from Paraná, responsible for a small

portion of Egypt’s beef imports from Brazil.

Seven Countries Now Ban Brazil Beef

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According to a survey conducted

by the Federal University of Minas

Gerais, only 39% of Brazilians

have financial investments of any kind.

For the higher income classes A and B,

the total reached 52% but for classes C and

D it dropped to 29%. Among persons with

investments, the preferred investment was savings

accounts, accounting for 27% of the total.

Only 39% of Brazilians Have Financial Investments

Transparency International on Dec.

5 released its annual perception of

corruption among 176 countries.

Brazil was ranked 69th, an apparent

improvement from its 73rd position in 2011. But

this year TI altered its methodology, making it

impossible to compare the results with past years.

Among Latin American nations, Brail trailed

Chile, Uruguay, Puerto Rico, Costa Rica and

Cuba. Among the BRICS nations, Brazil and

South Africa were tied with the best rankings.

Brazil Ranks 69th in Corruption Survey

According to the Ministry of Education,

the public sector in 2011 invested an

amount equal to 5.3% of gross domestic

product in education. This was up from 5.1% in 2010.

The government, however, is far from

its goal of investments equal to 10% of

GDP by 2022 set by the National Education

Plan. At the current pace, investments

in ten years will total only 8% of GDP.

Education Investments Were 5.3% of GDP in 2011

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26January2013

Happy Republic Day


Agri-Gulliver in Lilliput

In the era of building the economic strength

on the pillar of Industrial production, Brazil´s

agricultural muscles bring quite an impressive

diversity which is as pleasant as the one in the

Amazon jungle. Brazil ranks third among the

world’s major agricultural exporters and fourth

for food products. By cultivating agricultural

and oil resources, Brazil also ranks second

worldwide for bioethanol production.

This quasi-miracle has few important

factors in its base. Brazil has largest arable but

yet to be utilized land reserve, strong exporting

agricultural activities, radical economic reforms

and an aggressive trade and influence policy.

Because of this, agriculture is still a driving

force of the Brazilian economy with 5.8 percent

of GDP (against 2 percent in France), and with

the agribusiness share reaching 23 percent. In

2009, agriculture accounted for 19.3 percent

of the labor force, or 19 million people, thus

strongly contributing to poverty reduction.

Agribusiness employment accounted for 2.7

percent of the labor force.

It is no surprise that Brazil is today the

world’s largest producer and exporter of a

wide range of products: soybean, coffee, cane

sugar, orange juice, meat and tobacco. In spite

of weak governmental support to producers as

compared with OECD countries, and a domestic

consumption that captures 79 percent of

agricultural production, agribusiness accounts

for over 38 percent of Brazil’s exports, and a

$77.5 billion trade surplus in 2011, while the

country was still a net importer of agricultural

goods in the 1970s. In fact, agriculture has been

Agriculture in Brazil


a strong factor in the country’s macroeconomic

stability through currency flows on one hand,

and on the other, its contribution to energy

security with bioethanol development.

A significant expansion of credit and the

simplification of the tax system, combined with

a social policy for the underprivileged sections

of the population under the Lula presidency

(2003-10) strongly helped companies, spurred

investment and boosted domestic consumption.

Still impacted by financial crises,

agriculture’s growth has accelerated starting

in 2003, partly thanks to a productivity model

based on high mechanization, improved

concentration and significant labor force

reserves. Encouraged to move away from

social conflicts linked to land overcrowding

and colonization of new production areas,

investment in agricultural research boosted

crop productivity by over 151 percent in 30

years.

In the framework of the ambitious

Growth Acceleration Program (PAC) launched

in 2007, followed by a second program

phase, investments in infrastructure should

also advance agriculture, which has been

long penalized in terms of logistics in the

country’s inland regions. The specialization

and development of single-crop farming,

together with man-made enhancement of soils

through pastureland expansion and irrigation,

have bolstered economic growth. Today, five

commodities (soybean, sugar, meat, corn and

milk) account for 68 percent of the total national

agricultural production value, with soybean and

related products making up 38.7 percent of

Brazilian agribusiness exports. It is interesting

to note the factors which is turning Brazil into

Gulliver when rest of the world is Lilliput as it is

struggling to gain agri-productivity.

Policy changesAgricultural policy goals and programs

in Brazil have changed significantly. The

period between the mid 1960s to early 1980s

was characterized by massive government

intervention in agricultural commodity markets

primarily by means of subsidized rural credit

and price support mechanisms, including

government purchases and storage of excess

supply. At that time, the agricultural sector in

Brazil was in general not competitive (except

in tropical products such as coffee and sugar),

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and was characterized by highly skewed

distributions of farm income and land ownership

with large, unproductive landholdings known

as “latifundios.” It was in the 1960s and 1970s

that the country started to urbanize as many

rural poor migrated to large cities. During this

period, agricultural policy had the objective

of promoting food security of an increasingly

urban population, while compensating the

agricultural sector for the anti-export bias of the

import substitution model that was common in

developing countries at the time.

The debt crisis of the late 1980s forced

the Brazilian government to decrease

support to farmers. But significant changes

in agricultural policy goals were introduced in

1995, which shifted priority to land reform and

family farming in an attempt to alleviate rural

poverty. This shift in agricultural policy goals is

reflected in government expenditures in a new

focus area called the “agrarian organization”.

Agrarian organization programs are primarily

related to land reform. Approximately 500,000

new family farms were settled in expropriated

land. In addition to land reform, the government

adopted a set of policies targeted to “family

agriculture” in 1995 - known as PRONAF -

including subsidized credit lines, capacity

building, research, and extension services.

Interestingly enough, the Brazilian

government created a new ministry in 2000 to

run programs targeted to family farms and land

reform - the Ministry of Agrarian Development

(MDA). Brazil is probably the only country in

the world with two ministries of agriculture.

This reflects a supposed duality of farming in

the country - related to the skewed distribution

of rural income and land ownership - and

the misleading perception that agribusiness

development necessarily leads to small farmer

exclusion. According to the 1995 Census of

Agriculture, farms with less than 10 hectares

(24.7 acres) represent 49.7% of all farms in the

country and hold 2.2% of all landholdings. With

more than 500 hectares (1,235 acres), the

largest farms represent only 2.2% of all farms,

but own 56.5% of all landholdings.

Federal government expenditures on

agrarian organization programs increased

from 6% in the Sarney administration to 45%

of total expenditures on farm programs in the


The Brazilian government created

a new ministry in 2000 to run

programs targeted to family farms and

land reform - the Ministry of Agrarian

Development (MDA).

Lula administration which started showing

results.

ModernizationFostered by rising incomes, urbanization,

economic liberalization, and access to

competitive raw materials, multinational food

processors and retailers entered or increased

their investments in the Brazilian market during

the 1990s. Increased foreign direct investment

(FDI) by large, private agribusinesses in Brazil

displaced domestic competitors, increased

industry concentration, and eliminated many

medium and small companies. As a result,

the market share of multinational corporations

in the domestic food market increased. For

instance, Brazilian affiliates of multinational

agri-food companies generated 137,000 jobs,

almost US$5 billion in exports, and sales of

US$17 billion in 2000. Given the total value

of food industry shipments in Brazil of US$58

billion, the aggregate market share of foreign

companies reached 30% in 2000. Among the

top ten food processors in the country, eight are

multinational firms with foreign headquarters.

Recent official data show that FDI inflow in the

Brazilian agri-food processing industry totaled

US$8.2 billion between 2001 and 2004. The

top-three food retailers in the country are now

controlled by two French supermarket chains

(Casino and Carrefour) and one US-based

company (Wal-Mart), with a combined market

share of 39%.

Concomitant to these structural changes

in the post-farm gate stages of the agri-

food system, agricultural production also

modernized and became increasingly capital

intensive and integrated with upstream and

downstream supply chain participants. Tightly

coordinated agri-food supply chains have been

developed by the private sector - in particular,

large multinational food processors, fast-food

restaurant chains and retailers - to cater to

increasingly differentiated domestic and export

markets. It must be noted that farmers in Brazil

are increasingly exposed to markets that are

much more demanding in terms of food quality

and safety, more concentrated and vertically

coordinated, and more open to international

competition.

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Research in full throttle

Agricultural research is not new in Brazil.

It began to take shape in the mid-1970s, when

government launched Embrapa, a research

institute that now exports its expertise in tropical

agriculture to countries in Africa and Asia. Over

the last 10 years the arrival of the genetically

modified grains and growing investment in

farm mechanisation laid the groundwork for

the current boom.

Brazil’s agriculture fulfils the country’s

needs in almost all sectors - with wheat being

the only significant import.

“The research in tropical agriculture in

Brazil is really impressive. Productivity has been

increasing a lot and the country is diversifying

its output,” Says Dr Guilherme Dias, professor

of rural economy in the University of Sao

Paulo.But with domestic markets growing at a

slower pace than the output, the only way for

producers is to look abroad.

Rise of MachinesA growing number of farms in Brazil

are becoming mechanised. According to

industry data, sales of farm machines in Brazil

increased 52% in the first four months this

year compared with the same period of 2009.

The government has some programmes to

boost the sales of tractors to small farmers

and it seems to be going well. But lack of skill

is still one issue to be solved. Cheap labour

has played a great part in the development of

Brazilian agriculture, but on the other side, a

lack of qualified workers is hindering further

growth. “The machinery we sell has quite a lot

of technology on board. Sometimes it’s hard

to find people with qualification to operate

them,” says Walter van Halst, a reseller of farm

machines in the town Ponta Grossa.

Tudo BemBrazil shows a different way of striking a

balance between farming and the environment.

The country is accused of promoting agriculture

by razing the Amazon forest. And it is true that

there has been too much destructive farming

there. But most of the revolution of the past 40

years has taken place in the cerrado, (Tropical

savanna eco-region of Brazil) hundreds of miles

away. Norman Borlaug, who is often called the

father of the Green Revolution, said the best

way to save the world’s imperiled ecosystems

would be to grow so much food elsewhere

that nobody would need to touch the natural

wonders. Brazil shows that can be done.


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Renuka do Brasil is one of the 10 largest

sugar/ethanol producing groups in Brazil,

in business for more than 30 years. In the

middle of 2010, Shree Renuka Sugars Limited

acquired the controlling stake of the company.

The installed milling capacity is of 10.5

million tons divided between Mill Madhu, in

Promissao, and Mill Revati, in Brejo Alegre,

both cities located in the state of Sao Paulo,

the largest sugarcane producing region in the

world.

Renuka do Brasil

Among its principal products are: sugar,

ethanol, bioelectricity, and yeast. Renuka

do Brasil has an amply integrated structure,

controlling not just all the industrial processes,

but also all the agricultural processes, such

as planting, cultivation, harvesting, and cane

transport.

SRSL acquired RdB from Grupo Equipav

on July 7, 2010 and holds currently 59.4%

equity stake.

RdB is one of the largest sugar/ethanol

companies in Sao Paulo state in Southeast

Brazil. Facilities include two modern mills and

integrated co-generation capacity- Madhu

(Equipav, erstwhile) and Revati (Biopav,

erstwhile).

RdB has a crushing capacity of 44,400

TCD or 10.5 million tons/yr to produce sugar

which is sold in domestic as well as export

markets. Distillery has a capacity of 4,000

klpd to produce both hydrous and anhydrous

ethanol for Flex-fuel cars as well as industrial


needs. RdB generates 221 MW of exportable

power. Owned cane plantations at RdB cover

78,000 hectares of land.

SRSL acquired 100% of Renuka Vale do

Ivai on 19th March, 2010.

RVdI has two mills – São Pedro do Ivaí

(PR) and Cambuí (PR) – in the state of Parana

with surrounding own cane plantations on

28,000 hectares of land.

Proximity to ethanol distributors and the

port of Paranagua (551 km) along with the

stake in logistics companies and a port terminal

ensures lower logistics and export costs.

RVdI has a crushing capacity of 15,120

TCD or 3.1 million tons/yr to produce sugar for

domestic as well as export markets. Distillery

has a capacity of 1,310 klpd to produce both

hydrous and anhydrous ethanol.


The year that has just gone started with

some bright promises for currency speculators in

Brasil as they were buying Brazilian real at 1.833

against USD and were thinking that happy days

are to be here forever. Unfortunately for them no

story gets finished in January. On 27th December,

2012 Real was at 2.04 against USD and those

speculators lost their banquet, if we believe

Mr. Guido Mantega, finance minister of Brasil.

Extremely cheap borrowing rates in USA

and Europe enabled speculators to borrow money

at dirt cheap rate and they used to pump it into

Brazil into government bonds which generally

had really high rates. From sky-high rate, it was

impossible for the government to pump money

in the market to stimulate the flagging economy.

This brought sky-fall for those who earned their

bread-butter and Ferraris from speculation.

Brazil responded by implementing targeted

capital controls, while the Brazilian Central

Bank moved to slash interest rates--from an

August 2011 high of 12.5% to a record-low

7.25% in October 2012 which triggered outflow

of US dollars from the country. Government

was not in mode of intervention as long as

rates prevailed in the range of 2.0 to 2.10.

“We will continue working for a weak real

to boost competitiveness of Brazilian firms,”

Mantega told a group of business people in an

event on 29th August, which was also attended

by President Dilma Rousseff. Tough talk from

government officials and currency-market

intervention by the central bank then kept the real

trading between BRL2.00 and BRL2.10, a range

that the market perceived as being “comfortable”

for the government, from July through November.

But when Brazil reported weaker-than-

expected economic growth in the third quarter,

chatter that the government would consider a

weaker informal trading band between BRL2.10

and BRL2.15 caused the market to test the

central bank’s resolve amid a pickup in dollar

outflows. The bank remained on the sidelines

until the currency approached BRL2.14, when

the bank sold dollars into the spot market

Some traders, however, said they believe the

Real-ity Ch eck


real’s year-end weakness raised concerns at the

central bank about a spillover of inflation into 2013.

Inflation is expected to end 2012 at 5.7%, above the

government’s 4.5% target but within the tolerance

band of plus or minus two percentage points.

“In 2013, monetary policy should remain

stable,” said Reginaldo Galhardo, foreign-

exchange manager at Sao Paulo’s Treviso.

“But the foreign-exchange rate has turned into

a way to lower inflation, not increase economic

activity.” Mr. Galhardo said he expects the real

to trade between BRL2.00 and BRL2.10 to start

2013, but warned that the market shouldn’t be

surprised if the currency trades below BRL2.00.

Theory of relativity seems cakewalk in

comparison of predicting currency market of

Brazil. So if we take a leaf from book of Mr.

Mantega, we have heard this from him. “The

currency war is not over, but I can say that we

are better positioned and we reversed a trend

that was bad for Brazil, avoiding the inflow of

speculative capital.” 2013 will be all rock and roll.

“In 2013, monetary policy should remain stable”

Reginaldo Galhardo

namaste

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Brazil Economic & Commercial Report Jan 2013