The Future of Brazilian Agriculture

Soy expansion comes at a cost

Brazil’s soybean production has increased impressively over the past 20 years. In 1997, Brazil produced 27.3 million tonnes of soybeans, enough to be the the second largest producer in the world, but well behind the US’s 73.2 million tonnes. When US production dropped from 85 million tonnes in 2006 to 72.9 million tonnes in 2007, Brazilian production rose from 57 million tonnes to 59 million tonnes. A decade later, Brazil produced 114 million tonnes of soybeans compared to 120 million tonnes by the US.

Exports to Asia have been crucial to Brazilian soybean production growth. In 2007, the country’s exports were divided fairly evenly between Asia and the EU, with exports of 13 million tonnes and 10.2 million tonnes respectively. By 2013, China’s insatiable appetite for protein had decisively tipped the scales in Asia’s favor with the country importing 33.2 million tonnes all by itself.

Forecasters see a bright future for Brazilian soybeans. A cheap Brazilian real led to increased exports in 2017. That was welcome news for Brazilian farmers whose record harvest was being heaped in the streets due to a lack of storage space. It’s too soon to predict this year’s harvest because the 2017-2018 season just began. However, soybean acreage will likely increase as more farmers look to plant more profitable soy in lieu of corn.

As Brazilian farmers benefit from increasing soybean acreage, the environment pays through deforestation in the Amazon. Whereas farmers tend to redistribute only small percentages of acreage to or from soybean production, massive areas have become available through destruction of forest land. Soy acreage continued to grow even after the Soy Moratorium in 2006 banned the direct conversion of rainforest to soy fields. Farmers have skirted the moratorium by repurposing abandoned land previously cleared by cattle ranchers.

Deforestation driven by soy goes beyond land cleared for planting. Brazilian infrastructure has yet to catch up to soybean farming’s rise and the government is struggling to close the gap. Paved roads, a recently approved railroad, and a proposed 1,600 kilometer waterway development across the Amazon will all significantly alter and negatively impact the environment. The government continues to support plans that will lead to increased deforestation despite a global outcry.

The tension between business and environmentalists will continue even if there’s legislation with enough teeth to prohibit further deforestation. That would make it harder for soybean acreage to dramatically increase to meet soaring demand. Such legislation seems unlikely while President Michel Temer deals with a widespread corruption probe that continues to unfold in surprising ways.

Beef scandal continues to simmer

The Brazilian meat industry has been embroiled in a six-month corruption scandal that has ensnared government officials, CEOs, and plant inspectors. In March, Brazil Federal Police launched what the local media called “Operation Weak Flesh” to investigate allegations of tainted meat being mixed in with fresh meat for export. Bribery allegations followed along with the arrest of 30 meat inspectors.

Initially, the probe was waved off by officials stating that these events were isolated crimes committed by a few corrupt individuals. JBS and BRF—the world’s largest beef producer and country’s largest poultry exporter, respectively—were at the center of the investigation. Meat exports dropped to near-zero levels and countries proposed long-term bans on Brazilian beef and poultry until their safety could be assured. The scandal cost $250 to $300 million.

Current JBS CEO Wesley Batista and ex-chairman Joesley Batista agreed to a plea deal in May in which they admitted to bribing 1,800 officials. Satisfied importers returned to the market. Meat exports soon rebounded with only a few scattered reports of banned sales throughout the summer. However, the good news was short-lived.

Scandal returned in September after Joesley Batista was arrested for alleged insider trading. Wesley was arrested soon thereafter. Out of necessity, their father and JBS founder Jose Batista Sobrinho returned as CEO. Brazilian development bank BNDES wants to oust the Batista family entirely from the board. Unfortunately for BNDES, the Batistas own 42 percent of the company, as opposed to the bank’s 21 percent. Furthermore, the corruption probe could ensnare Brazil’s agriculture minister and even President Temer.

Despite the turmoil, JBS remained profitable for the first half of 2017 and beef exports are at a near-record of 1.91 million tonnes for 2017-2018. This supports the idea that the meat scandal may be easily forgotten after a few incident-free years.

Sugar is in a rut

Unlike the meat industry, the Brazilian sugarcane industry remains in a multi-year rut. Sugar prices declined from their peak in January 2011 and did not recover until August 2015. During that time, Brazil’s gross domestic product (GDP) faced a similar decline. But unlike sugar prices, the country’s economy has yet to fully recover.

Sugarcane mills have been especially hard hit by the economic downturn. Low sugar prices hurt the price of their product, and a declining Brazilian real caused their foreign-denominated debts to become unserviceable. Many mills closed and others filed for bankruptcy protection.

Millers looked to ethanol production as a lucrative alternative to unprofitable sugar, but ethanol demand depends on growing vehicle demand. New motor vehicle sales follow the strength of a country’s economy. Flex fuel vehicles, which can use ethanol or gasoline, make up the majority of new vehicles in Brazil. After hitting a peak in 2012, flex fuel vehicle sales declined along with overall vehicle sales and Brazil’s GDP. New motor vehicle sales, much like the economy, have yet to fully recover.

Whereas other industries have optimistic outlooks, the future appears bleak for Brazil’s sugarcane industry. Even if sugar prices climb higher, Brazilian sugar faces competition from EU beet sugar. While sugar production remains at record highs and consumption is at near-record levels, food and beverage industries have been introducing new products or alternative sweeteners in a bid to appeal to more health conscious consumers.

A cautiously optimistic future

Brazilian agriculture remains a bright spot for the country despite the concerns and scandals. An uncomfortable balance of increased production and expression of environmental concern seems to be placating global observers for now. Recently, environmentalists could claim a rare victory in after Brazil reversed its stance and reinstated a mining ban for a forested Amazon area roughly the size of Denmark.

So far, meat importers have been satisfied with the thoroughness of Brazil’s “Weak Flesh” investigation. Only a handful of countries, representing a small fraction of global business, continue to impose bans on Brazilian meat. There is some concern that the JBS scandal could lead to the ouster of the country’s agricultural minister or the impeachment of President Temer. That, however, will only be the fallout of a concluded investigation and will unlikely have an impact on meat exports.

There’s less certainty for the future of the sugarcane industry. If Brazil’s economic health improves, possibly buoyed by the strength of the agricultural sector, new motor vehicle sales will likely increase. That could, in turn, rescue some beleaguered sugar mills by boosting ethanol demand.

Beyond these industries, one can be bullish on Brazilian agriculture with only a few reservations. Brazilian cotton production looks to be on the upswing based on increased global demand. Brazil recently cut arabica production after poor weather and a pest infestation. Robusta coffee, which is used primarily in instant coffee, production increased year-over-year. Brazil has successfully weathered recent turmoil, but enough problems remain that it’s safe to recommend careful monitoring in the coming months.