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The Great Brazilian Land Grab

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Mike

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Forbes Magazine July 25, 2005

Brazil is fast becoming the globe's agri-powerhouse. Behind its impressive rise: an epic 19th century land grab occuring at a 21st-century pace.
WHen Walter Horita, a second-generation Japanese-Brazilian, staked his first claim in the raw savannah of Brazil's interior, back in 1984, there were no roads, telephones or running water in this stretch of the state of Bahia. Bandits had just murdered his neighbors and taken their land. Undeterred, the 20-year-old lived under a black plastic tarp as he cleared the first 420 acres of armadillos and anacondas for modest crops of soy and rice.

Twenty years later Walter Horita's pilot is flying him in his twin-engine Beechcraft over his 74,000-acre estate, tidy homesteads and blindingly white, high quality cotton fields that are nearing harvest and are collectively worth an estimated $60 million. "That was one of my best buys," Horita suddenly yells over the plane's engines, pointing down at the lush fields.

In 1998 Horita spent $60 an acre on a 17,000-acre farm, which, just seven years later, is worth at least $700 an acre. And there's still room for appreciation. The best cropland in the American Midwest goes for $4,000 to $5,000 an acre, even though the profits in the subsidy-dependent U.S. are a fraction of what Horita achieves in Brazil. The U.S. Department of Agriculture calculates that the subsidy-free cotton farms in Horita's region had 35% profit margins on average last year. Today's low cotton prices have pushed margins down to 15%, but in 2003, because of poor U.S. crops and high demand from Asia, farms like Horita's cleared 60% to 70%.

A giant arbitrage is about to take place on the world agricultural market. Farmers will sell--already are selling--overpriced American and European farmland and are buying underpriced Brazilian farmland. Add to the existing economics a possible reduction in agricultural subsidies--it may yet happen--and you have the makings of a transfer of farm wealth from the northern to the southern hemisphere.

While developing China emerges as a manufacturing hub and India as the service industry's back room, Brazil--in the words of former U.S. Secretary of State Colin Powell--is becoming an "agricultural superpower." In the last several years Brazil has become the world's largest exporter of beef, soybeans, coffee, orange juice, sugar and chicken. The bumper crops are one big reason why President Luiz Inácio Lula da Silva's left-leaning government could claim a 5.1% real GDP growth rate last year.

Soybeans are Brazil's showcase crop. The high-protein bean couldn't tolerate conditions along the equator until two decades ago, when Brazil's agriculture department created strains capable of growing in the country's interior. Today, having added 30 million acres of soybeans since 1995, the nation is the world's largest exporter of soy products.

Brazil is number four in pork, for example, but probably not for long; its global market share has jumped from 4% to 13% since 2000. Last year Brazil established a legal precedent when it successfully challenged U.S. cotton subsidies before the World Trade Organization. "We want farmer to compete against farmer, not farmers against the U.S. Treasury," says Pedro de Camargo Neto, the former agriculture official who originated Brazil's successful challenges to U.S. cotton and European sugar subsidies.

Of course, Brazil practices its own protectionism in other sectors. Also on the debit side: its dysfunctional judicial system, corrupt legislature and mind-boggling bureaucracy. According to the Pensamento Nacional das Bases Empresariais, a national association of small and medium-size businesses, 10% to 20% of Brazil's GDP disappears in graft. A federal minister found 90% of the municipalities he audited had "misused" 20% to 30% of the public resources under their control, and allegations of congressional vote-buying are unraveling President Lula's coalition government. Brazil's tax burden is higher than Germany's. (And complicated: Tax rates on fertilizer changed three times last year.)

Brazil is a violent place, not just in the favelas of Rio de Janeiro. Outside the Ordem Terceira de São Domingos church in Salvador, as if on cue for an approaching reporter, a thug emerging from a bar pulls a rusty revolver from his shorts and aims it point-blank at a man and a barking dog. Brazil's homicide rate is 19 per 100,000, triple the U.S.' rate.

No surprise, then, that farming in Brazil is a rough way to make a living. But Brazilians who know how to dodge the criminals and the bureaucrats name their farms Eldorado and Ouro Verde (Green Gold) with good reason. According to a recent Credit Suisse First Boston study, total production costs in the U.S. heartland are $235 an acre; in Brazil's heartland, where transportation to faraway ports is a huge expense, those same costs are still just $162 an acre. The USDA estimates that the average soy farmer in the Brazilian state of Paraná enjoyed a 51% profit margin last year. Corn producers in Bahia cleared 44%; cotton earned 39% in Mato Grosso.

Land holdings are concentrated. The million-acre farm of the Maggi family in Mato Grosso is 50% larger than the state of Rhode Island; many Brazilian farms have between 30,000 and 200,000 acres. Not all of them represent inherited wealth. The feverish run-up in land values has enabled some daring entrepreneurs like Walter Horita to amass huge holdings overnight.

Let's visit the western Bahia town of Luis Eduardo Magalhães (LEM) to see how this boom is playing out. The town of 45,000 more closely resembles Wild Bill Hickok's Deadwood than it does Council Bluffs, Iowa. Two decades ago LEM consisted of a single poacher of emus, surrounded by wild savannah, selling gas from a barrel at a bend in a dirt road. American farmers were among the first to spot the region's reliable sun and rain and the flatness of its plateau. They knew lime could correct the poor soil quality of the savannah that Brazilians call cerrado. When their crops flourished in the "worthless" land they had claimed through a Brazilian homestead act, well-connected bandits called grilheiros--named after the desiccated crickets the bandits used to "age" forged property deeds--murdered three of the four pioneering American farmers. Clay Earl--a son of one of the murdered farmers, who, as a boy, repeatedly helped defend the family farm during shoot-outs--says "it was just like the far West 150 years ago."

The land seized in the Bahian land wars that raged between 1978 and 1985 was eventually parceled and sold off to young Brazilian farmers moving up from the southern states. Because of hyperinflation and Brazil's regular currency crises, farmland is to this day priced in 132-pound soybean "sacks," not cash, and farmers routinely plow their profits back into more land.

Olmiro Flores de Oliveira says when he started in Bahia, "one lunch bought 10 hectares [25 acres]." Today Flores owns 30,000 acres of land--worth 70 times what he paid a decade ago--and he has added to his empire John Deere and Mitsubishi franchises. Jao Vadim (we can't use his real name for security reasons) is a soft-spoken Brazilian who owns 22,000 acres, 13,000 of them virgin cerrado. Vadim is producing 4,700 pounds per acre of cotton and clearing 40% after expenses. Corn at 8,600 pounds per acre clears 34%, soybeans at 3,400 pounds per acre 29%.

The transformation of Brazilian land is in its early stages. The U.S. and Brazil are roughly the same size, but Brazil has only 5% of its land devoted to crops, compared with the U.S.' 19%. Even without touching the environmentally sensitive Amazonian jungle, Brazil could, with modest investment, add another 420 million acres of farm crops--the equivalent of America's entire agricultural space--mostly by converting underutilized pasture land and cerrado.

Last year De Oliveira's Deere dealership in LEM sold 388 tractors, combines, planters and cotton pickers, farm vehicles costing between $28,000 and $340,000 each. "The U.S. land rush took place over a century," says Michael Shean, an agricultural researcher. "It was 10-acre plots awarded by government and half a million farmers going out West in wagons. Brazil, in contrast, has opened up an enormous amount of land in five years, using modern technology and financing."

LEM's population has almost quadrupled in five years and is still growing at a 20% annual clip. In its shantytown mangy dogs and lice-covered children move warily among the red-dust lanes, where there were 300 bars and 97 whorehouses at last count. The latest knifing makes the paper--complete with bloody pictures from the morgue--and the town's evangelical Baptist pastor, normally holding services in his garage, voluntarily locks himself inside the overcrowded jailhouse to preach the gospel to 60 prisoners forced to sleep in shifts on 12 cots.

But, a few streets over, sticks in the ground represent the future agricultural museum and town hall; bulldozers are clearing ground for neighborhoods. Down the road from the Massey Ferguson and Case dealerships, Cargill's silos and Bunge's soybean plant are working around the clock.

A lot of the wealth is hidden. Miguel Carvalho is a 73-year-old farmer with nine children. Outside his homestead is a mud-rutted lane filled with rusted farm equipment; the chair in his office behind the eucalyptus windbreak is tied together with pink twine. No sign that Carvalho is sitting on 1,000 head of cattle, prized coffee bushes and land worth $20 million. Carvalho paid mostly $8 an acre for land worth around $700.

Not far from Carvalho, Paulo (Loco) Borges shuffles in mismatched flip-flops around a mountain of dirty soybeans, cursing the shuddering machine meant to separate the beans from unwanted twigs and debris. Borges sold $12 million worth of land this year.

At LEM's brand-new gated "Cotton Residence," next door to the competing "Soy Bean" and "Corn" developments, opulent villas with satellite dishes and sold-but-not-yet-built-upon lots for millionaire farmers sit behind spitting fountains and guards with pistols at their hips. Last November a farmer's 10-year-old son was kidnapped at gunpoint in the next town over; he was released only after other farmers passed the hat and helped the family scramble together the $200,000 ransom.

Well-financed U.S. and European investors are moving in to compete with Brazilian natives, redeploying their low-cost capital in high-return Brazil. Young American farmers in particular, financed by an older generation of farmers diversifying away from expensive cropland in the U.S., are coming down to Bahia to make their fortune. The Buenos Aires-based Adeco Agropecuaria is already one of the biggest landowners in Argentina, with 222,000 acres, and is now diversifying its commodity and climate risk by moving heavily into Brazil. Hertz FarmManagement, an American firm headquartered in Nevada, Iowa, is sinking clients' money into western Bahia, as HSBC and Holland's Rabobank move into the region alongside the agencies representing Monsanto, Bayer and Syngenta products.

The Hotel Saint Louis is a year-old hotel rising ten stories out of LEM's red-dust streets. Brazilians, Americans, Dutch,French, Swiss, Japanese and Germans are in the garden restaurant, drinking lime juice laced with sugar cane spirits as they swap tales from the front: $100,000 worth of uninsured chemicals stolen from a farmyard; a foreign farmer unwittingly caught up in his neighbor's bank fraud and in danger of having his own cotton crop seized by the bank.

Fortunes will be made here, and fortunes lost. And, probably at a slower pace, fortunes will be lost on the overpriced pampas of Iowa and the Loire Valley. Soybeans and sugar are getting outsourced.
 

mrj

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I wonder.......maybe what is "new" about all this is the quick information era and media coverage.....my grandfather-in-law, Tom Jones, considered leaving the USA and going to South America, not certain if it was Brazil or another country) early in the 1900's because land prices here were too high for ranchers during a farming boom time.

Something else to wonder about......how many times has the government/bandits caused the Brazillian "boom-times" to go bust in the past century?

MRJ
 

Mike

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MRJ said:
I wonder.......maybe what is "new" about all this is the quick information era and media coverage.....my grandfather-in-law, Tom Jones, considered leaving the USA and going to South America, not certain if it was Brazil or another country) early in the 1900's because land prices here were too high for ranchers during a farming boom time.

Something else to wonder about......how many times has the government/bandits caused the Brazillian "boom-times" to go bust in the past century?

MRJ

It was common practice for Southerners to migrate to South America after the civil war due to the ruination of infrastructure (carpetbaggers) in the south.
Also, Germans moved to Brazil in droves during and after WWII.
Problem was........ they could barely eke out a living because of the transportation problems of shipping goods out of the country.

There is another section to this article that I will post that puts this article into perspective. It is about the Big American Corporations investing in farming in Brazil and S.A. and competing directly with the American Farmers and Ranchers. So far I am undecided on my stance concerning these practices, but when the competition is the big corps and results in lowering my profits I must look them carefully.
 

pointrider

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I don't suppose there are any cow-calf producers in this forum that would consider buying or leasing some land in Brazil and setting up a Brazilian division of a new global enterprise? Then you could look at Australia and Argentina.

I'm just kidding (today). I can't even find a Montana rancher who is interested in starting a new division in Missouri or Oklahoma or Wisconsin even though the overall regional shift is occuring. This is why commodity agriculture works like it does. We have to go through all the losses of farms and ranches because of people refusing to do business the way big business does business until there are only some big businesses left. Then, they go to Mexico and Brazil and all kinds of places.

The poultry industry evolved like this, and now Tyson and Pilgrim's Pride are major players in Mexico. Some day we will hear about large ranching operations buying into or buying out ranchers in Brazil - or vice versa. Which way do you think it will be?

I think more ranches will be bought into and bought outright in Brazil because of land prices and property tax issues as well as labor costs, etc. Maybe an investment club would work for some of you. You could pool your resources and buy into the game that way. You might have some fun, and it would probably be real profitable, too. That way the guys and gals won't have to leave "Big Sky Country." They can just hire a manager to oversee the fund and the operations.

What do you think?
 

Mike

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Brazil co-op has U.S. partner

compiled by BEEF staff

Apr 1, 2005 12:00 PM

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The difficulty of marketing cattle to meatpackers is driving Brazil's cattle breeders to build their own slaughter and processing plants. In Paraná state, Corol Cooperative Agroindustrial plans to build a plant with an initial harvest capacity of 500 animals/day, investing $33.9 million (US) in a joint venture with a “U.S. company.”
Primedia Business - Beef Magazine, Click Here!

About half the capital will be foreign and the rest raised through bank financing. Corol officials won't specify which U.S. company is involved, and a canvass of the larger U.S. meat packers didn't turn up any admitted candidates. Corol execs estimate the joint venture will be formed in a month.

The project stipulates each cattle breeder will have a quota of animals to deliver each month. The plant will have the potential to increase production to 2,000 animals within four years. Production will be bound for export markets.
 

Mike

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Brazil Looks North

By Clint Peck Senior Editor

Jun 1, 2002 12:00 PM

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You'll probably never meet Marcos Minghini, Liza de Paulo or João Vinicis Pratini de Moraes. But, the trio represents a looming competitive threat to U.S. beef producers.
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Minghini is a Brazilian cattle farmer, while de Paulo is a scientist for a large Brazilian agribusiness. Pratini de Moraes is Brazil's agriculture minister and may be the most powerful, yet underrated, agripolitico in the world.

Already boasting the planet's largest commercial cattle herd, Brazil is clearly a formidable player in today's international beef market. But, with 165 million cattle currently grazing 370 million acres, Brazil could put another 180 million-200 million acres into production — “without cutting down a single tree,” as Pratini de Moraes says. These areas of undeveloped savanna equal the size of France and Germany — or Texas and New Mexico.

The Brazilian beef story grows more ominous.

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Production costs are a third to half of what American ranchers face. Brazil's costs are better compared to Australia's grass-fed beef system, however, but even then, Brazil wins out — at a 15% lower cost of production.
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Brazil is close to removing foot-and-mouth disease (FMD) as an export impediment. Its economy and political system are relatively stable. And recently, Brazil has filled the beef production void left after Argentina's economy and political system crashed last fall.
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Beef exports, along with sugar, orange juice, coffee, soybeans, poultry and pork, are seen as Brazil's pass into First World status.

“Europe is our biggest trade partner, and we will do everything possible to grow those markets,” says Pratini de Moraes. “But, we also know there are other areas where we can gain markets for our beef and other agricultural commodities.”

He's talking about the U.S., and the Brazilian agriculture minister has been in close dialog with U.S. agricultural and trade officials on market access, gradual elimination of export subsidies and revision of internal supports where they affect external markets.

How all this bodes for U.S. beef producers is becoming very clear.

“We can compete very well with any beef producers in the world,” Pratini de Moraes says. “Agriculture will be a focal point of all world trade negotiations in the next few years — and we know we have a strong position from which to negotiate.”

Pratini de Moraes believes improving the income of rural-based people and keeping them from moving into the already over-crowded cities is critical for his country's advancement. And, he believes that agricultural development must come via market channels, not at taxpayers' expense.

“We're not going to reach those goals through artificial methods,” he says firmly. “We do not subsidize farming,” he adds, though admiting some “family farmers” receive special tax credits to adopt certain state-of-the-art practices, but the credits have to be re-paid.

“In today's world, the competition is no longer between farmers — the competition is between treasuries,” says Pratini de Moraes. “Our treasury cannot compete with the U.S. treasury or the European treasuries.”

Agricultural subsidies are not only expensive, he says, but harmful to farmers in all countries.

“Every country should protect its agriculture,” he says, “but we think it is wrong when the form and level of support depress international prices.”

Pratini de Moraes is especially critical of export subsidies, which he says distort international trade and carry “an enormous social impact on people of the world.”

He points out that last year the U.S., Japan and the European Union combined to dole out more than $1 billion/day in agricultural subsidies.

“If the rich countries would give 10% of what's spent in subsidies to help feed the world, there would be no more hunger on Earth,” he says.

It's a sentiment widely held by Brazilian beef producers. For instance, Marcos Minghini, a medium-sized beef farmer (300 cows) from the southern state of Paraná, has a hard time understanding why he should be asked to compete against producers in subsidized countries.

Like American producers, Minghini says he's wants a level playing field. “If other countries would reduce their barriers and subsidies, we could compete on the same basis,” he says. “We could compete against anyone if it were simply a matter of markets.”

Francisco Luiz, president of the Sociedade Rural do Paraná — a group similar to a state farm bureau — understands why Europe and America subsidize their food systems.

“We understand these countries think it is necessary for national security. What we can't understand is why they impose quotas, tariffs and unscientific sanctions that rob others of the opportunity to compete in international markets,” he says.
Packers And Production Alliances

Export competition isn't the only thorn in the sides of Brazilian beef producers. They also deeply distrust meat packers, who they view as an impediment to competition.

About 90% of all market cattle are sold directly to Brazilian slaughterhouses, the majority of which are small and inefficient by U.S. standards. In Paraná, for example, 33 facilities kill an average of 200 head/day. Another 81 kill 60 head/day. Paraná also has some larger “conglomerate” slaughterhouses — but they're few and far between.

Beef farmer Edson Gaudêncio, Santo Antonio, Paraná, says this packing structure catches most Brazilians between a rock and a hard place.

“With the small slaughterhouses, you never know when you will get paid,” he says. Cattle checks often take more than a month to be delivered. “And the bigger slaughterhouses that can guarantee payment sometimes form cartels to develop one price among them,” he adds.

Gaudêncio and his neighbors are trying to find other routes to domestic and international markets. They're selling custom-processed beef directly into retail outlets. Last year, 10% of Gaudêncio's production from his 400 cows was sold through the international Carrefour® supermarket chain.

“This concept is new to us, and we're still working to make it better,” he says. “Maybe someday it will allow us to get around dominance by the big slaughterhouses and the uncertainly of payment from the small slaughterhouses.”

The Brazilian cattle industry is based on “natural” production. Loosely translated, cattle are grown with no added hormones. But natural production goes a step further at Fazenda São Miguel, one of southern Brazil's showcase cattle farms. Part of the family-owned Independência agricultural company, São Miguel has become a model for large-scale, organic beef production.

About 12,000 of São Miguel's 65,000 head grown each year are “fattened” organically on its lush grasslands. The organic beef, along with most of São Miguel's traditional production, is exported to Chile, Argentina and Europe.

No fertilizers, antibiotics or vaccines are used in these organic operations. And, it's working better than anyone at São Miguel expected.

“To our surprise, we've found it's easier and more economical to raise beef organically,” says João Mella, a cattle buyer for Independência. “We're also receiving 25% better prices in the organic beef market.” Mella says he passes 10-12% in added profits back to the organic calf producers he buys from.

Key to this system is biochemist Liza de Paulo. She makes sure strict international organic production rules are followed at São Miguel.

“We are constantly testing our production — and we are watched closely by our customers to be sure we produce to their standards,” she explains.

And because Independência's operations also include a slaughterhouse, fertilizer plant and tannery, de Paulo and her lab mates continually monitor virtually everything produced and discharged by Independência factories.

“We must also follow very strict environmental laws to avoid polluting the water and soil,” says de Paulo. “This is my responsibility, legally and morally, and I take it very seriously.”

Next month: A closer look at Brazilian beef production practices and how U.S. trade officials are addressing competition from Brazil.

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