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Cablegate: Mato Grosso Do Sul State Highlights Brazil's Agricultural

VZCZCXRO2069
PP RUEHRG
DE RUEHSO #0199/01 1091514
ZNR UUUUU ZZH
P 181514Z APR 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 8141
INFO RUEHBR/AMEMBASSY BRASILIA 9271
RUEHAC/AMEMBASSY ASUNCION 3363
RUEHBU/AMEMBASSY BUENOS AIRES 3116
RUEHMN/AMEMBASSY MONTEVIDEO 2668
RUEHLP/AMEMBASSY LA PAZ 3775
RUEHCV/AMEMBASSY CARACAS 0720
RUEHSG/AMEMBASSY SANTIAGO 2364
RUEHRG/AMCONSUL RECIFE 4073
RUEHRI/AMCONSUL RIO DE JANEIRO 8678
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJC/DEPT OF JUSTICE WASHDC
RHMFIUU/HOMELAND SECURITY CENTER WASHDC
RUEABND/DEA HQS WASHDC
RHMFISS/CDR USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 04 SAO PAULO 000199

SIPDIS

SIPDIS
SENSITIVE

STATE FOR WHA/BSC, WHA/EPSC

NSC FOR TOMASULO
SOUTHCOM ALSO FOR POLAD
USAID FOR LAC/AA

E.O. 12958: N/A
TAGS: PGOV EAGR ECON EIND ETRD BR
SUBJECT: MATO GROSSO DO SUL STATE HIGHLIGHTS BRAZIL'S AGRICULTURAL
BOOM

REF: A) Sao Paulo 170 B) Sao Paulo 177

SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY

Summary
-------

1. (SBU) Brazil's continued position as a leading international
agricultural powerhouse is fueled by the rapid economic expansion in
states such as Mato Grosso do Sul (MS). Driven by high commodity
prices as well as tourism to the world's largest wetland space, the
Pantanal, MS is undergoing an economic boom. Experts say this is
just a preview of the state's potential and confirm that dozens of
initiatives are underway to turn MS into an even larger source of
meat, soybeans, paper, and ethanol. Additionally, innovative
infrastructure projects are transforming MS from an agricultural
region into a state with industrial potential. Foreign interest,
especially from East Asia, is increasing, but regional commercial
and business issues may complicate the picture. The protectionist
policies of Evo Morales in neighboring Bolivia and the potential for
similar trade policies emerging out of Paraguay, may curb growth in
some sectors. End Summary.

Agriculture Leading Economic Explosion
--------------------------------------

2. (SBU) Mato Grosso do Sul State (MS) is located in Brazil's
central-west region and borders Bolivia and Paraguay. With 576,400
square miles (slightly larger than the size of Germany) and fertile
fields, the state is identified as Brazil's cattle country and one
of its major breadbaskets. MS's population of 2.3 million is
heavily involved (almost 50 percent) in services and tourism because
of the presence of the Pantanal, the world's largest wetland area
covering 75,000 square miles in three countries. Agriculture
represents another third of the workforce, with about a fifth
involved in the industrial sector. Of MS's total exports, soybeans
account for 35 percent, pork and chicken 20 percent, beef 14
percent, mineral ores 8 percent, leather 7 percent and wood 5
percent. (Note: MS accounts for only 1 percent of Brazil's GDP.
End Note.)

3. (SBU) During a three-day visit to Campo Grande and environs (see
reftels), Poloff met with a range of government and business
officials to get a sense of the opportunities and challenges the
state is facing. According to First Secretary Dacio Queiroz da
Silva of the MS Federation of Agriculture and Livestock (FAMASUL),
MS's rich soil means that the state will continue to serve as one of
Brazil's agricultural powerhouses. Silva noted that while vital to
the state's economy, the 25 million head of cattle are actually
decreasing in relative importance to sugar because sugarcane for
ethanol production has become a more profitable use of farmland.
Soybean planting is also growing thanks to the spike in world
prices, and the state government is evaluating paper products as a
new target industry. (Note: Silva's overall assessment of continued
agricultural growth was ebullient. He only briefly touched on
conflicts - which he neglected to acknowledge often turn violent --
between landowners and the indigenous, per ref B. End Note).

State Plans Large Infrastructure Upgrades
-----------------------------------------

4. (SBU) State Secretary for the Environment, Cities, Planning, and
Science and Technology Carlos Alberto Negreiros Said Menezes
explained that MS was leading the charge for large infrastructure
projects. Menezes said that MS has shed its image as a mismanaged
and unproductive state unable to secure federal funding for
infrastructure programs even when the governor and president were of
the same party. He noted that the state is focusing on several
mega-initiatives to develop its overall economy, including a
pipeline to bring in diesel from other states and transport ethanol.

SAO PAULO 00000199 002 OF 004


Simultaneously, MS is amplifying the state electricity grid to
provide renewable alternative energy for new local businesses as
well as to other parts of Brazil. MS is constructing a major
highway running from the capital city of Campo Grande to the state's
eastern border in order to secure a new commercial link to Sao
Paulo. According to Menezes, MS will build an additional expressway
along Paraguay's northern border, the state's southern edge, to
increase trade between Brazil and Paraguay and introduce more of a
state presence in this crime-riddled frontier. MS will construct a
railroad running south to Parana State to connect with an existing
rail to the major port of Paranagua. (Note: Current high
transportation costs are limiting competitiveness and expansion. As
an example, soybean from MS are exported through Paranagua in Parana
State and incur transportation costs equal to two-thirds of their
original value or 40 percent of export value. End Note.)
Construction of a new cargo terminal and lengthening of existing
runways at the Campo Grande International Airport will also
encourage business growth, Menezes said. Menezes stated that
funding for these new initiatives is coming from federal
government-supported programs and the Brazilian National Development
Bank (BNDES), the current MS administration's clean-up of previously
wasteful state spending, and well as new sources of government
revenue generated from a growing number of businesses.

5. (SBU) In addition to these large-scale programs, Menezes said
that the state hopes to boost the economy by expanding ports and
smaller highways and railroads, as well as tripling the number of
sugar mills to produce ethanol. MS expects to increase its annual
production of ethanol from 600,000 to 2.5 billion liters in the next
two years and build a new ethanol pipeline for overseas shipments
through the port of Paranagua. (Note: Brazil produced 20.75 billion
liters of ethanol in 2007, of which Sao Paulo State accounted for 12
billion. End Note.) Noting the more than one million acres owned
by International Paper in MS, Menezes said that the state is
planning to plant thousands of trees in its southern region to
develop wood and paper processing. In December 2006, the company
began construction of a major pulp and paper mill in Tres Lagoas on
the Sao Paulo State border in order to take advantage of Sao Paulo's
infrastructure, an investment estimated at USD 1.5 billion.

Campo Grande Leading the Charge
-------------------------------

6. (SBU) Economic Development Agency of Campo Grande (ADCG)
President Paulo Salvatore Ponzini stated that MS's internal border
with Sao Paulo state makes it an attractive destination for
Brazilian investors. ADCG Administration, Planning and Finances
Coordinator Sergio da Rocha Bastos added that MS uses tax incentives
to attract investment from other states, including the opportunity
for some businesses to start up and operate tax-free for ten years.
(Note: There is an ongoing lawsuit between the states of Amazonas
and Sao Paulo in which Sao Paulo offered similar tax incentives. By
law, Amazonas is the only Brazilian state permitted to offer tax
incentives to encourage investment. End Note.) MS's lower labor
costs also provide a competitive advantage over Sao Paulo and Minas
Gerais states. Campo Grande is developing a high-tech park to
attract new opportunities as well, particularly cable television
companies seeking alternatives to the saturated markets of Sao Paulo
and Rio de Janeiro states.

7. (SBU) According to Bastos, Campo Grande is exploring technology
as a way to enhance its position as the focal point of this rich
agricultural state. Campo Grande is investing USD 25 million in
building a "logistics platform" to link the state's highways and
railroads in a logistics hub that would centralize collection,
packaging, and customs preparation for immediate export through
Brazil's two major ports of Paranagua (Parana State) and Santos (Sao
Paulo State). Bastos claimed that this hub would facilitate
higher-quality and more efficient service.


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Challenges to Reach Potential Remain
------------------------------------

8. (SBU) ADCG's Bastos admitted that the state government has to
overcome significant hurdles in order to reach its full economic
potential. MS must build and upgrade miles of highways and connect
more of the state's cities with Campo Grande, build more schools,
encourage the role of women in the economy, and create a state-wide
development agency as well as an international trade promotion
entity. The city has begun addressing some of these issues through
projects supported by BNDES. Campo Grande has started constructing
kindergartens with a view towards offering more employment
opportunities for women, has initiated a major sewage system
overhaul, and is investigating ways to eliminate the city's slums
through an Inter-American Development Bank initiative encouraging
poorer city dwellers to get involved with park protection efforts.

Foreign Interest in Mato Grosso do Sul
--------------------------------------

9. (SBU) ADCG's Bastos noted that foreign investors are
increasingly interested in MS, particularly because of its
agricultural strength and its geographic location in the center of
South America which potentially makes it a distribution center for
the continent. Bastos explained that MS is focusing on becoming a
South American export hub for Asia and wants to use Campo Grande's
logistics platform to serve as the focus of this effort. Chilean
entrepreneurs have approached his office seeking to encourage Campo
Grande's logistics platform to consider connecting to the port of
Iquique in Chile to export Brazilian goods to Asia. Bastos told
Poloff he has also received Chinese business and official
delegations interested in corn and beef exports. Singaporean
bankers have visited and are considering investing part of a USD 200
million hedge fund in MS's meat production sector. State Secretary
Menezes told Poloff that Japanese investors are interested in
bio-diesel and ethanol exports via Paranagua, and South Korean
business leaders are looking at railroads and an unspecified
transport route that would cross Paraguay into Chile to offer an
alternative to international shipping through the Panama Canal.

Relations with Bolivia and Paraguay
-----------------------------------

10. (SBU) State Secretary Menezes complained that since Evo Morales
became president of Bolivia, bilateral business cooperation has
faced a number of hurdles. For example, Brazil and Bolivia were
discussing gas cooperation, but Morales pulled out of negotiations
when he assumed the presidency. A possible new road linking eastern
Bolivia with Paraguay and Brazil in order to increase tri-lateral
trade has also yet to make serious headway due to Morales, Menezes
claimed. MS hopes to address these challenges and to revive
regional trade through an Integration Zone of the Central Region of
South America (ZIRCOSUR) in which 34 regions and states from
Argentina, Bolivia, Brazil, Chile and Paraguay would cooperate.
FAMASUL's Silva said that farming opportunities in Bolivia have
become increasingly difficult for Brazilians because of policies
President Morales has carried out discouraging foreign investment,
especially near the border. Silva fears that should Fernando Lugo
win the presidential elections in Paraguay, he will adopt similar
policies discouraging Brazilian investment because, according to
Silva, Lugo views Brazilian farmers as "the enemy."

Industrial Role in Economic Growth
----------------------------------

11. (SBU) While acknowledging agriculture's role in contributing to
the state's impressive economic growth, Federation of Industries and
Commerce of Mato Grosso do Sul (FIEMS) President Sergio Marcolino
Longen highlighted MS's efforts to encourage opportunities in
addition to agriculture. FIEMS is developing a variety of programs

SAO PAULO 00000199 004 OF 004


to persuade residents to look beyond agriculture and develop
service-related technology and logistical expertise for
infrastructure projects, he said. The organization wants to
overcome the state's long-standing agricultural tradition and move
toward semi-industrial sectors over the next five years. Longen
said that MS wants to begin processing all meat products within the
state. MS wants to increase steel production and become
self-sufficient in energy (biomass and petrochemicals) by 2010.

Comment
-------

12. (SBU) MS's economic growth is part of a national trend in which
Brazilian states are focusing on developing their limited
infrastructure to create opportunities for market expansion. As
elsewhere in Brazil, improved infrastructure is a major key to
economic growth potential. Mato Grosso do Sul's case is interesting
because while tourism and services account for almost half of the
state economy, experts are looking beyond tourists and small
business to larger industries and agricultural operations that
produce goods that the state can market abroad. Should MS succeed
in linking its highways, ports, and pipelines with its neighbors and
improve distribution of its agricultural products overseas, the
state could transform itself from a regional commodity producer to a
solid international player.

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