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Cablegate: Response: Impact of Rising Food/Commodity Prices - Brazil

VZCZCXRO2186
RR RUEHRG
DE RUEHBR #0641/01 1331805
ZNR UUUUU ZZH
R 121805Z MAY 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 1626
INFO RUEHRC/USDA FAS WASHDC
RUEHC/SECSTATE WASHDC 1627
RUEHSO/AMCONSUL SAO PAULO 2051
RUEHRI/AMCONSUL RIO DE JANEIRO 6146
RUEHRG/AMCONSUL RECIFE 8028

UNCLAS SECTION 01 OF 03 BRASILIA 000641

SENSITIVE

SIPDIS

STATE FOR USAID
STATE FOR EEB/TPP/ABT/ATP JSPECK
USDA FAS/OA FOR MHOUSE
USDA FAS/OGA FOR ACHAUDRY
USDA FAS/OFSO FOR AREA DIRECTOR JBAILEY
USDA FAS/OCRA FOR BZANIN

E.O. 12958: N/A
TAGS: EAGR BR
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - BRAZIL

REF: A) SAO PAULO 199, B) SAO PAULO 23, C) SCO PAULO 227

SENSITIVE BUT UNCLASSIFIED

1. (U) THIS CABLE IS SENSITIVE BUT UNCLASSIFIED AND NOT FOR
INTERNET DISTRIBUTION.
2. (SBU) Summary. Below is Post's response to STATE 39410 regarding
the impact of rising food and commodity prices on Brazil. As Brazil
is a significant net agricultural exporter, high international
commodity prices have been beneficial. At the same time, higher
domestic agriculture prices are contributing to increasing
inflation, but have not had a significant impact on Brazil's
economic and political stability. Agricultural producers continue
to seek ways to reap the most benefit from these high prices, but
expansion opportunities are somewhat constrained by a high rural
debt burden and a weak transportation infrastructure.

DEMAND

3. (SBU) Half of the 4 percent inflation that Brazil has seen in the
past 12 months was a result of the increase in food prices. Food and
beverages represent 21 percent of the average Brazilian household's
consumption. The most important commodities are rice, beans, wheat,
chicken, beef, manioc flour, sugar and soybean oil. The average cost
of the food basket has increased approximately 13 percent in the
last year. The most significant price changes were seen in dry beans
(70 percent), soybean oil (57 percent), beef (22 percent) and wheat
flour (21 percent).

4. (SBU) Brazilian consumption of chicken, manioc flour and soybean
oil is entirely supplied by domestic production. Domestic beef, dry
beans and rice production supply 99, 95 and 90 percent of domestic
consumption, respectively. However, domestic production of wheat
supplies only 37 percent of consumption. Although the impact of high
prices is stronger on the poor and urban groups, mostly in the less
developed regions of Brazil, such as the Northeast, higher prices
have not resulted in a noticeable shift in consumption towards
alternative commodities. Incomes in the Northeast continue to rise,
leading to a decline in the consumption of rice in favor of bread
and animal proteins.

SUPPLY

5. (SBU) Brazil is a significant net agricultural exporter
(approximately US$40 billion in 2007), and agribusiness exports
account for nearly a third of Brazil's total exports. In the basic
commodities, Brazil is a net exporter of beef, chicken and soybean
oil. It is self-sufficient in rice, dry beans and manioc flour, but
it is the world's largest importer of wheat.

6. (SBU) As a result of higher prices, agricultural production is
increasing slightly. As indicated in the recent FAS grain annual
report (and soon to be indicated in the FAS soybean annual report),
farmers are responding to high international prices by seeking to
maximize production, and both Brazilian and multinational companies
are expanding production capacity. However, potential expansion is
constrained by farmers' heavy credit burden carried over from
several years ago and the significant problems with transportation
infrastructure.

7. (SBU) There has been no shift in production between food and
non-food commodities such as biofuels. Brazil utilizes sugar cane
for fuel, not food crops. Sugar cane accounts for only one percent
of total cultivated land for crops. High international prices of
such commodities as soybeans and cotton are discouraging the use of
those commodities for biofuels.

8. (SBU) The price of agricultural inputs has risen significantly in
Brazil. Land prices have increased with the price of commodities.
The price of seeds, chemicals and irrigation equipment increased
slightly. Water and labor costs have not increased. The most
significant increase has been in the price of fertilizer.
Fertilizer prices rose between 35 and 50 percent last year, and are
expected to do the same this year. The average price of two of the
most common fertilizers used in growing soybeans increased around
300 percent between January 2007 and April 2008. Potassium
chloride, the most common potassium fertilizer, also known as
potash, rose 190 percent in the same period. Increasing fertilizer
prices have caused nervous farmers to start buying fertilizer
earlier than normal in order to hedge against rising prices.

BRASILIA 00000641 002 OF 003

9. (SBU) A shortage of storage capacity contributes to some crop
loss. Poor infrastructure, such as bad roads, limited port
facilities, and a lack of railroads or the ability to transport via
waterway, provides significant impediments to expanding production
and exports. Despite these difficulties, Brazil remains the world's
third largest agricultural exporter.

POLITICAL IMPACT

10. (SBU) There have been no public protests, violence, class
conflict, or other activities that would impact the stability of the
Brazilian government as a result of high food prices. As Brazil is
a leader in biofuels technology, research, consumption and
marketing, the government and the general public strongly support
and defend the use of biofuels. Brazil's political leaders see the
growing world demand for agricultural products as being positive,
and they view Brazil as a key part to solving this problem. To
date, the concerns over domestic price increases and inflation have
been relatively modest.

ECONOMIC IMPACT

11. (SBU) Rural households in the Amazon are mostly self-sustainable
small farms. They rarely suffer from food shortages and are not
expected to be impacted by rising food prices. In rural
northeastern Brazil, food prices and local staple crops are highly
dependent on weather patterns. At the moment, much of northeastern
Brazil is suffering from unusually heavy rains, which although they
are causing severe local flooding, are expected to result in better
than usual crops. However, rising food prices in poor cities and
towns in Brazil's Northeast may cause localized problems for
individuals outside the government safety net programs - a situation
that deserves monitoring.

ENVIRONMENTAL IMPACT

12. (SBU) The rate of deforestation of the Amazon closely tracks the
increase in commodity prices. In the last five months, the
government has reported a sharp increase in the deforestation rate,
reversing a declining trend in the prior four years. There is
little evidence that cultivation of staple food crops in Brazil
(rice, dry beans, cassava, small-scale corn production) is a major
driver of deforestation. In addition, informal or illegal land
clearing often takes place on Brazil's Amazon frontiers, as
squatters occupy areas devoid of effective environmental
enforcement. These illegal practices are not associated with
cultivation of staple crops in Brazil.

GOVERNMENT POLICY RESPONSE

13. (SBU) As a result of high commodity prices and Argentina's
export restrictions, the GOB eliminated the import tariff for up to
1 million metric tons (mt) of wheat imported before June 30, 2008.
Industry is asking for the time limit to be extended and the amount
increased. The United States and Canada will be the primary sources
of this wheat. In addition, the GOB has declared that it wants
Brazil to double its wheat production by 2012. A plan for how this
will be accomplished is supposed to be released before the end of
the year.

14. (SBU) On April 23, the Brazilian Minister of Agriculture
announced that, for the next six to eight months, the government
would block the export of the one million mt (milled equivalent) of
rice currently in government stocks and would encourage the private
sector to not export rice. Following a meeting with the rice sector
the following day, the Minister confirmed that Brazil has enough
rice in public and private stocks to not need to block exports of
privately-held rice. Brazil's demonstrated willingness to interfere
in the market has contributed to a nervous international market and
reportedly has led to embarrassment on the part of Brazilian
negotiators in Geneva.

15. (SBU) Brazil's central bank is responding to the inflationary
pressure through more restrictive monetary policy. On April 16,
2008, Brazil raised its benchmark (SELIC) rate from 11.25 percent to
11.75 percent in effort to control inflation. Over the next year,
the central bank is expected to raise its overnight interest rate by
roughly 1.0 to 1.5 percentage points. Not all of this increase can
be attributed to food inflation, but the central bank has cited food

BRASILIA 00000641 003 OF 003


inflation as one significant factor that is affecting its
decision-making.

16. (SBU) In light of the increase in deforestation, the Brazilian
authorities have stepped up efforts to enforce laws protecting the
Amazon. However, they are unlikely to solve the problem given the
magnitude of the Amazon. Although Brazil has made no changes in its
biotech or SPS policies as a result of high commodity prices, Brazil
has taken the opportunity to renew its public calls for an end to
agricultural subsidies in developed countries. President Lula
recently has said that agricultural subsidies and corn-based ethanol
are to blame for the high food prices, while sugar-based ethanol is
not.

IMPACT ON POST PROGRAMS
17. (SBU) As part of our partnership under the bilateral biofuels
MOU, we have agreed to work jointly to address public criticism of
ethanol production. Secretary Rice and Brazilian Chief of Staff
Dilma Rouseff have agreed to create a sustainability task force, and
post will hold a biofuels seminar in September, in part to discuss
countering the criticism that biofuels contribute to high prices.

PUBLIC PROPOSALS

18. (SBU) We have responded positively to Brazil's suggestion that
we work together to address the food/energy issue and would advocate
continued efforts to analyze and respond to the criticisms on a
factual level. Also, working jointly to develop the next-generation
of biofuels will help decrease any perception that the ethanol
market has an impact on food prices. In the long term, efforts to
improve the investment climate, such as negotiating bilateral
investment treaties and tax treaties with the U.S., as well as
streamlining bureaucratic hurdles to investment, would open
opportunities for investors to participate in the development of
Brazilian infrastructure, thereby reducing the cost of bringing
products to market.

SOBEL

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