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Cablegate: Southwest Brazil: Cattle Crisis, Porous Border, and U.S.

DE RUEHSO #1002/01 2611336
R 181336Z SEP 06





E.O. 12958: N/A


1. (SBU) Consul General (CG) recently visited Brazil's southwestern
border state of Mato Grosso do Sul. Meetings with representatives
of the cattle ranching sector and government researchers shed light
on an economic dichotomy in the Brazilian beef industry today:
Drought conditions, market worries regarding Foot and Mouth Disease,
and a general lack of business credit fuel an ongoing crisis in
Brazil's cattle ranching sector, while Brazilian slaughterhouses are
experiencing business growth due to expanding export opportunities
and the relative strength of the Brazilian currency. Because cattle
ranchers are not seeing the profit margins enjoyed by meat packers,
more and more ranch owners are converting pasture land into sugar
cane fields in an effort to cash in on Brazil's new hot commodity --
ethanol produced from cane. At the same time, on the eastern edge
of the state, U.S.-based International Paper Corporation is poised
to break ground on a new, billion-dollar pulp and paper processing
plant to capitalize on 20 years of land purchases and tree farming.
Meanwhile, state government leaders talk frankly of the challenges
they face policing a long and porous border with Bolivia and
Paraguay, and of how their state is used as a "contraband corridor"
to the rest of Brazil. The CG gave a number of interviews to local
TV and print media, and participated in a public diplomacy event
that highlighted Mission investments in local educational projects.

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2. (SBU) A visitor to Mato Grosso do Sul is immediately struck by
the wide open, expansive terrain that has fostered huge cattle
ranches, many of which have been passed down from colonial titles.
Individual ranchers raise as many as 20,000 head of cattle at a
time, and the landscape is dotted with the distinctive white-gray
Brahman breeds imported from India in the 19th Century to withstand
the heat and relatively dry conditions. While in the state, the CG
met researchers and outreach specialists at a center near the state
capital of Campo Grande, run by the federal government's
agricultural research enterprise, Embrapa. He also toured a large
family-owned cattle ranch and had lunch with members of the
Federated Industries of Mato Grosso do Sul (FIEMS), many of whom own
businesses related to cattle ranching. The common theme struck by
all participants in these meetings was that the cattle industry in
this part of Brazil is in a state of crisis. A lingering drought
has driven up operating costs, and because of Brazil's notoriously
high interest rates, ranchers say they are hard pressed to obtain
favorable commercial bank loans or lines of credit. Furthermore,
the price local ranchers receive for exports of their product --
live cattle -- has been stunted by the relatively appreciated value
of the Brazilian Real and a constricted world market for Brazilian
beef caused by an outbreak of Foot and Mouth Disease in 2005.

3. (SBU) Cattle ranchers in Mato Grosso do Sul are still reeling
from the 2005 outbreak of Foot and Mouth Disease (FMD), known
regionally as Aftosa Fever. As a result of the outbreak, some
34,000 head of cattle were destroyed, and 50 countries banned the
import of beef from certain regions of Brazil, which is the world's
leading exporter of beef. The bans have been lifted gradually for
products from the state and from the neighboring states of Parana
and Sao Paulo, but new cases were reported in Mato Grosso do Sul in
August of this year. Cattle ranchers decry the embargos, claiming
they suffer unfairly because their industry is more transparent than
those in neighboring countries; international control of FMD is
based largely on self-reporting of cases. Brazilian cattle ranchers
insist that their competitors in Paraguay, for example, are not
affected by bans because their animals are not tested as a matter of
routine, and thus, no negative report is ever generated that would
trigger international embargos. Highlighting this cross-border
dispute, in August 2006 Paraguayan officials announced the
destruction of 16 bulls suffering from what the Paraguayans called a
bacterial infection and not the Aftosa viral infection. Mato Grosso
do Sul officials were skeptical of the diagnosis, and threatened to
close some 250 miles of the state's border with Paraguay. (NOTE:

SAO PAULO 00001002 002 OF 004

The United States periodically imposes various limitations on the
importation of Paraguayan and Brazilian beef products. END NOTE.)


4. (SBU) Ranchers and state government officials noted that a
growing number of landowners are converting pasture land to sugar
cane in order to capitalize on the ethanol craze that is sweeping
the energy and agriculture sectors of Brazil and much of the world.
Government officials said that several large-scale and famous
American investors have expressed interest in acquiring property and
facilities in Mato Grosso do Sul for sugar and ethanol production.
In the near to mid-term, any such significant conversion of
pastureland to sugar cane should have little impact on the overall
level of beef production, since currently Brazilian cattle enjoy the
largest grazing acre-to-cow ratio in the world.


5. (U) Despite the widely discussed "cattle crisis," Brazil remains
the world's leading beef exporter, and exporters here achieved
record sales in the first half of 2006. From January to July,
Brazilian beef exports totaled $2 billion, a 15.5 percent increase
over the same period last year. Even though it only recently lifted
its official ban on Brazilian beef, Russia remained the largest
single importer of Brazilian raw cattle products, while the United
States was the largest importer of processed beef products. A surge
in exports to Arab nations, particularly Egypt, helped minimize the
effects on meat packers' profits of the 50-nation embargo on
Brazilian beef due to the Aftosa scare and the relatively high value
of the Real on international foreign exchange markets.

6. (U) Brazil currently exports 31% of the beef sold on world
markets, and two new giant slaughterhouses may increase the
country's market share even further in the coming year. The Friboli
Group plans a new plant in Rio Grande do Sul that will process 1,000
head of cattle per day with room to expand to 2,000, and the Bertini
Group announced that it is investing $100 million to build the
world's second largest slaughterhouse in Mato Grosso do Sul. The
Bertini plant, due to be completed in May 2007, will have the
capacity to slaughter 3,000 head of cattle per day. But at the same
time, cattle prices have fallen and producers' operational costs
have risen, highlighting the almost polar economic positions of
Brazil's cattle ranchers and of its meat packers, particularly


7. (SBU) The CG visited the forestry operation of U.S.-based
International Paper Corporation near Tres Lagoas on the far eastern
edge of Mato Grosso do Sul, where it borders Sao Paulo State. Since
the late 1980s, International Paper has been steadily buying
contiguous parcels of land or establishing production agreements
with land owners, and planting large tracts of commercial eucalyptus
trees. Company representatives said that, due to unique aspects of
the region's climate, soil characteristics and biodiversity,
eucalyptus trees grow particularly quickly for pulp production
there, reaching peak maturity in seven years. The company's
forestry manager showed the nursery facilities, where tree cuttings
are cared for until they sprout roots and are eventually planted in
rows, plantation style. A variety of saplings are first planted in
a test plot on each land parcel so foresters can determine which of
the test trees will grow to the best specifications for the
company's pulp needs. They then take cuttings from the best tree to
produce others identical to it: this process is continued to fill
the entire parcel with clones of the original tree. The company
thus maximizes each parcel of land by cultivating trees uniquely
suited to its specific and localized conditions.

8. (U) The company has also taken steps to preserve tracks of wild

SAO PAULO 00001002 003 OF 004

forests and wetlands. By federal and state law, landowners must set
aside a percentage of each parcel of land purchased for commercial
use to be kept in a "natural" state. In a unique project,
International Paper has linked a series of natural forest areas
among its various land holdings around Tres Lagoas to create a
contiguous forest corridor larger and potentially more
environmentally sound than the individual set-asides required by
law. This corridor not only provides a continuous range of natural
trees and coexisting biodiversity, instead of a patchwork of smaller
stands of trees, it also creates a greater buffer zone along area

9. (SBU) International Paper has been planning to build a major
pulp and paper mill in the Tres Lagoas area for many years, but
economic and market considerations stalled the project several
times. The company now seems fully prepared to start construction
on what it says will be a $1.5 billion investment in a
state-of-the-art pulp and paper mill, but it also has been seeking
out partners for the venture. We were told that most environmental
and other governmental permit hurdles -- Brazil is notorious for
bureaucratic quagmires associated with the start-up and closing of
businesses -- have been overcome, and the company expects final
clearance to break ground by the end of October. Construction may
require as many as 10,000 temporary workers building the component
"islands" of the plant simultaneously, rather than having a single
contractor build the facility from the ground up. The design
engineer explained that the plant will utilize leading technologies
and design features, including waste recovery that will be used to
generate power. In fact, once started, the plant should become
energy self-sufficient, and will actually add power to Brazil's grid
for which the company will receive payments or credits.


10. (U) In addition to giving a number of interviews to local TV
and print media, the CG also participated in a public affairs
outreach event with the Mato Grosso do Sul Secretary of Education.
This event took place at a local high school and was attended by a
cross section of state educators, policy makers, parents and
students. The event highlighted several Mission-supported projects.
The CG awarded a certificate of participation to a young man from a
largely rural area of the state who had participated in the
Mission's Youth Ambassadors Program. He was chosen as one of only
25 participants out of 2000 applicants to spend two weeks in the
United States both meeting official representatives and staying with
a host family and attending the local public high school.

11. (U) The CG also awarded a certificate to a principal who
participated in a Mission-sponsored exchange program and
acknowledged the Mission's book donation to the principal's school.
The event, which included an indigenous dance performance from
several ethnic groups in the state, also highlighted a documentary
film currently in production that the Mission has supported
financially. When completed in the coming months, the film will
chronicle the various indigenous "Indian" groups of Mato Grosso do
Sul that still maintain a discreet identity and live in
reservation-like settings. In recent years many of these indigenous
groups have faced severe poverty and even food shortages, and have
been involved in sometimes violent confrontations with neighboring
land owners trying to displace them, and with government agents whom
the groups allege act unjustly or with little effect. The State
Secretary of Education will show the film to public school children

in Mato Grosso do Sul to promote awareness and understanding of this
aspect of their society.

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12. (SBU) Mato Grosso do Sul Governor Jose Orcirio Miranda dos
Santos (known as "Zeca do PT" for his party affiliation), Secretary
of Public Security Raufi Antonio Jaccoud Marques, and various police
commanders told the Consul General of the difficulty they face

SAO PAULO 00001002 004 OF 004

monitoring the long border that the state shares with both Bolivia
and Paraguay. As an international border, federal agencies from
each country maintain ultimate control of the border itself, but a
lack of capacity and will, particularly on the Bolivian and
Paraguayan sides, according to these officials, leaves the state
vulnerable to criminals who use the porous border as a means to
smuggle drugs and contraband into Brazil. Security officials
described the state as a "corridor" for contraband, with most of the
smuggled products passed onward to the more populous areas of
southern and central Brazil. In addition to Bolivia and Paraguay,
Mato Grosso do Sul also shares borders with five Brazilian states,
including Sao Paulo and Minas Gerais.

13. (SBU) Police officials openly discussed their challenges,
including the prevention of poaching of highly regarded wildlife
along the state's northwestern edge, a flat, marshy wilderness area
called the Pantanal. One police commander specifically requested
USG help in coordinating efforts between Brazil, Paraguay and
Bolivia regarding animal protection, noting "the animals do not stop
at the border," but environmental protection enforcement often does.
The CG has discussed this with CONGEN and Embassy law enforcement
representatives and with USAID officers, who will follow up to
explore possible regional seminar or information exchange


14. (SBU) Steady rainfall will help the region of southwestern
Brazil with some of its agricultural and environmental challenges.
(NOTE: The water level at the massive Iguazu Falls in nearby Parana
State was at 20 percent of normal during the early July visit of
CODEL CORNYN, and forest fires in the nearby national park were
sparked in the unusually dry conditions. END NOTE) However, the
state is also facing some transitional conditions that will bring a
boom to some, and possibly a bust to others. The beef industry
continues to face economic conditions creating a dichotomy between
cattle ranchers, who have been bearing the cost of unfavorable
conditions like weather, disease and currency exchange rates, and
the slaughterhouses, who have managed to buffer and even prosper in
the same economic environment by reducing payments to ranchers while
exploiting new international markets. Almost everyone in the state
seems to have some connection to raising cattle; even some
politicians we encountered who do not depend on ranching for a
living maintain small "hobby ranches" with a few hundred head of
cattle. But unless the ranchers can pry loose some investment
capital or make gains on the price of their cows, the economic
dichotomy and their "crisis" will continue.

15. (SBU) Investments in sugar cane and alternative crops like
pulp wood may help turn around the fortunes of landowners, suppliers
and service industries, but there are concerns that the influx of
temporary and seasonal labor needed for these enterprises will
overwhelm small communities once the work wraps up.

16. (SBU) Many in government tout the economic potential of the
state's natural beauty and wildlife that are famous among
eco-tourists but remain relatively untapped as sources of tourism
dollars. Increasingly, tighter enforcement at Brazil's major ports
and border crossings has pushed contraband runners to use wide-open,
untamed and largely unmanned territories like Mato Grosso do Sul as
crossing points and corridors to their main markets of Sao Paulo,
Belo Horizonte, Rio de Janeiro and beyond. If local, state and
federal government officials want to better develop the area for
tourism, security will have to be assured, and will need to be
managed better than in Brazil's current slate of destination cities.
Campo Grande is a surprisingly modern, well-developed and enjoyable
city lying at the gateway to tremendous natural beauty and economic
opportunity. How these assets are tapped and managed will dictate
the state's future. END COMMENT.

17. (U) This cable was coordinated/cleared by Embassy Brasilia.


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