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'Now, Brazil is Arriving'

Ag minister Wagner Rossi expects the country to play a major role in feeding the planet

Published on: Jul 15, 2011

Brazilian Minister of Agriculture Wagner Rossi quickly makes me feel at home as we settle into lunch and interview at his country estate near Ribeirao Preto, Sao Paulo. Rossi is both charming and sincere, two qualities that help him cut through a mountain of political red tape as he leads one of the fastest growing agriculture sectors in the world.

Brazil is already a leading commodity producer in soybeans, coffee, orange juice, sugar, soybeans and beef. While it still has its issues - namely poor roads, ports and railways - investments from China and other foreign partners are making those problems easier to tackle. Rossi has been leading its government to modify laws that allow foreign investment without land grabs.

Brazilian Minister of Agriculture Wagner Rossi talks with Mike Wilson about key issues facing Brazil.
Brazilian Minister of Agriculture Wagner Rossi talks with Mike Wilson about key issues facing Brazil.

"What we don't need is land transfers, but rather, partnerships," he says. Brazil is moving toward long-term leases for foreign institutions, yet another sign this country is becoming more sophisticated and aware of its growing importance in world commodity production.

As a young man Rossi spent time in America, getting a PhD in Business Administration at Bowling Green State University. He also studied in Michigan.

"I enjoyed seeing how American farmers in the Midwest worked," he says. "That was very impressive for me. At the time the production gap between Brazil and the U.S. was large. Today it's much closer. The technological gap is lower. We always look to the U.S. as our mirror, the way we want to be. We want to arrive where you are, and now, Brazil is arriving."

Brazil is doing very well in many different products, and that's what makes the Brazilian system different, he adds. "We are not only experts in traditional foods like coffee, orange juice and sugar. Now we have a very important place in the world market for soybeans, beef, poultry, and pork."

Here is the transcript from our visit with minister Rossi.

Farm Futures: What will Brazil's role be in feeding the world as we approach population 9 billion in 2050?

Rossi: We think we could contribute up to 50% of the food needed for that projected population growth by 2050, but one third is a more reasonable target.

We know that except for Brazil, the only new arable land available is in Africa.  There's very little available in Asia, Europe, United States and Australia. So the fact is Brazil will take on a higher profile position in the foreseeable future when it comes to food production.

In the past 20 years we have only increased the cultivated land area in Brazil by 25%, to about 47 million hectares (115 million acres); in the same period, we have boosted food production by 152%. So what we really have seen is a major efficiency revolution going on in this country.

FF: To what do you attribute Brazil's surge in productivity?

Rossi: We have several competitive advantages. One, we have a lot more land available for production than the United States. You don't really have that much land available to expand production. The U.S. still has a tremendous yield advantage in corn, for example. There are sectors where we have advantages. One unique advantage is, we already have 120 million hectares (294 million acres) of land available for Ag production.

We're talking about a country that has had significant developments in science and technology. But it wasn't always this way. Some decades ago, multinational companies would come in with their technology, but it wasn't adapted to tropical agriculture. So we had to engage a scientific effort, through Embrapa, to make sure those technologies were in line with our soils and climates.

Now by contrast, international players have set up their own research and development laboratories in Brazil. They realize there is a different underlying logic going on here. This has made the entire agricultural system much more substantial and heartier.

FF: How do Brazil's farmers compare to U.S. farmers?

Rossi: We have small scale, medium size and business scale farmers. These industrial scale farmers are focusing on commodities and energy. They depend on capital intensive investments.

I look at our agriculture as a tripod. The first leg, the most important, has to do with the entrepreneurial capacity of Brazilian farmers. They have gone through a mini crisis and have managed that crisis. They have moved to consolidate their skills and have evolved to the same stature as U.S. farmers.

The second leg in the agriculture revolution in Brazil is the ongoing development of an autonomous Brazilian agronomical science - changing science into applied technology. This occurred at Embrapa (the government-funded ag research organization), but also includes federal and state universities which carried out regional research projects.

The third leg has been government support. Why? Brazil has extremely high interest rates. So the government supplies assistance in assuring credit lines at preferential interest rates. It also supports agriculture with a minimum price policy. For example, the government does not grant subsidies to farmers, but it if this year's harvest was so bad farmers would have to live with such low prices it would threaten their survival, the farmer can resort to the government as guarantor of last recourse, to receive a minimum cash price. The important thing about the minimum price is it does not provide any guarantee to cover losses. If everything goes bad, the government will step in and guarantee a purchaser to pay a price that will cover variable costs, those first hand disbursements farmers had to make to plant the crop. It ensures they do not go out of business.

FF: Why is the Brazilian government looking to reform foreign investments?

Rossi: In Brazil, we know that there is one type of investment where you never lose money, that's the purchase of land; land will inevitably appreciate in Brazil.

It is a nationally owned asset; we want to assure it is used for production oriented purposes.

The government is studying options to limit large investments, and instead possibly going to long term leases. We are engaging in an in-depth analysis in this matter.

We noticed that some countries had an interest in purchasing large expanses of land. That was the case in Africa, and it was not only China making the purchases, also oil producing countries from the Middle East. There were two typical buyer profiles: The first is the sovereign funds, very often presenting themselves under a different legal guise, but the fact of the matter is, these are foreign governments trying to purchase land in Brazil. We did not want to have a sovereignty problem. The second type of buyers were those who just wanted to buy land as a financial commodity, with speculative intentions. We do not want to allow land purchases to become merely a financial commodity.

Even so, we very much welcome foreign investment. What we really need is not land transfers; what we really need are partnerships, joint ventures, joint business undertakings. We are very much open to corporations who wish to become full fledged partners with Brazilian counterparts.

FF: How would you describe the U.S. - Brazil trade relationship?

Rossi: The U.S. and Brazil should always have a preferential type of relationship. I was pleased to attend president Obama's reception here in Brazil and have made an effort to insure we will have open relations and a world where we boost our special bilateral relationship when it comes to agriculture.

If you actually add the Brazilian southern common market as an agricultural bloc, we will stand as high profile players in the market. Instead of focusing on our differences, I think we should focus on what can unite us, our mutual interests. You guys are better at a number of things; we are better than you in some things. If we use all the potential we have, for example, in ethanol, we will quite simply have something to add in value to the U.S. economy. Our pursuit of new technological resources and breakthroughs available from the United States is the kind of pursuit that will remain unabated.

Politics can intervene positively. We ended up distancing ourselves in the recent path but we can overcome that. Our new president has taken some important steps in that direction. We are at a point in time where the U.S. and Brazil should renew our 'courting practices,' if you will.

FF: Transportation is a serious problem. How soon will Brazil solve its logistical problems?

Rossi: We do have some challenges. Brazil is a country that is as vast as the U.S. as a continent. Unlike the U.S., Brazil does not have two coast lines. The history of Brazil's development is concentrated on the coast line. Only in the '50s did Brazil start turning its attention towards the hinterlands. The founder of Brazil built the capital in the middle of nowhere, as a part of our march toward the west, as the U.S. had done in the previous century.

What happened is, we made inroads with highways; today we pay the price for that. Transporting Ag commodities with low value on trucks cost a lot of money.

We have tapped into the Brazilian Midwest. Take for example Mato Grosso. That state has important Ag production regions, which find it very difficult to ensure outflow of that production. They have to live with very high transport costs. So, we're currently engaged in a major effort - the growth acceleration program, led by the government - to bring on new transport modalities in railways and waterways. Waterways are an area where the U.S. has enjoyed significant development.

In the next ten years, infrastructure will change quite a lot and we will become more competitive. We are currently investing very much in the railways system, with a north-south rail project connecting the Midwest of Brazil up to Brazil's north and northeastern region. That will connect to the railway systems in the south and south east that already exist.

We have some shortcomings in our ports. The throughput, the volumes being processed, has increased quite a bit. The private sector initiative has gotten under way and companies like Cargill, Bunge or ADM operate their own terminals. We're currently seeking out partners. During my trip to China, the president put forward a number of projects that may be done with China, directed at improving outflow of ag commodities.

This might sound a bit pretentious, but even with the existing logistics conditions out there coupled with strong foreign exchange pressure, for every year the past decade, we have increased Ag commodities exports 14%. In ten years we set nine consecutive production records, one after the other. That, despite poor logistics, and despite the financial downturn.

If those conditions were better, the sky would be the limit.

FF: Can you describe China's investment role in Brazil?

Rossi: We have a wide array of very good investment opportunities. We have one important project going through Peru, the Pacific passage. That's very important for us. I can't say exactly which the main investor is, bedsides the Brazilian and Peruvian governments, but China is involved in that project.

The main project put forward to the Chinese is a high speed train we're building between Rio and Sao Paulo. Because of China's outstanding success with the high speed train, we're currently considering a partnership. China has already made specific investments - one in Bahia, where China is building a soybean processing facility. There are other investment projects. The Chinese have an investment project in Anápolis, the second largest city in Goiás,

FF: How is China as a customer?

Rossi: Brazilian beef, pork, poultry, soybeans, all of them have a future in China.

In my last visit to China we succeed in getting its approval to buy Brazil's pork. It was very important for two reasons; one, because China is a benchmark market, not only for pork but meat consumption; two, the approval came right after the U.S. allowed us to likewise tap into their market. So those two very symbolic developments enabled Brazil to move into the Korean market, and also into the Japanese market, by extension. We're now working with Japanese and Korean counterparts to come to an agreement on pork exports from Brazil.

We are happy to see more of our beef plants approved for exporting products to China. I was recently told there are five new plants that have been approved, that will allow us to expand our working relations with China in beef. With poultry, the developments have been even better. We now have 50 plants that are officially approved to export poultry to China.

FF: Will inflation become an issue here?

Rossi: There is a wide array of circumstances that converged to pressure prices. Overheated demand is a worldwide phenomenon, including Brazil, and it's especially true for commodities. Brazilian's economy has a strong export component. Brazil is an open economy by definition. We find ourselves in the unique position with the foreign exchange market, where the Brazilian currency has appreciated, and that led imports into Brazil to expand significantly. Average prices of imports have gone up.

We're keenly aware that bringing inflation under control is one of our top priorities. Inflation is not out of control in much of the country. Brazil has an inflation exchange range system in place; there's a 2% up and down band which is acceptable; at the moment we are tapping the top of the range but taking necessary measures to bring it down. 

Brazil has experienced such fast development. The only risk we face is growing too much. We want our economy to grow around 4 to 5% annually, while at the same time keeping inflation under control - that's a permanent ongoing quest. We need to strike a balance.

FF: Brazil does not give its farmers subsidies, but instead gives them discounted loans. Why?

Rossi: We do not provide any direct subsidies for production or exports. The government provides funding that has to be paid back. I think that's much better than subsidies.

One reason is we operate in a market with high interest rates from private banks. We have credit lines available from state-owned banks, particularly BNDS, and Banco do Brasil. These credit lines allow farmers access to more affordable interest rates.

The interest rates we charge Brazilian farmers are still at least twice as much as the levels in other countries. The basic reference rate is around 6.75% per year. For family farming, which has a different meaning and overtone than business scale farming, the rate is even lower than 6.75%.

We plan to give financial resources to ethanol plants, not to sugar plants. Right now we must improve our production of ethanol. We have to do something different for them.

FF: The government is rolling out new financial incentives to expand cattle. Why?

Rossi: Brazil is establishing credit incentives for cattle ranchers to retain female cattle for breeding purposes. Currently one third of all animals slaughtered are females, which means you can enjoy prompt revenue, but you lose a stream of revenue in the future. So Brazil is now paying cattle ranchers not to slaughter females in the herd.

For ranchers who just want to fatten cattle, the Brazilian government is establishing credit lines available to third party ranchers who may be willing to purchase the females to expand their herds. So we're really making an effort to retain females and expand future supply. There's such a demand for meat in the world, however much you produce there will be need for even more.

FF: Does the beef sector need modernization?

Rossi: Brazil has the world's second largest cattle herd after India. But Brazil is the world's largest beef exporter, competing with the U.S. head to head. Now, in some areas we have excellent cattle ranching, next to outdated, low yield cattle ranching. The national average stocking rate is only 1.2 head of cattle per hectare. We know we can easily go to three head of cattle per hectare, with two strong results: improved quality of grazing lands that will shorten the time required to fatten the cattle; and second, we can free up areas for agriculture purposes. We have very traditional ranchers out there, we need to win them over and have them adopt modern practices.

Our cattle ranchers are typically risk averse. They do not like credit lines. The government does not have a specific cattle ranching funding program available; it would need to be tailor made to cattle ranching.

If you provide soybean, maize or cotton credit programs, the return on investment happens in one year; by contrast, in cattle ranching you're talking about reproduction, birth of the calf, then, by sixth or seventh month, weaning. For the remainder of their lives Brazilian cattle will live in the pasture, eating grass with very little added to the diet. That is the same pattern until they are sent to feedlot for three months of fattening before slaughter. We're talking about 3 to 5 years for the full cycle to evolve. 

FF: How would you describe the U.S. - Brazil trade relationship?

Rossi: The U.S. and Brazil should always have a preferential type of relationship. I was pleased to attend president Obama's reception here in Brazil and have made an effort to insure we will have open relations and a world where we boost our special bilateral relationship when it comes to agriculture.

If you actually add the Brazilian southern common market as an agricultural bloc, we will stand as high profile players in the market. Instead of focusing on our differences, I think we should focus on what can unite us, our mutual interests. You guys are better at a number of things; we are better than you in some things. If we use all the potential we have, for example, in ethanol, we will quite simply have something to add in value to the U.S. economy. Our pursuit of new technological resources and breakthroughs available from the United States is the kind of pursuit that will remain unabated.

Politics can intervene positively. We ended up distancing ourselves in the recent path but we can overcome that. Our new president has taken some important steps in that direction. We are at a point in time where we should renew our 'courting practices,' if you will.

FF: What is the trade relationship like between Brazil and the European Union?

Rossi: My grandparents used to say that a good business opportunity is only a good opportunity if it is good for everyone. Of course, as part of the negotiations between highly industrialized countries and countries that have outstanding performance in agriculture and cattle ranching, in such negotiations you need to find ways to align our interests.

We know that Europe has one problem, among others, as far as agriculture is concerned. Although European agriculture is small vis-à-vis European GDP, accounting for 5%, the social and political strength of European farmers is pretty significant. In Brazil we have just the opposite problem.

From a globalization perspective, we need to find better ways to use the expertise available in different countries. But it is a very difficult task politically speaking. It is very difficult for a European politician to advocate free market competition in a situation where European competitors are likely to lose out. It is also difficult for those of us Brazilian politicians to tell our investors that freedom should prevail.

It is my belief that in the past, Brazil and other developing countries were highly penalized because of an unfair type of trade relations. No insult meant here, but these relationships could be described as colonial in nature. Things are different today; we have food stuffs and minerals that the world needs. We will know how to impose or set a fair price for a fair, just trade relationship.

FF: Is there a balance between having a free market economy and enforcing government controls?

Rossi: There are different models out there, determined by the history of our nations. We in Brazil are going through a turning point in history. President Lula (Luiz Inácio Lula da Silva) showed it is possible to take state-led measures to insure a greater balance in the economy. In the immediate prior administration before Lula, there used to be a high degree of trust in market forces.

Today we Brazilians know all too well how important a role the state can perform. We were able to overcome the international financial crisis and were the first to come out of the crisis because our government acted timely and appropriately.

I know the Chinese government plays a much higher role in their economy, but there are moments in time in the history of a country where that is a positive development. It is a positive development that the Chinese have a slightly more open economy.