Brazil’s potential to become a major agricultural player in the international trade market is seen by their untapped fertile land and advanced farming techniques. Brazil’s historic economic decisions have shown it to be aggressive in pushing economic reform to boost output. Through its biotechnology research and untapped resources, Brazil is looking to continue its agricultural output with particular emphasis on the soybean, as it is currently only second to the United States as the leading producers and exporters of soybean. This paper explores the history agriculture in Brazil, its use of genetically modified crops and the untapped potential that exists within Brazil to continue growth as a large soybean producer.
Brazil’s historical agricultural policies have placed an emphasis on agribusinesses. These farming operations are large-scale business operations embracing the production, processing, and distribution of agricultural products and the manufacture of farm machinery, equipment, and supplies. This enabled the agriculture output to increase dramatically with the advent of new technologies to allow for increased efficiencies.
Brazil’s position in international agricultural trade and its position in biotechnology places it an interesting crossroads with regards to genetically modified crops. As one of the last GM-free producers of soybean, it provides an alternative to other producers using GM seeds. But on the other hand its strong biotechnology research into genetically modified crops gives it an edge for GM crop usage. Furthermore the pull toward the use of genetically modified soybean seeds by farmers and the lobbying by private firms investing in research.
The future of Brazil’s agricultural role is dependent on utilizing their untapped resources. Transportation infrastructure is particularly important to Brazil because of the large amount of under-utilized land in central savannah. These lands are poised to be converted into fertile plots through the use of different farming techniques and irrigation. Further accent on increased efficiency and mechanization could continue to bolster the agricultural output.
History of Agriculture of Brazil
Brazil began as an agricultural player post World War II. And in two time periods, Brazil has managed to grow from simply a player to that of an agricultural force to be reckoned with. There was first the horizontal expansion from 1949 to 1969 and then the conservative modernization from 1970 to today. Right after World War II, Brazil’s president was overthrown and democratic rule was established. But “the overvalued foreign-exchange rate, established in 1945, remained fixed until 1953. This, combined with persistent inflation and a repressed demand, meant sharp increases in imports and a sluggish performance of exports.” (Country Studies – “Brazil”) The new government became worried about the future of their exports and this would potentially have a negative impact on inflation. So as a result, the new government adopted an import-substitution industrialization strategy to increase economic growth. Heavy export taxes were levied on export commodities, and as a result, Brazil’s economy began growing at a tremendous pace.
This required that the agricultural sector generate most of the economy’s foreign exchange and as a result, agricultural GDP increased 4.2 percent each year between 1949 and 1969. This was seen as a direct consequence of “horizontal expansion,” which was the incorporation of new land, especially along the agricultural frontier, with the advent of aggressive road construction. Moreover, the disincentives of the import-substitution industrialization policies were avoided by providing access to land at concessionary terms for the landowning elite and for commercial farmers.
In the late 1960s, it was seen that the horizontal agricultural growth was reaching its limits. The government implemented a “conservative modernization strategy” which provided incentives for the formation of agribusiness complexes. At this point the government began investing in the adaptation and development of green-revolution technologies. This had an important side-effect for mechanization and chemical inputs. The government provided strong incentives for the creation and expansion of processing industries and for the development and modernization of agricultural input industries. These agribusiness complexes received subsidized credit, guaranteed prices, and tax exemptions and subsidies when exported. Traditional, unprocessed, agricultural products, however, were subjected to heavy taxation and to price and other controls. Brazil’s government thus pushed the growth of agribusinesses. Their production methods underwent considerable technical change, and their production and yields increased markedly. Crop production between 1970 and 1990 showed that the components of the modern segment grew considerably, both in production and in yield, while those of the traditional segment stagnated or declined. The growth in export crops allowed Brazil to become one of the world's largest soybean producers and to earn needed foreign exchange. (Country Studies – “Brazil”)
The promotion of soybeans by the Brazilian government was for much more than simply saving and increasing foreign exchange. The government wanted to not only increase soybean exports, but to also decrease soybean oil imports. The government subsidized and provided production credit to farmers growing soybeans. They recognized soybeans as important to capture a new market in exports, to enhance public health and spur the economy. The government even used soybeans to indirectly increase animal protein consumption. This was done by increasing animal production which expanded soy meal demand. And according to the Economic Research Service and the USDA, soybean production was even a matter of national security when the government began noticing the increasing strength of neighboring nations, the GOB felt compelled to better integrate western States into the national economy by opening this area to agricultural production. (ERS/USDA – “Agriculture in Brazil and Argentina”)
Recent Agricultural Policies
To curb inflation, in the mid 1990s, Brazil launched an economic stabilization program called the “Real Plan” named after the country’s new stable currency, the real. The plan stresses more market orientation, privatization of government-owned industries, lower tariffs, tight credit, “de-indexation” of prices, and a new, stable currency. The Central Bank of Brazil estimates that the agricultural sector grew by 5 percent in 1997 to $102 billion. Although the downside of the plan is that there exists a smaller pool of available credit for producers. While interest rates for the agricultural sector are in general lower, overall banks have become more selective when making new loans. (ERS/USDA – “Future of Brazil’s Agricultural Sector”) Before the Real Plan, the government was a major buyer and distributor of the agricultural commodities. But with this plan, the government is removing itself from direct management of markets.
The Real Plan also eliminates the state sales tax on primary and semi-manufactured exports. Soybean crushers and those that exported soybean oil and meal had a tax advantage over those who exported unprocessed soybeans. So this change caused a steep increase in soybean exports, reaching a record 8.3 million tons in 1997. And since then, agricultural exports have worked to increasing Brazil’s trade deficit. The government also has increased the availability of credit for exports by providing interest rate guarantees to commercial banks that finance export sales, ensuring access to financing at rates equivalent to those available internationally.
In the recent years Brazil’s agricultural sector has played a key role in Brazil’s recent economic recovery. In 2004 Brazil was the world’s largest exporter of beef, chicken, soybeans, sugar, orange juice and coffee, registering a record trade surplus in agricultural products of $34 billion US dollars. The potential for expansion in the agricultural sector is immense, with the ERS/USDA estimating Brazil could expand its land area in production by up to 170 million hectares without further deforestation of the Amazon. Brazil also has 12% of the world’s fresh water supply. Only a relatively small proportion of Brazil’s agricultural production is exported – evidence of the size and dominance of the domestic market. Further expansion in agricultural production will require significant advances in market access for exports and significant investment in transportation infrastructure, both of which are high priorities on the government’s agenda.
History of Genetically Modified Crops in Brazil: The Soybean
Brazil’s hot climate does not lend to optimal plant growth, with the heat increasing the spread of plant diseases. Brazil has long been a powerhouse for exporting sugar and coffee, but other temperate-climate crops did not fare well in the Brazilian soil. In the 1970s there was a world-wide shortage of feed protein and this led to large-scale soybean production in South American countries such as Argentina and Brazil. And by 2003, Brazil’s share of the soybean market is at 28 percent and the government estimates that there is an additional 100 million acres for production. (Gibson – “Origins, History and Uses of Soybean”)
Brazil overcame its inherent agricultural problems through research in plant genetics and new techniques for farming. Brazil’s government-sponsored agricultural research institute, EMBRAPA (Brazilian Agency for Research on Agriculture and Animal Husbandry), is a public research corporation using more than half of Brazil’s agricultural R&D spending. As the research arm of Brazil’s Ministry of Agriculture one of their chief successes was adapting soybeans, a temperate climate crop, for planting in the tropics that characterized Brazil’s terrain and climate. The highly “latitude sensitive” soybean varieties give best full-season production in a zone usually no wider than 150 to 250 km (90 to 150 miles). Brazil’s EMBRAPA developed a soybean variety that flourishes in the tropics’ shorter day length and mild, wet climate. Under optimal conditions, Brazil’s tropical soybean produces yields of 4.7 to 5.4 metric tons per hectare (70 to 80 bushels per acre), compared with Brazilian national average yields of about 2.5 tons per hectare.
EMBRAPA has a small budget as a government-funded operation. Their budget is supplemented by treasury funds from CNPq, a funding agency in the Ministry of Science and Technology. (Paarlberg – “Governing the GM Crop Revolution”) Other sources of funding include the World Bank and private investors such as Cargill, Bunge and the Blairo Maggi. (Margolis – “Brazil’s Growing Power”) Brazil is an attractive choice for investors interested in genetically modified crop research because of its strong intellectual property rights laws. In 1996, the government strengthened patent law and a specific cultivar law. (Paarlberg – “Governing the GM Crop Revolution”) With other corporations such as Monsanto, EMBRAPA jointly develops GM soybean seeds for testing in the fields of Brazil. Their genetically modified crops contain modifications that allow the crop to survive in Brazil’s ecological conditions. These modifications include herbicide-tolerance and insect-resistance characteristics. But the process to commercialize these genetically modified crops is a long and arduous process because of agreements and negotiations that must be made with the companies holding patents relating to the genes that are being dealt with.
Yet despite their strong research into genetically modified foods, Brazil has until recently remained a “GM-free” commodities producer. Brazil had considered going along with the GM soybean trend following the United States and Argentina, but a backlash against GM crops in Europe provided an incentive for Brazil to remain GM-free to provide an alternative to the soybeans of the US and Argentina. But this wasn’t effective because it was discovered that a portion of the crops in southern Brazil were already planted with smuggled GM seeds from Argentina. (Paarlberg – “Governing the GM Crop Revolution”) According to a 2001 USDA report, 20 to 40 percent of the soybean crop planted in the south of Brazil was genetically modified. In September of 2002, the Brazilian government bowed to mounting pressure and “issued an executive decree that allows farmers to plant GM soybeans—but only if they already possess the GM seeds and only during the 2003–2004 growing season.” (Nugent, “Battling over Biotechnology”) These laws worked in favor of the soy producers, because it allowed them to sell black market GM soybeans if they registered with the government. The farmers, however, had to rely on the GM soy seeds from their previous crop to plant them, since selling GM seeds was illegal. (Ewing – “End of Brazil GMO Ban) The farmers had to also assume financial responsibility for any environmental damage as a result of planting the GM crops.
Led by Monsanto, biotech companies lobbied the Brazilian government for the legalization of GMO seed selling. These companies are attempting to recoup financial losses from the seeds that are smuggled into Brazil. Monsanto is leading the charge because their genetically modified Roundup Ready soybean seeds are being smuggled into Brazil and planted. And seeds from“Our technology is being used illegally in Brazil and, as a result, Brazilian growers are enjoying the advantages of the technology without paying for it. U.S. growers are rightly concerned about this, and I can assure you that we at Monsanto are working hard to address this problem,” said Carl Casale, vice president for Monsanto's North American Agricultural Business. Monsanto received approval to conduct its first field test of Roundup Ready soybeans in Brazil in February 1997. Based on the results of those studies, the company applied to CTNBio, Brazil's regulatory agency for biotechnology products, for full approval of the sale of Roundup Ready soybeans. CTNBio, the Portuguese abbreviation for the Brazilian Biosafety Commission, granted Monsanto's request in September 1998. Groups opposed to biotechnology filed lawsuits and in 1999 a Brazilian court issued an injunction suspending the CTNBio approval. In late 2001, the president of the Appellate Court assigned the case to a panel of three judges for a final decision. Two months later, the lead judge on the panel issued an opinion stating that the law giving CTNBio authority to approve Roundup Ready soybeans was constitutional and voted to cancel the pending injunctions. (Laws – “Monsanto Seeks to Collect in Brazil”)
But even with approval for selling the seeds, it would still be tough to identify which crops were grown with Roundup Ready seeds. In order to counter this to receive royalties from farmers illegally using their GM soybean seeds, Monsanto struck a deal with Brazil's grain elevator operators--Cargill and Archer Daniels Midland. The terms of their agreement were that the grain elevator operators would test the soybeans to see if they're Roundup Ready, and if they were, the operators could collect a royalty from farmers of $7 per metric ton, splitting the fees 50-50 with Monsanto. Because of this deal, Monsanto could take in nearly $50 million in revenue. Next year, say analysts, the company's take could be $4.40 a metric ton, generating $50 million in revenue and after-tax profit of $18.5 million. If Brazil continues its present rate of growth of soybean plantations and output, the profits gained from charging farmers royalty could amount to 18% of Monsanto's earnings by 2008. Since the Brazilian deal, Argentina, the world's number three soybean producer, has said it may impose a tax on soybeans to compensate GM seed companies. (Tatge – “Piracy on the High Plains”)
The Brazilian government finally legalized the planting of GM soybean seeds if farmers registered their crops. And from the statistics released in 2004, Brazil’s planting of GM soybean crops increased rapidly, up 66% to 5 million hectares in 2004, making Brazil the fourth largest producer of GM crops worldwide.
International Trade to GM or not to GM
In different parts of the world, there exists conflicting opinions regarding genetically modified crops that are imported. For example in Europe there exists a strong aversion to GM crops. The main criteria for a country to legalize GM crops or not would be based on their target market. Being the second largest exporter of soybeans, Brazil has a sizable market share around the world. Until recently it has been a GM-free exporter of soybean crops. This would work to their advantage because the in the current world, the debate between GM and non-GM crops has in a sense created two markets for producers of important crops such as soybeans. Soybean’s importance to the world as a vital source of protein for humans and feed for livestock intensifies the GM debate. According to AgBioWorld:
“Producers in some countries may benefit from the establishment of segregated agricultural markets for GM and non-GM products, depending on three factors:
(a) The strength of opposition toward GM products in important markets (be they domestic or foreign)
(b) The costs of segregating production throughout the supply chain
(c) The difference in productivity between GM and non-GM production.
In principle these countries may choose to grow GM crops for (domestic or foreign) markets where consumers are indifferent as to GMO content, and to supply GMO-free products to markets where consumers are willing to pay a premium for this characteristic. Such a market development would be analogous to the niche markets that have developed over recent decades for organic foods.” (Nielson – “Genetically Modified Foods”)
In recent years, Brazil has faced the debate of whether or not to legalize GM crops. On one hand, the fact that both the United States and Argentina who are first and third, respectively, in the world for soybean production are both exporting huge amounts of GM soybeans would seem to leave a niche for Brazil to capture the large market for GM-free soybeans. With consumers in European markets willing to pay a premium to ensure that their soybean feed is GM-free, Brazil is in a good position to capitalize on this. Yet this debate is almost made easy, as nearly 1/3 of Brazil’s soybean crop is grown from genetically modified soybean seeds smuggled in from Argentina. And with rising costs from transportation and shipping costs for producers in Brazil, the extra 6 to 17% that it is estimated would be required to test to ensure a crop is GM-free would place an unnecessary burden on Brazilian farmers. (Nielson – “Genetically Modified Foods”) The USDA estimates that “cost savings attributable to biotech soybeans are estimated at about $40 per metric ton, significantly larger than the $8-per-ton premium received by producers for nonbiotech soybeans in Argentine markets.” (ERS/USDA – “Future Development”)
Other factors spurred Brazil’s approval of GM soybeans to be planted. But these weren’t directly related to Monsanto. According to Forbes, “China, the world's largest importer of soybeans, got the ball rolling when it asked the Brazilian government to certify that its soybeans were GM free.” (Tatge – “Piracy on the High Plains) Brazil could only offer Monsanto's claim that its GM soybeans posed no known health risk, a requirement for Chinese imports. After this incident the Brazilian government moved to give farmers approval to plant Roundup Ready GM soybeans.
Furthermore, Brazil can benefit from the U.S.-China disputes over genetically modified soybeans. The United States and China had reached an impasse regarding the safety of genetically modified crops. The agreement reached was to stop the use of temporary permits to certify the safety of genetically modified soybeans. As an important trade partner to China, Brazil could look upon these experiences to learn about
*As of 2000.
Brazil’s Agricultural Potentials
Brazil is setting the stage to become an agricultural powerhouse within the next two decades. This can be seen in the increasing economic and agricultural growth referenced in the previous section. With greater efficiency and untapped lands, Brazil is gearing up to spend more on the transportation infrastructure to help lower costs for current producers and open up access to more land for expanding plantations.
Efficiency is the theme utilized by farmers in Brazil. Higher yields have resulted from improved seed and pest control management and increased use of fertilizer and irrigation. A trend toward greater mechanization has reduced labor needs. Statistics have shown that the share of the labor force in agriculture has in fact dropped from 37% in 1980 to 25% in 1996. These improvements have allowed Brazilian farmers to deal with the competitive pressures caused by real exchange rate appreciation, the opening of markets to international or regional competitions and rising real wages. (ERS/USDA – “Agricultural Outlook”)
In the central region of Brazil, it is a savannah climate that could be further developed for agricultural expansion. Currently it is already home to sparse plantations of field crops, including soybeans, but only 10% of the 180 million hectares are utilized. The flat land of the Cerrados with only grasses and brush make it easy to clear and suitable for heavy machinery. Although the soil would need large amounts of fertilizers and lime to reduce the acidity, the limited plots that are currently on this terrain have already demonstrated the ability to produce soybean yields above the national average. Furthermore the rainfall during the soybean growing months is fairly consistent and the land is currently fairly inexpensive.
However the current issue is the expansion in the transportation infrastructure that would be necessary to reach the central savannah. This in itself would potentially discourage the development of the Cerrados. In fact, some analysts have reported that the area “could increase between 5 and 12 million hectares in the medium term (5 to 10 years) with long-term potential for expanding crops onto an additional 60 million hectares—an area equivalent to the total land currently planted to corn and soybeans in the U.S.” (ERS/USDA – “Agricultural Outlook”) As a result of the Real Plan a stabilized economy and low inflation would stimulate investment in transportation infrastructure.
Brazil's soy producers spend $34 a ton in freight costs, about twice the cost in the U.S. and Argentina, Brazil's biggest rivals. The higher transport expenses add $864 million annually to the Brazilian soy industry's costs, a study of the Brazilian Association of Vegetable Oil Industries said. (Cortes – “Brazil Plans Road Projects”) To help mitigate the costs, the Transportation Ministry of Brazil has set aside $570 million to improve over 11,000 kilometers (nearly 6900 miles) of roads by the 2005/2006 harvest to allow exporters to remain competitive with lower transportation costs. Projects already underway are beginning to have an impact, particularly the Madeira-Amazon route designed to move west-central Mato Grosso soybeans via a waterway from Porto Velho to oceangoing vessels coming up the Amazon. (ERS/USDA – “Future Development”)
The current infrastructure is deteriorating and causing costs to increase even for those plantations with readily available access to transportation. “With low international prices, it’s much more difficult to keep affording high production costs,” said Sergio Mendes, director of the National Grain Exporters Association, in an interview from Sao Paulo. “Freight costs are so high in Brazil that farmers prefer not to increase their planted area.” (Cortes – “Brazil Plans Road Projects”) Brazil’s soy industry counts on roads for about 60 percent of its transportation needs, rails for 33 percent and waterways for 7 percent. This is compared to the United States who, as the world’s largest soybean producer, uses roads for 16 percent of its soy transportation, railways for 23 percent, and waterways for 61 percent. Argentina, the world's third largest, uses roads for 82 percent, railways for 16 percent and waterways for 2 percent. (Cortes – “Brazil Plans Road Projects”)
The Brazilian government’s historical support of soybean crops has given it an advantage over other crops. Its importance to Brazil’s economy and international status is unmatched amongst other crops. The government’s support of agricultural research resulted in its developments and ultimately helped propel Brazil to being the second largest producer of soybeans in the world. They have improved efficiency and output through various methods.
Brazilian soybean producers have distinct competitive advantages over the number one producer of soybean, the United States. Though the United States is a distinct competitor (see charts in appendix), Brazil’s land cost is overall much lower than that of the United States. And while the United States is improving on technologies and methods, Brazil has an extra dimension to expand; the advantage lies with the under-utilized territories available in the central and west of the country. These areas have demonstrated to provide high-yield soybean crops. If this area were fully utilized, it would provide enough land area than that of what the United States currently has dedicated to soybeans. According to the Economic Research Service and the USDA, contrary to the United States and some other producers, “Brazil has “expanded crop area and output substantially in the past 5 to 10 years at unsubsidized prices and without the benefit of loan deficiency payments, subsidized crop insurance, production flexibility contract payments, or emergency supplemental income payments.” (ERS/USDA – Future Developments)
The approval granted by the Brazilian government to allow for the planting of genetically modified soybean seeds gives Brazilian producers a dual advantage. On one hand they can now lower costs of production to remain competitive on the open market. And on the other hand, with new checks being implemented by companies such as Monsanto to verify planting of genetically modified soybeans, Brazil can still continue to assure that portions of its crop are GM-free. This will allow them to still cater toward both the market that demands GM-free crops and the other market that does not mind.
But Brazil’s standing as one of the top-ranked soybean exporters faces the greatest threat within itself. With the increasing age of the transportation infrastructure starting to show, costs for farmers to ship their products are increasing. Furthermore, the longer that it takes to develop an efficient transportation system from the west central to the shipping ports, Brazil slowly loses its competitive advantage to other leading soybean producers.
The Brazil’s government is definitely heading toward the right direction with current and scheduled improvements to the transportation infrastructure. These forward-looking plans combined with positive economic growth and continued agriculture research will work together to allow Brazil to continue its growth as a major player in international agricultural trade of soybeans.
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