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### Viewing cable 08BRASILIA641, RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - BRAZIL

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08BRASILIA641 | 2008-05-12 18:05 | 2011-07-11 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Brasilia

`

    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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