VZCZCXRO8469
RR RUEHRG
DE RUEHBR #0965/01 1371824
ZNR UUUUU ZZH
R 171824Z MAY 06
FM AMEMBASSY BRASILIA
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INFO RUEHSO/AMCONSUL SAO PAULO 6971
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RUEHRI/AMCONSUL RIO DE JANEIRO 2087
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RUEHRC/USDA FAS WASHDC
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UNCLAS SECTION 01 OF 02 BRASILIA 000965 
 
SIPDIS 
 
DEPT FOR WHA/BSC, EB/TPP 
DEPT PLEASE PASS TO USTR FOR MSULLIVAN, RCROWDER 
USDA FOR JBPENN, FFAS 
USDOC FOR 3134/USFCS/OIO/WH/SHUPKA 
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD 
GENEVA FOR USTR 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR WTRO ETRD ECON BR
SUBJECT:  GOB PROVIDES EMERGENCY AID TO SOY FARMERS 
 
 
¶1. Summary.  The Brazilian federal government announced on May 12 a 
subsidy of 1 billion Reais (approximately US$470 million) in 
emergency aid for soybean farmers in the form of price supports. 
The package seeks to reduce the indebtedness of soy farmers and help 
improve the generally adverse agricultural situation, owing to the 
strong Real and high production and transportation costs.  The 
"mini-package" was not well received by the soybean sector, which 
considered it belated and insufficient to remedy their losses.  Nor 
did the emergency aid persuade farmers, mostly from the country's 
Center-West region, to cease their continuing protests against the 
federal government's agricultural policies.  End Summary. 
 
¶2.  On May 12, 2006, the Brazilian government announced one billion 
Reais (US$470 million) in emergency aid for the soybean sector. 
This amount is in addition to US$8 billion that was announced April 
6 in the form of price supports, debt rollover, and crop insurance 
for the general agricultural sector.  This new package for soy is 
intended to subsidize part of the increase in transportation costs 
due to higher diesel prices. 
 
¶3.  Some government officials here have expressed concern that the 
emergency aid will be viewed as a direct subsidy for producers, 
therefore compromising Brazil's position at the WTO.  However, other 
officials dismiss this concern, arguing that the amount of aid 
contemplated is so small that it would neither affect Brazil's 
bargaining position in the Doha negotiations nor prove inconsistent 
with the country's current WTO obligations.  They contend that 
because the prevailing level of Brazilian subsidies is so low, the 
current package will fit within both the "de minimis" 10% of gross 
production value limit on direct subsidies and the ceiling on 
General Support Measures up to an additional US$900 million. 
 
¶4.  The GOB will disburse the additional emergency aid  through 
Private Option Risk Premium (PROP) options.  PROP is a price support 
program managed by CONAB, the Brazilian food supply company 
equivalent to the Commodity Credit Corporation, and linked to the 
Ministry of Agriculture.  The PROP option price represents the 
maximum amount that CONAB will pay to cooperatives and processors in 
order to guarantee a certain price to producers, which is above the 
market price.  The first weekly auction of PROP options will be 
conducted on May 23, 2006.  The goal is to assist in the sale of 15 
to 20 million metric tons of soybeans.  The government plans to pay 
producers between US$0.70 and $2.80 per 60-kilo bag of soybeans, 
depending on how far the producer is located from port. 
 
¶5.  The "mini-package," as it is being referred to, was not well 
received by the soybean sector, which complained that it was like 
"giving an aspirin to someone in the intensive care unit". 
Producers had requested 3 billion Reais for the state of Mato Grosso 
alone.  Producers also question the timing of the subsidy as much of 
the 2005/06 crop has already been sold. 
 
¶6.  After three years of adverse conditions, the vast majority of 
Brazilian farmers are not in a positive financial position and the 
mood of the sector is austere.  In late April, Brazilian soybean 
farmers began blockading roads in Mato Grosso, Parana, and Rio 
Grande do Sul states, demanding minimum price guarantees for their 
crop.  Farmers claim that the government minimum price does not 
cover their current production costs.  The government's minimum 
price for soybeans is about US$115 per metric ton.  Farmers state 
this year's cost of production to be in the range of US$230 per 
metric ton. 
 
¶7.  When the Brazilian government rejected farmers' proposal for a 
higher minimum price, farmers began blocking access to storage 
facilities to prevent exports from leaving the country.  Farmer 
protests have entered their fourth week, and Brazilian and U.S. 
industry officials report that no soybeans are being exported. 
According to ANEC, the Brazilian Exporters' Association, accumulated 
losses so far are in the US$100 million range, and it may be 
possible that American soybeans and Argentine meal and oil will fill 
Brazil's pending contracts. 
 
¶8.  The combination of low international prices, rising costs of 
inputs and transportation (including higher diesel prices), and the 
strong Real has continued to cut away at farmers' profit margins. 
Other Brazilian industries are also suffering from a similar 
 
BRASILIA 00000965  002 OF 002 
 
 
cost-price squeeze, including those that produce a range of export 
goods such as cars, car parts, shoes, machines, and furniture.  On 
May 10, the U.S. dollar slumped to 2.0, its lowest exchange rate 
against the Brazilian Real in five years, bad news for Brazilian 
soybean farmers.  While in recent days the dollar has rallied (up to 
2.13 as of May 16), many Brazilian industries will not see 
significant relief until the exchange rate rises at least until 2.5 
to 1. 
 
¶9.  For the first time in seven years, the area projected for 
soybean cultivation in Brazil is projected to decline.  Post 
estimates that this year's planted area is down 4 percent and that 
next year's area will be down another 2 percent.  The governor of 
Mato Grosso, and Brazil's largest soybean farmer, recently projected 
a 10 percent drop in planted soybean area for 2006/07. 
 
Comment 
 
¶10.  Revenues from soybeans, the country's most valuable export 
crop, are vital to the Brazilian trade balance.  So far in 2006, 
soybeans represent a staggering 8% of total Brazilian exports, yet 
this represents a drop from 12% in 2005.  As Brazil's continued 
economic growth remains highly dependent on exports, further 
contraction of the soybean sector would increase the country's 
vulnerabilities. 
 
Chicola