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RHMFISS/CDR USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 04 SAO PAULO 001002 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/BSC 
NSC FOR FEARS 
SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958:  N/A 
TAGS: PGOV PREL EAGR ETRD ENRG SENV KPAO EINV ECON BR
SUBJECT: SOUTHWEST BRAZIL: CATTLE CRISIS, POROUS BORDER, AND U.S. 
INVESTMENT IN PAPER 
 
 
------- 
SUMMARY 
------- 
 
¶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. 
END SUMMARY. 
 
--------------------------------------------- -- 
WATER, WATER NOWHERE; NOR LOANS, NOR FMD RELIEF 
--------------------------------------------- -- 
 
¶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.) 
 
------------------------- 
FROM COW PIES TO GASOLINE 
------------------------- 
 
¶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. 
 
----------------------------------- 
WHILE BRAZIL'S MEAT PACKERS PROSPER 
----------------------------------- 
 
¶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 
exporters. 
 
------------------------------- 
WHERE THE EUCALYPTUS GROWS FAST 
------------------------------- 
 
¶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 
wetlands. 
 
¶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. 
 
--------------------------------------------- 
YOUTH AMBASSADORS AND INDIGENOUS FILM PROJECT 
--------------------------------------------- 
 
¶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 
 
SIPDIS 
in Mato Grosso do Sul to promote awareness and understanding of this 
aspect of their society. 
 
 
--------------------------------------------- -- 
LONG ON BORDER, SHORT ON CAPACITY TO CONTROL IT 
--------------------------------------------- -- 
 
¶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 
opportunities. 
 
---------------------------- 
COMMENT: DEALING WITH CHANGE 
---------------------------- 
 
¶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. 
 
MCMCULLEN