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PP RUEHRG
DE RUEHSO #0199/01 1091514
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P 181514Z APR 08
FM AMCONSUL SAO PAULO
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UNCLAS SECTION 01 OF 04 SAO PAULO 000199 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/BSC, WHA/EPSC 
 
NSC FOR TOMASULO 
SOUTHCOM ALSO FOR POLAD 
USAID FOR LAC/AA 
 
E.O. 12958: N/A 
TAGS: PGOV EAGR ECON EIND ETRD BR
SUBJECT: MATO GROSSO DO SUL STATE HIGHLIGHTS BRAZIL'S AGRICULTURAL 
BOOM 
 
REF: A) Sao Paulo 170 B) Sao Paulo 177 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY 
 
Summary 
------- 
 
¶1.  (SBU) Brazil's continued position as a leading international 
agricultural powerhouse is fueled by the rapid economic expansion in 
states such as Mato Grosso do Sul (MS).  Driven by high commodity 
prices as well as tourism to the world's largest wetland space, the 
Pantanal, MS is undergoing an economic boom.  Experts say this is 
just a preview of the state's potential and confirm that dozens of 
initiatives are underway to turn MS into an even larger source of 
meat, soybeans, paper, and ethanol.  Additionally, innovative 
infrastructure projects are transforming MS from an agricultural 
region into a state with industrial potential.  Foreign interest, 
especially from East Asia, is increasing, but regional commercial 
and business issues may complicate the picture.  The protectionist 
policies of Evo Morales in neighboring Bolivia and the potential for 
similar trade policies emerging out of Paraguay, may curb growth in 
some sectors.  End Summary. 
 
Agriculture Leading Economic Explosion 
-------------------------------------- 
 
¶2.  (SBU) Mato Grosso do Sul State (MS) is located in Brazil's 
central-west region and borders Bolivia and Paraguay.  With 576,400 
square miles (slightly larger than the size of Germany) and fertile 
fields, the state is identified as Brazil's cattle country and one 
of its major breadbaskets.  MS's population of 2.3 million is 
heavily involved (almost 50 percent) in services and tourism because 
of the presence of the Pantanal, the world's largest wetland area 
covering 75,000 square miles in three countries.  Agriculture 
represents another third of the workforce, with about a fifth 
involved in the industrial sector.  Of MS's total exports, soybeans 
account for 35 percent, pork and chicken 20 percent, beef 14 
percent, mineral ores 8 percent, leather 7 percent and wood 5 
percent.  (Note: MS accounts for only 1 percent of Brazil's GDP. 
End Note.) 
 
¶3.  (SBU) During a three-day visit to Campo Grande and environs (see 
reftels), Poloff met with a range of government and business 
officials to get a sense of the opportunities and challenges the 
state is facing.  According to First Secretary Dacio Queiroz da 
Silva of the MS Federation of Agriculture and Livestock (FAMASUL), 
MS's rich soil means that the state will continue to serve as one of 
Brazil's agricultural powerhouses.  Silva noted that while vital to 
the state's economy, the 25 million head of cattle are actually 
decreasing in relative importance to sugar because sugarcane for 
ethanol production has become a more profitable use of farmland. 
Soybean planting is also growing thanks to the spike in world 
prices, and the state government is evaluating paper products as a 
new target industry.  (Note: Silva's overall assessment of continued 
agricultural growth was ebullient.  He only briefly touched on 
conflicts - which he neglected to acknowledge often turn violent -- 
between landowners and the indigenous, per ref B.  End Note). 
 
State Plans Large Infrastructure Upgrades 
----------------------------------------- 
 
¶4.  (SBU) State Secretary for the Environment, Cities, Planning, and 
Science and Technology Carlos Alberto Negreiros Said Menezes 
explained that MS was leading the charge for large infrastructure 
projects.  Menezes said that MS has shed its image as a mismanaged 
and unproductive state unable to secure federal funding for 
infrastructure programs even when the governor and president were of 
the same party.  He noted that the state is focusing on several 
mega-initiatives to develop its overall economy, including a 
pipeline to bring in diesel from other states and transport ethanol. 
 
SAO PAULO 00000199  002 OF 004 
 
 
 Simultaneously, MS is amplifying the state electricity grid to 
provide renewable alternative energy for new local businesses as 
well as to other parts of Brazil.  MS is constructing a major 
highway running from the capital city of Campo Grande to the state's 
eastern border in order to secure a new commercial link to Sao 
Paulo.  According to Menezes, MS will build an additional expressway 
along Paraguay's northern border, the state's southern edge, to 
increase trade between Brazil and Paraguay and introduce more of a 
state presence in this crime-riddled frontier.  MS will construct a 
railroad running south to Parana State to connect with an existing 
rail to the major port of Paranagua.  (Note: Current high 
transportation costs are limiting competitiveness and expansion.  As 
an example, soybean from MS are exported through Paranagua in Parana 
State and incur transportation costs equal to two-thirds of their 
original value or 40 percent of export value.  End Note.) 
Construction of a new cargo terminal and lengthening of existing 
runways at the Campo Grande International Airport will also 
encourage business growth, Menezes said.  Menezes stated that 
funding for these new initiatives is coming from federal 
government-supported programs and the Brazilian National Development 
Bank (BNDES), the current MS administration's clean-up of previously 
wasteful state spending, and well as new sources of government 
revenue generated from a growing number of businesses. 
 
¶5.  (SBU) In addition to these large-scale programs, Menezes said 
that the state hopes to boost the economy by expanding ports and 
smaller highways and railroads, as well as tripling the number of 
sugar mills to produce ethanol.  MS expects to increase its annual 
production of ethanol from 600,000 to 2.5 billion liters in the next 
two years and build a new ethanol pipeline for overseas shipments 
through the port of Paranagua.  (Note: Brazil produced 20.75 billion 
liters of ethanol in 2007, of which Sao Paulo State accounted for 12 
billion.  End Note.)  Noting the more than one million acres owned 
by International Paper in MS, Menezes said that the state is 
planning to plant thousands of trees in its southern region to 
develop wood and paper processing.  In December 2006, the company 
began construction of a major pulp and paper mill in Tres Lagoas on 
the Sao Paulo State border in order to take advantage of Sao Paulo's 
infrastructure, an investment estimated at USD 1.5 billion. 
 
Campo Grande Leading the Charge 
------------------------------- 
 
¶6.  (SBU) Economic Development Agency of Campo Grande (ADCG) 
President Paulo Salvatore Ponzini stated that MS's internal border 
with Sao Paulo state makes it an attractive destination for 
Brazilian investors.  ADCG Administration, Planning and Finances 
Coordinator Sergio da Rocha Bastos added that MS uses tax incentives 
to attract investment from other states, including the opportunity 
for some businesses to start up and operate tax-free for ten years. 
(Note:  There is an ongoing lawsuit between the states of Amazonas 
and Sao Paulo in which Sao Paulo offered similar tax incentives.  By 
law, Amazonas is the only Brazilian state permitted to offer tax 
incentives to encourage investment.  End Note.)  MS's lower labor 
costs also provide a competitive advantage over Sao Paulo and Minas 
Gerais states.  Campo Grande is developing a high-tech park to 
attract new opportunities as well, particularly cable television 
companies seeking alternatives to the saturated markets of Sao Paulo 
and Rio de Janeiro states. 
 
¶7.  (SBU) According to Bastos, Campo Grande is exploring technology 
as a way to enhance its position as the focal point of this rich 
agricultural state.  Campo Grande is investing USD 25 million in 
building a "logistics platform" to link the state's highways and 
railroads in a logistics hub that would centralize collection, 
packaging, and customs preparation for immediate export through 
Brazil's two major ports of Paranagua (Parana State) and Santos (Sao 
Paulo State).  Bastos claimed that this hub would facilitate 
higher-quality and more efficient service. 
 
 
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Challenges to Reach Potential Remain 
------------------------------------ 
 
¶8.  (SBU) ADCG's Bastos admitted that the state government has to 
overcome significant hurdles in order to reach its full economic 
potential.  MS must build and upgrade miles of highways and connect 
more of the state's cities with Campo Grande, build more schools, 
encourage the role of women in the economy, and create a state-wide 
development agency as well as an international trade promotion 
entity.  The city has begun addressing some of these issues through 
projects supported by BNDES.  Campo Grande has started constructing 
kindergartens with a view towards offering more employment 
opportunities for women, has initiated a major sewage system 
overhaul, and is investigating ways to eliminate the city's slums 
through an Inter-American Development Bank initiative encouraging 
poorer city dwellers to get involved with park protection efforts. 
 
Foreign Interest in Mato Grosso do Sul 
-------------------------------------- 
 
¶9.  (SBU) ADCG's Bastos noted that foreign investors are 
increasingly interested in MS, particularly because of its 
agricultural strength and its geographic location in the center of 
South America which potentially makes it a distribution center for 
the continent.  Bastos explained that MS is focusing on becoming a 
South American export hub for Asia and wants to use Campo Grande's 
logistics platform to serve as the focus of this effort.  Chilean 
entrepreneurs have approached his office seeking to encourage Campo 
Grande's logistics platform to consider connecting to the port of 
Iquique in Chile to export Brazilian goods to Asia.  Bastos told 
Poloff he has also received Chinese business and official 
delegations interested in corn and beef exports.  Singaporean 
bankers have visited and are considering investing part of a USD 200 
million hedge fund in MS's meat production sector.  State Secretary 
Menezes told Poloff that Japanese investors are interested in 
bio-diesel and ethanol exports via Paranagua, and South Korean 
business leaders are looking at railroads and an unspecified 
transport route that would cross Paraguay into Chile to offer an 
alternative to international shipping through the Panama Canal. 
 
Relations with Bolivia and Paraguay 
----------------------------------- 
 
¶10.  (SBU) State Secretary Menezes complained that since Evo Morales 
became president of Bolivia, bilateral business cooperation has 
faced a number of hurdles.  For example, Brazil and Bolivia were 
discussing gas cooperation, but Morales pulled out of negotiations 
when he assumed the presidency.  A possible new road linking eastern 
Bolivia with Paraguay and Brazil in order to increase tri-lateral 
trade has also yet to make serious headway due to Morales, Menezes 
claimed.  MS hopes to address these challenges and to revive 
regional trade through an Integration Zone of the Central Region of 
South America (ZIRCOSUR) in which 34 regions and states from 
Argentina, Bolivia, Brazil, Chile and Paraguay would cooperate. 
FAMASUL's Silva said that farming opportunities in Bolivia have 
become increasingly difficult for Brazilians because of policies 
President Morales has carried out discouraging foreign investment, 
especially near the border.  Silva fears that should Fernando Lugo 
win the presidential elections in Paraguay, he will adopt similar 
policies discouraging Brazilian investment because, according to 
Silva, Lugo views Brazilian farmers as "the enemy." 
 
Industrial Role in Economic Growth 
---------------------------------- 
 
¶11.  (SBU) While acknowledging agriculture's role in contributing to 
the state's impressive economic growth, Federation of Industries and 
Commerce of Mato Grosso do Sul (FIEMS) President Sergio Marcolino 
Longen highlighted MS's efforts to encourage opportunities in 
addition to agriculture.  FIEMS is developing a variety of programs 
 
SAO PAULO 00000199  004 OF 004 
 
 
to persuade residents to look beyond agriculture and develop 
service-related technology and logistical expertise for 
infrastructure projects, he said.  The organization wants to 
overcome the state's long-standing agricultural tradition and move 
toward semi-industrial sectors over the next five years.  Longen 
said that MS wants to begin processing all meat products within the 
state.  MS wants to increase steel production and become 
self-sufficient in energy (biomass and petrochemicals) by 2010. 
 
Comment 
------- 
 
¶12.  (SBU) MS's economic growth is part of a national trend in which 
Brazilian states are focusing on developing their limited 
infrastructure to create opportunities for market expansion.  As 
elsewhere in Brazil, improved infrastructure is a major key to 
economic growth potential.  Mato Grosso do Sul's case is interesting 
because while tourism and services account for almost half of the 
state economy, experts are looking beyond tourists and small 
business to larger industries and agricultural operations that 
produce goods that the state can market abroad.  Should MS succeed 
in linking its highways, ports, and pipelines with its neighbors and 
improve distribution of its agricultural products overseas, the 
state could transform itself from a regional commodity producer to a 
solid international player. 
 
WHITE