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