Can a new commodities boom revive Brazil?

Roughly every other glass of orange juice drunk around the world comes from the orchards of São Paulo state, boasts Duarte Nogueira.

“We have everything beginning with the letter ‘C’,” says the mayor of Ribeirão Preto, a city four hours inland from the state capital, before reeling off the Portuguese names of produce cultivated in the region.

“Coffee, sugarcane (cana), citruses, meat (carne) and cellulose,” the main ingredient for paper. “Agriculture is growing more and more and it is not only a virtue of our region but of Brazil.” 

The South American nation is now one of the world’s top producers of foodstuffs — from soyabeans to sugar and beef to bananas. Blessed with an abundance of natural wealth, such as vast iron ore deposits and deep sea oil reserves, Brazil also supplies some of the most important raw materials for modern economies. 

Latin America’s largest economy is now riding a rally in prices for many of these basic goods, as Covid-19 restrictions lift and worldwide growth returns. Among bullish traders there is even talk of a new commodities “supercycle”.

After disruptions in global supply chains constrained availability for certain items, demand has been stoked by a resurgent China sucking in resources and governments spending on recovery programmes, notably the US. The Bloomberg Commodity index, following a sharp drop around the start of the pandemic, has rebounded to levels not seen since 2015. Global food costs dropped for the first time in a year last month, with price declines for vegetable oil, cereals and dairy products according to a UN index, but the gauge was still more than 30 points higher than its level for the same period in 2020.

The impact is being keenly felt in Brazil’s agribusiness sector. Combined with a weakened exchange rate, which boosts revenues from products quoted in dollars, it is a boon to many Brazilian farmers and surrounding communities.

Maurílio Biagi Filho, a tycoon from a sugar and ethanol family in Ribeirão Preto, describes as “very rare” the confluence of high agricultural prices and record production. “When that happens, when you have both things going for you, it’s extraordinary,” he adds.

The region around Ribeirão Preto, or the “Brazilian California” as it is sometimes called, is testament to the prosperity that has flowed from an explosion in the country’s agriculture over recent decades. 

Porsche and BMW car dealerships are interspersed among rows of luxury high-rise apartments in a southern district of the municipality. Its population has expanded by two-thirds over the past 30 years. 

However, the affluence is a far cry from the problems now assailing large parts of the nation of 213m people.

Millions have lost work because of the public health crisis, leading to a record unemployment rate of almost 15 per cent. In a country of plenty, hunger has risen as inflation — in no small part driven by higher prices for Brazilian goods on international markets — pushes everyday items out of reach.

For ordinary citizens and investors alike, how the commodities upswing plays out will have an important bearing not only on Brazil’s convalescence from Covid-19 but on its destiny in the years to come. There are hopes it will kickstart an economy that was sluggish even before the pandemic and help to unlock the country’s long-promised potential.

A “window of opportunity” is opening for Brazil, says Gustavo Arruda, an economist at BNP Paribas. 

“There is a boom that we can take advantage of. You can spend [the gains] and do nothing. Or else make the most of it and get things done,” he says, alluding to structural reforms to make the economy more competitive that have been promised for two decades.

Yet despite the renewed optimism, there are obstacles that might prevent the commodities upswing from translating into a broader recovery.

It will require policymakers to avoid the mistakes of the previous commodities bonanza of the 2000s. Then an emerging markets darling, Brazil’s performance would later disappoint as opportunities were missed to boost productivity by improving infrastructure and slashing red tape.

And in parallel to the farming boom, a drawn-out deindustrialisation is occurring in Brazil, with factory closures and lay-offs as many traditional manufacturers struggle to remain competitive.

How Brazil grapples with these two trends may determine whether the country can break free from an age-old pattern of boom and bust that goes back to its origins as a resource colony.

At the metalworkers’ union headquarters in the ABC region, named after three industrial towns south of São Paulo, where former president Luiz Inácio Lula da Silva made his name as a strike leader during the military dictatorship, director Aroaldo Oliveira da Silva says booming agriculture by itself will not be sufficient to lift society.

“[When] it’s over once and for all, we’re actually going to be an agrarian country. But then we will be in absolute misery. Because nowadays, agriculture is so mechanised that it does not absorb labour,” he says. “Brazil will not sustain itself with agribusiness alone.”

Breadbasket of the world

Throughout its history, Brazil’s fortunes have often been tied to export manias. From sugar in the early days of Portuguese conquest through to gold, coffee and the Amazonian rubber rush of the late 19th century.

During the noughties it surfed the wave of the commodities supercycle, a prolonged period of high prices. Under Lula, poverty rates fell as his left-leaning administrations spent part of the fiscal dividends on social programmes.

But as that boom cooled, there followed a lost decade in which living standards tumbled. 

A huge corruption scandal, failed interventionist policies under Lula’s successor Dilma Rousseff, and mass protests that foreshadowed her impeachment provided the backdrop to what was then the country’s worst ever recession in 2015-16.

Despite the tumult of recent times, though, its farming belt has continued a quiet revolution that has cemented its status as an agricultural powerhouse.

“In the 1970s, Brazil was food-insecure. We imported everything: meat from Europe, milk from the US, beans from Mexico, apples from Argentina,” says Celso Moretti, president of Embrapa, a government-run agricultural research body.

“In less than five decades, we were able to establish sustainable and competitive tropical agriculture that has no parallel in the modern world,” he adds. “We have areas that we crop twice or three times a year.”

Much has centred on the Cerrado, or savannah, in the highlands of central Brazil that occupies more than a fifth of national territory. New techniques and technological developments, as well as the conversion of forest land, has transformed huge expanses in places such as Mato Grosso into plantations reminiscent of the American midwest.

The results have been remarkable. Today, the South American country is the largest producer of soyabeans and coffee as well as the biggest exporter of both beef and sugar. 

“Brazil is already the breadbasket of the world. We have the largest agricultural trade balance,” says José Carlos Hausknecht of agribusiness consultancy MB Agro Consultoria. “When we look at future projections, Brazil increases its share of the world market.”

This has offered a rare bright spot from the domestic gloom. As Brazil’s gross domestic product contracted 4.1 per cent last year during the pandemic, only agriculture registered positive growth, of 2 per cent.

Agribusiness as a whole, comprising inputs, farming and livestock, processing and services, has increased its share of the economy during the pandemic and could surpass more than 30 per cent of gross domestic product this year, according to estimates by the Centre for Advanced Studies in Applied Economics at the University of São Paulo (USP).

And despite the worst drought in almost a century in central Brazil and a more modest growth forecast, a record-breaking harvest of grains, cereals and oilseeds is expected in 2021, according to Brazilian statistics authority IBGE.

“In the years of poor performance we had in the economy, GDP performance would have been worse if not for agricultural exports,” says Pedro Dejneka at market intelligence group MD Commodities.

While this has enriched a relatively small number of landowners and ranchers, it is less clear whether the new commodities boom, including the windfall from higher iron ore prices, will spread wealth more widely throughout society. 

Marcos Fava Neves, an agribusiness expert at USP, points to Ribeirão Preto as an example of how agriculture can fuel urban development. 

“When you go to these cities built in the last 30 years, they have fancy hotels, nice restaurants, fitness centres and ice cream stores. Agribusiness brings the money, and then you see the service business booming. Ribeirão has four big malls — even by the US standard that is too much,” he said. “The growth of opportunities will be in the countryside.”

Arruda from BNP Paribas acknowledges that while there are positive knock-on effects from the commodities sector, it has a concentrating effect on income which can exacerbate inequality. Modern agriculture requires large properties, but little need for labour and has less dependence on other sectors, while effective taxes levied on the exports are typically low. “There is very high productivity in few hands,” he adds.

Factories floored

The ascendancy of Brazil’s agricultural sector is taking place at a time of malaise in its manufacturing sector. When Ford decided this year to quit manufacturing in Brazil after a century in the country, it stunned thousands of workers and dealt a blow to national pride.

Yet it was just the latest in a string of exits that has rung alarm bells. Mercedes-Benz ceased passenger car production not long before (though it still builds trucks), while brands including Sony and Canon have also ended operations.

Finance minister Paulo Guedes recently commented on the fact that the agribusiness sector’s share of GDP has overtaken that of “transformation” industries, a broad term covering all forms of manufacturing from plastics and pharmaceuticals to beverages and cars. He did not mince his words: “We are slowly being deindustrialised, which is bad for the country.”

One of the ironies of this process is that shortages of steel and components have resulted in slower deliveries for farm equipment.

With its smokestack petrochemical plants, car factories and metal workshops, the ABC region has for decades been the beating industrial heart of Brazil’s most developed state.

But the biggest of the three, São Bernardo do Campo, was already having to cope with Ford’s earlier closure of a factory with the loss of almost 3,000 jobs in 2019.

Mayor Orlando Morando insists the decision was down to the US automaker’s global strategy at the time, rather than local factors. The old site is now being converted into a logistics centre, as the municipality looks to further diversify its economy.

However, the ABC region is no longer the magnet it once was for internal migrants from poorer states. “In the past, great fortunes were concentrated in the metropolises,” says Morando. “Today there is a big concentration of wealth in the countryside.”

The trend of deindustrialisation is long-running. Since the mid-1980s manufacturing’s share of GDP has halved, according to analysis by the Getúlio Vargas Foundation. Between 2013 and 2019, 1.4m industrial jobs were lost, or 15 per cent of the workforce, IBGE figures show. Experts say this matters as industry tends to create more secure employment and has a stronger “multiplier effect” on other areas of economic activity.

Rafael Cagnin, an economist at the Institute of Studies for Industrial Development think-tank, describes Brazil’s experience as “premature”, compared with more advanced economies that were richer when the hollowing out began.

Outsourcing of low-tech activities such as clothing, textiles and shoes to lower-cost countries often happens as an economy becomes wealthier, he explains. “But in the Brazilian case, much of the premature deindustrialisation comes from activity of greater technological intensity, like machinery and equipment, chemicals, petrochemicals and the automobile industry.”

“[It] has blocked the continuation of the country’s development,” he adds. 

There are still undoubted examples of excellence. The world’s third-largest aircraft maker, Embraer, is the jewel in the crown of Brazilian engineering. But for Cagnin, the “industrial fabric” as a whole has decayed.

Export dependency

As commodity prices tend to be quite volatile, greater dependence on such exports risks leaving a country more exposed to the ups and downs of global cycles.

But Brazil’s farming sector blurs the distinction that economists sometimes draw between producing commodities, which is often a low value-added activity, and the more sophisticated products and services that generate greater wealth for a society.

“Agribusiness now is not just farms, because we export technology, machines and software. We have a lot of start-ups,” says Denis Arroyo Alves, director at Orplana, an association of sugarcane producers. “It is a new economy based in the countryside.”

To optimists, this offers an opportunity to revitalise Brazilian industry and expand other connected advanced activities. From “smart” heavy-duty machinery and self-driving tractors to “green” chemistry, electronics and computer programming, they say there is considerable potential given the right support and conditions. A thriving scene of “agritech” start-ups shows many entrepreneurs are already grasping this.

“Agribusiness can be a catalyst for re-industrialisation,’‘ says Cagnin. “Although this does not yet exist on a large scale, there are instances.”

As sellers of soyabeans and beef in particular come under pressure to prove their supply chains are free from deforestation, for example, there will be greater need for satellite tracking and reliable tracing systems.

With threats of products boycotts from European consumers and supermarkets over the Amazon, environmental protection — given short shrift by President Jair Bolsonaro — is likely to become an even more important theme for big agribusinesses, as will decarbonisation. Both will involve innovations, technology and R&D investments. 

Yet many economists stress the need for deep reforms to help tackle the notorious custo Brasil — the cost of doing business in Brazil — which holds back manufacturers. This will include dealing with byzantine taxes, burdensome bureaucracy and creaking — or nonexistent — infrastructure, particularly in transportation. 

A tax reform bill is now making its way through Congress. But with elections in just over a year’s time, there are doubts about the political desire to enact the sweeping changes necessary.

Unlike the last commodities boom, this time around China is unlikely to return to the astronomical growth rates that transformed it into a commercial superpower. Many analysts predict a strong but shorter upswing as warehouse stocks are replenished following the chaos of Covid.

“There will be a two to three-year wave of accelerated growth,” says Welber Barral, co-founder of BMJ Consultores Associados. “A great recovery, but after that it is unknown.”

Additional reporting by Carolina Pulice