August 30, 2011

Brazil Could Lose R$ 60 Billion in Potential Ag Investments

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The Brazilian Congress held public hearing last week as part of the process to develop new regulations concerning the purchase of Brazilian farmland by foreigners. In August of 2010, then President Lula essentially suspended the purchase of farmland by foreigners and since then, billions of dollars of potential investments have been setting on the sidelines waiting for clarification of the new regulations. The hearings were held by a subcommittee of Congress (Subestra) assigned to develop the new regulations by the end of the year.

Industry participants in the hearing indicated that as much as R$ 60 billion in potential investments over the next 5 years may be lost if this issue is not resolved. They estimate that R$ 7 in potential investments could be lost in grain production, R$ 16 billion in sugarcane production, and R$ 37 billion in forestry projects.

The industry participants suggested that a distinction should be made between speculative investments and investments focused on increased agricultural production. Unrestricted land speculation was one of the principal reasons why Lula took action last year. Rapidly increasing land prices were forcing many Brazilian farmers out of the land market because they could not compete with foreign investors looking to purchase tens of thousands or hundreds of thousands of hectares. The final fact that pushed Lula to restrict purchases was the revelation that the Chinese government had been purchasing farmland in the state of Bahia.

The situation for the sugar/ethanol sector is especially troubling since 30% of the sugar/ethanol mills are owned by foreigners and no new investments will be forthcoming if the land ownership issue is not resolved. Brazil's ethanol production is in decline at the same time that demand for the fuel continues to increase. The country needs dozens of new sugar/ethanol mills in the near future just to keep up with increasing domestic demand. A large amount of land for sugarcane production is essential for a sugar/ethanol mills in order to better control the quantity and quality of the sugarcane. Without the ability to purchase land, investors will be very hesitant to pour billions of dollars into new sugar/ethanol mills.