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January 19, 2015

New Ag Secretary in the State of Sao Paulo has a Lot to Worry About

The State of Sao Paulo in southeastern Brazil has a new Secretary of Agriculture and he has a lot of problems to confront including: the ongoing crisis in the sugar sector, low commodity prices, recovering from the worst drought in 80 years, and continuing low water levels in the state's reservoirs

The principal agricultural activity in the state is the growing and processing of sugarcane which accounts for 34% of the agricultural GDP in the state. The combination of adverse weather, low sugar and ethanol prices, and misguided governmental policies has led to the closing of 44 sugar mills during the last three years and another 33 sugar mills entering into bankruptcy proceedings. The sugar sector in the state has lost 50,000 direct jobs in the last three years and more than 100,000 jobs when related industries such as services and equipment are included.

Low sugar and ethanol prices are the major concern for the sector. The price of sugar is governed by the international marketplace, but the price of ethanol is directly related to the price of gasoline which is controlled by the federal government. Sugarcane producers in Brazil have been petitioning the federal government to increase the price of gasoline, but the government has held down the price of gasoline out of a concern for domestic inflation. With the recent declines in international petroleum prices, it would now be even more difficult to increase ethanol prices.

Many sugar mills in Brazil are able to adjust their production to favor either sugar or ethanol depending on which product offers the best return. With the downturn in world sugar prices, mill operators had been hoping that ethanol would be their key to profitability, but thus far that has not been the case.

Adverse weather over the last few years has also led to problems in the sugar sector. Droughts, frosts, and high temperatures have all led to declining sugarcane production in the state even though the sugarcane acreage has increased. With an uncertain economic future for the sugar sector, future increases in sugarcane acreage are now in doubt.

In addition to being the major producer of sugar and ethanol, the state is also the number one producer of rubber and oranges and a major producer of coffee, forestry products from reforestation, ornamental flowers, eggs, fruits, poultry, swine, and beef. The state also produces soybeans, corn, and dry beans, but grain prices have also been weak as well.

The water levels in the state's hydroelectric reservoirs have improved slightly over the last few months, but not nearly enough to say the crisis is over. January is generally the rainiest time of the year, but rainfall levels have been below normal for the last month leaving many to worry if there will be enough rainfall to recharge the water levels in a meaningful way. The summer rainy season still has two more month to go before the next dry season sets in and state officials are hoping for above normal rainfall during February and March. If the rainfall does not pick up, the state could once again be facing electrical shortages.