Escreve Chris Mayer:
Brazil Screws Up
Dear Capital & Crisis Reader,
Brazilian agriculture looked set to become the breadbasket of the world in the 21st century. It seemed to have everything. Lots of flatland. Plenty of water and sunshine. Already, Brazil is a big exporter of a long list of agricultural items.
I guess Brazil can't stand prosperity, because it just screwed it all up.
The implications will echo far beyond the borders of Brazil. It will have an impact on the world's future food supply and on food prices. And it also raises broader questions about investing in Brazil at all.
On Tuesday, the Brazilian government released new rules -- "immediately binding" -- that restrict foreign ownership of Brazilian land. Worse, the legal rules are so unclear that all such acquisitions since 1988 could be null and void, with the land returned to nationals. Some political groups are saying this is exactly what should be done.
The mainstream papers seem to treat this latter possibility as unlikely. And more moderate political groups also say such a drastic step is unlikely. But I can tell you from talking to people down there in the last few days -- including attorneys -- that local businesspeople are not dismissing that possibility. At best, Brazil is in legal limbo on these questions.
Blame politics. It is an election year in Brazil. The country will vote for a new president on Oct. 3. All indications are that it will be Dilma Rousseff. She is one of the ones who have been highly critical of foreigners buying Brazilian land. "Brazilian land for Brazilians" is the chant.
And there have been a lot of foreigners buying. I wrote to you before about a project in the cerrado that turns scrubland into productive farmland. The economics are very compelling. You get a 100%-plus return in three-four years without leverage using a proven 40-year-old process.
Other folks started to figure this out, too. A group in Hong Kong -- backed by Jacob Rothschild and a pair of Hong Kong tycoons -- raised $179 million to do just what I described in my newsletter. This company, Agrifirma, planned an IPO next year. Then just this month, Macquarie announced a plan to raise as much as $600 million to invest in Brazilian farmland.
There is lots of land in Brazil. The country could double the amount of land under cultivation -- something no other large country could plausibly do. The land is also cheap and potentially very productive. Brazilians can harvest two crops a year, for instance. All these investors are doing the same math. Buy the land. Improve the land. Boom: big returns only a few years later.
Many foreigners are already there. By some estimates, foreigners own or control about 20% of Brazil's cane production. Estimates for some other crops are even higher. Good estimates are tough to come by because many do business through a Brazilian company, even though foreigners own and control it. This is the loophole the government closed with Tuesday's bombshell of an announcement.
In any event, the new rules will freeze agricultural investment in Brazil. This is big news for global food markets because Brazil was such a key part of the equation. Brazil, as I've pointed out, is the world's arable land bank. This is where we'd get the added food supply the world needs.
As Reuters points out, "Brazil's essential role as a provider of food for the world's expanding population is at risk... There are simply no large-scale alternatives to Brazil's unique agriculture potential."
Brazil can't do it alone. Getting the arable land Brazil has to production is a process that takes significant investment and time. Foreigners brought the needed capital. In April alone -- the latest data are available -- foreign investment in Brazilian agriculture was $26 million -- up 225% from a year ago. Between 2002-2008, foreign investors poured nearly $2.5 billion into land alone.
Foreign money also brought the expertise of large-scale and modern farming techniques. Their investment creates jobs for Brazilians. They pay taxes. They raise the value of Brazilian lands. A recent study said that farmland values had increased 54-70% over the last three years in frontier regions.
And of course, foreign money brought more food to the world. What did Brazilians do with Brazilian land before? Nothing. It sat there. And the country was poor and backward.
It looks like Brazil is pining for the old days. Governments are "pathologically stupid," as my friend Doug Casey likes to say. So perhaps this shouldn't be a surprise. Nonetheless, I am always amazed at how readily politicians are so quick to kill the golden geese. (The U.S. government is, sadly, no different.)
It is ominous, too, that this announcement comes during the same year as massive drought sweeps across Europe, killing off crops of all kinds -- but especially Russia's wheat harvest.
Add to that this trend -- in the words of the Financial Times -- "Beijing buys unusually large amounts of corn, soya and rice on the market." Yes, China is now importing corn, and prices in China are at record levels. Soybean imports are double what they were only five years ago. China will import more grain this year than any year since its own crop failures in 1995. It will import about 1 million tonnes, up from only .05 million tonnes last year. --
Chris Mayer: Capital & Crisis, Aug 27, 2010
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