Booming sugar exports and quick harvest could spell trouble for ethanol

Booming international prices and a weakening currency led Brazilian mills to increase sugar production by 32 percent in the 2020-2021 harvest, making the country the world’s biggest producer for the second year in a row. Now, as more and more cane becomes sugar, and the dry weather speeds up the harvest, the country risks reducing the safety margin for ethanol production in 2021, according to experts. 

Data from sugar mills association Unica shows that sugarcane crushing reached 415.1 million tonnes by the end of August — 3.8 percent more than the same period in 2019-2020, despite a slowdown in the second half of the month caused by rains in São Paulo state.[restricted]

According to Bruno Lima, sugar and ethanol analyst at consultancy StoneX, the increasing appetite for Brazilian sugar exports and the dry weather are encouraging producers to move forward with a final push before the end of the harvest in October. As a result, there will be less surplus sugarcane — cana bis, as it is known in Brazil — in the fields to support an early start of the 2021-2022 crushing season in March. 

“When crushing speeds are high, you have less leftover sugarcane for the next harvest. Our estimates are that ethanol stocks will reach 1.5 billion liters by late March, compared to 1.9 billion liters in the previous season. We may have a price peak at this time,” Mr. Lima tells The Brazilian Report

The National Supply Company (Conab) expects Brazil’s ethanol production to drop by 14.3 percent, to 30.6 billion liters over the course of the harvest. 

Any price hikes, however, depend on the recovery in fuel consumption after the end of social isolation measures and will be capped by gasoline prices, he adds. As ethanol is less energy-efficient than gasoline, local drivers will not buy it unless the price is 70 percent lower than gasoline. 

With sugar beet crops suffering from jaundice in Europe, Thailand’s production halved, and Índia’s harvest hindered by Covid-19, benchmark sugar prices remain high, which suggests the production mix will remain slanted toward sweetener for the time being. 

Recent measures by the Brazilian federal government have also made sweetener more advantageous for local producers. On Monday, President Jair Bolsonaro announced the U.S. government had increased sugar import quotas from Brazil by 80,000 tons, reaching a total of 310,000 tons. The deal, however, came two weeks after Brazil extended tax exemptions for U.S. bioethanol until December, which may push prices down for a while.  

For Eduardo Leão de Sousa, Unica’s executive director, a potential increase in ethanol production is owed to “a scenario of demand for sugar and bioethanol.” In an emailed statement, he added that the mix may be quickly altered if there is a need to do so, and stressed that producers are committed to the targets established in the National Biofuels Policy. 

Monitoring by StoneX, however, stoked concern about how much leeway there is to shift production, 57 percent of sugar exports for next year are already sold or pre-priced. 

First rice, now sugar? Not quite

Despite a 120-percent increase in sugar exports in August, to a monthly record of 3 million tons, Brazilian experts refute any expectation of a shortage in the domestic market, as has now been the case with rice.

According to Mr. Leão de Sousa, domestic consumption hovers around 10 million tons a year, however, “in five months of harvest, we produced over 25 million tons of sugar and crushing is still ongoing — not to mention the harvest in the Northeast, which starts right now”, he notes. 

From January to August, exports surpassed 15 million tons — 57 percent more than the same period of 2019. Meanwhile, Conab predicts Brazil’s sugar production to hit a record of 39.3 million tonnes in the 2020-2021 harvest — 35.6 million coming from Brazil’s Center-West, Southeast, and South regions, known collectively as the ‘Center-South.’ 

Per StoneX calculations, exports from April to August were enough to keep stocks at a reasonable level. However, “from October to March, the Center-South area has to export more than we have ever done in history” to avoid high stocks from pressuring prices, says Mr. Lima. 

The extra push, he says, happens precisely when the harvest is beginning in the northern hemisphere. “Traditionally, the export seasonality is lower in this period. Will there be so much demand from now on?”, he asks.

International benchmark prices suggest so. In New York, prices rose 7 percent in the week from September 11 to September 18, off the back of concerns with dry weather in principal producing areas and forest fires.  

Unexpected factors

Abroad, crop failure in Thailand leading to the smallest production in 10 years was already on producers radar since the beginning of the year, say experts. Still, the Brazilian output may be required to fill other unexpected gaps. 

In the European Union, where France’s sugar beet crops were attacked by jaundice and Germany’s suffered from dry weather, sugar production is set to fall to 16.1 million tons, down from around 17 million in 2019.

In India, another major producer, Covid-19 is the issue: the harvest there is largely manual and the uptick in infections may prevent workers from travelling and delay production

India’s situation is being closely monitored and has not entirely been factored into current prices, says Mr. Lima. “There are fears that, if Covid-19 cases increase too much in India, we may have a scenario that is not in the game right now. It will impact not only production, but also logistics. They may not be able to export if they close the ports.”[/restricted]


Brazil makes concessions for U.S., despite cuts on Brazilian steel quotas

Traditionally, Brazil’s trade policy — along with almost all dealings with foreign countries — has been based on the principle of reciprocity. Raise tariffs on Brazilian goods? Expect the same to happen in return. However, this long-held credo is being cast aside during the Jair Bolsonaro government, with the Foreign Affairs Ministry led by anti-globalist Ernesto Araújo happy to make concessions to Donald Trump’s U.S. As we explained in this morning’s Daily Briefing, Mr. Araújo is pushing for a 90-day renewal of Brazil’s tax-free quota for foreign ethanol, benefiting U.S. producers — just days after Donald Trump’s White House imposed reduced import quotas on Brazilian semi-finished steel.[restricted]

According to President Trump, the measure came as a result of the slowdown of the U.S. steel industry, due to the dwindling demand during the coronavirus pandemic. Brazil’s Foreign Affairs Ministry says it is confident quotas will be lifted as economic conditions improve.

Import quotas allow Brazilian producers to sell their products to the U.S. tariff-free up to a given volume. Since 2018, the U.S.’s steel and aluminum import tariffs have risen to 25 percent, going against the rules of the World Trade Organization (WTO).

In justifying the measure announced on Friday, Mr. Trump proclaimed that shipments of steel from domestic producers fell 15 percent in the first six months of the year, and that the capacity utilization rate of U.S. firms in the sector was below 70 percent on a year-to-date basis from August 15. 

“Moreover, imports from most countries have declined this year in a manner commensurate with this contraction, whereas imports from Brazil have decreased only slightly.”

The price of steel in the U.S. fell 12 percent this year, because the Covid-19 pandemic crushed demand across all related sectors, from home appliances to civil construction. At a steel sector conference last week, American executives said that the recovery process is likely to take between one and two years. 

However, among representatives of the private sector and members of the Brazilian government, the U.S.’s aggressive move is largely down to the proximity of presidential elections in that country. They highlight that Mr. Trump’s decision on Friday was a gesture to the steel industry, which comprises important Republican Party backers and could boost his re-election chances. Throughout his term, the president has been keenly tuned to the message of protecting American jobs to the detriment of foreign imports.

Sharp Q4 downturn

Brazil is the world’s 12th largest exporter of steel products and the U.S. is its biggest market. Brazilian steel sales to the U.S. add up to an average of USD 2.6 billion a year, and around 85 percent of the total volume consists of semi-finished steel used as raw materials for American industry. In the other direction, Brazil imports around USD 1 billion in metallurgical coal and USD 4.3 billion in machinery and equipment every year from the U.S.

The Aço-Brasil Institute, representing steel producers in the country, says that the restriction will result in a sharp fall in sales for Q4 2020, from 350,000 tons to 60,000. Since April, Brazil has been working with a quota system estimated at 3.5 million tons per year, adopted in the place of a 25-percent increase in import taxes on Brazilian steel.

CNN Brasil reported that U.S. pressure on Brazil to adopt new quotas began in June, when U.S. Trade Representative Robert Lighthizer telephoned Ernesto Araújo, asking the country to voluntarily restrict its sales to the U.S. due to the reduced demand for steel caused by the pandemic. After consulting with the private sector, Mr. Araújo replied that contracts had already been signed for Q3 2020.

The Foreign Affairs Minister did not comment on these talks, but Aço-Brasil confirmed that negotiations have been in place for the last month to formalize the reduction of quotas. 

December trade talks

Brazil has already exported 90 percent of its annual quota, with restrictions now falling upon the remaining 350,000 tons to be shipped — now, only 60,000 tons may be exported, the future of the other 290,000 will be discussed in December.

In a joint statement on Saturday evening, the Foreign Affairs and Economy Ministries affirmed that, despite the reduction, tariffs on intra-quota steel would remain at zero. The same statement confirmed that the two countries will negotiate once more in December.

“The Brazilian government upholds the firm expectation that the recovery of the U.S. steel sector, the frank and constructive dialogue on the issue — to be resumed in December — and the exceptional quality of bilateral relations will allow the full reinstatement and the increase of trade levels of semi-finished steel,” read the statement, banking on Brazil’s perceived ‘special relationship’ with Donald Trump’s White House.

Measure contradicts President Bolsonaro

Belief in the existence of this ‘special relationship’ increasingly appears to be one-sided, as was exemplified in a brief meeting between President Jair Bolsonaro and President Donald Trump in September of last year, at the UN General Assembly.

While the Brazilian leader blurted out an “I love you!” to his U.S. counterpart, Mr. Trump replied: “it’s nice to see you again.”

In June of this year, in another attempt to show his closeness to Donald Trump, Mr. Bolsonaro said he had spoken to the White House and asked for an increase in export quotas of Brazilian semi-finished steel. Last week, he claimed he had solved the issue.

“Some months ago there was news that the American president was going to tax our steel and the press criticized me. I held my tongue for almost 30 days. Obviously I spoke with Mr. Trump, and 30 days later tariffs on our steel were not raised.”[/restricted]


Philippines halt Brazilian poultry imports due to coronavirus scare

The Philippines decided this Friday to temporarily halt Brazilian poultry imports after Chinese authorities said they had identified traces of the coronavirus in frozen chicken wings imported from Brazil.

“With the recent reports from China and in compliance with the country’s Food Safety Act to regulate food business operators and safeguard Filipino consumers, the temporary ban on the import of chicken meat is imposed,” said the country’s Department of Agriculture in a statement sent to Reuters.

Between January and July 2020, Brazil exported USD 31.5 million to the Philippines in poultry products, according to government data.

On Thursday, authorities in the Chinese city of Shenzhen announced they had found traces of the virus in frozen chicken wings imported from Brazil. China did not disclose the brand of the contaminated products. According to Brazilian news website G1, the contaminated products came from the state of Santa Catarina, from a slaughterhouse owned by food company Aurora. 

In reaction to the Chinese announcement, the Brazilian Association of Animal Protein (ABPA) said in a statement that “it remains unclear where the possible contamination might have occurred — and whether it happened during transportation.” 

The association, which represents one of Brazil’s most important sectors, also said that the transmission of Covid-19 in food is negligible, following similar announcements from the World Health Organization (WHO). This afternoon, ABPA had not yet posted a statement in relation to the Philippines’ decision. 

On Thursday, reporter José Roberto Castro showed that concerns of contamination in Brazilian slaughterhouses and meat processing plants are not new. Six Brazilian abattoirs, most of them in the country’s southern region, are already banned from selling to Chinese customers due to worries about contamination among the plant’s staff.

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Chinese authorities say coronavirus found in Brazilian poultry

The Chinese municipality of Shenzhen announced they have found traces of the coronavirus in frozen chicken wings imported from Brazil. Despite no public indication of bans of Brazilian animal products, the report causes concern in local authorities. Brazil’s Agriculture Ministry is treating the case as an “alleged contamination,” adding that the country hasn’t received any official warning. In a statement, Brazilian authorities say they are “looking for official information to clarify the circumstances of the alleged contamination.”[restricted]

According to pro-Beijing newspaper South China Morning Post, the virus was found on the surface of a frozen chicken wing. The discovery happened on Wednesday, during a routine inspection. Every staff member who had contact with the product was tested, but all results reportedly came back negative.

Chinese authorities also announced the detection of the coronavirus on packages of frozen shrimp from Ecuador. Recently, sanitary authorities also have been finding the coronavirus in other seafood products.

“Shenzhen will continue to track and test all relevant frozen foods. The government also would like to remind residents to be cautious when purchasing imported frozen meat and seafood,” said the Shenzhen Municipal Health Commission, as reported by the South China Morning Post. The commission did not name the brand in question. However, according to Brazilian news website G1, the contaminated batch comes from a slaughterhouse owned by food company Aurora, located in the southern state of Santa Catarina.

The Agriculture Ministry says it is investigating the case. The Brazilian Association of Animal Protein (ABPA) said in a statement that “it remains unclear where the possible contamination might have occurred — and whether it happened during transportation.” 

The ABPA also stresses that the risk of Covid-19 transmission via food products is negligible. They take their cue from the World Health Organization, which put out a statement on April 7 downplaying the chances of food-to-human contamination. “There is no evidence to date of viruses that cause respiratory illnesses being transmitted via food or food packaging. Coronaviruses cannot multiply on food; they need an animal or human host to multiply.”

However, the WHO reinforced the need for measures to protect food workers. “It is imperative for the food industry to reinforce personal hygiene measures and provide refresher training on food hygiene principles to eliminate or reduce the risk of food surfaces and food packaging materials becoming contaminated with the virus from food workers.”

Slaughterhouses a hotbed for coronavirus

This is the first time that products from Brazilian food processing plants have been flagged for coronavirus contamination, but such concerns are not new. Six Brazilian slaughterhouses are already banned from selling to Chinese customers, due to worries about contamination among the plant’s staff. Four such facilities are located in the southern state of Rio Grande do Sul, which neighbors Santa Catarina, from where the contaminated chicken reportedly originated.

The pandemic continues to rage across Brazil, with over 104,000 deaths and 3.1 million confirmed cases. And the meat industry shoulders some of the blame for the spread, as slaughterhouses increase hazards of coronavirus transmission. Production sites are made up of closed, refrigerated spaces, with ventilation systems built to avoid external contamination. These factories see hundreds and sometimes thousands of workers side by side, manipulating animal protein.

By June 16, at least 47 abattoirs in 17 states had been shut down by the Agriculture Ministry due to the coronavirus. The looming crisis could have massive repercussions across the globe, as Brazil is the world’s largest meat exporter.

Priscila Dibi Schvarcz, the labor prosecutor responsible for monitoring the industry during the pandemic, told The Brazilian Report that since the beginning of the pandemic, agreements for improvements had been made. So far, all over the country, 94 plant managers accepted the commitment to implement stricter sanitary protocols, but still she sees much room for improvement.

“An effective investment in health management is necessary. We have shortcomings related to active surveillance: early removal of infected people, effective daily active searches, testing routines for asymptomatic, pre-symptomatic [patients],” said Ms. Schvarcz.

Regarding the alleged chicken-related contamination in China, the ABPA declined to comment, saying the association is still seeking more information — but arguing that all the right measures have been taken since the beginning of the coronavirus crisis. “The Brazilian meat-exporting sector reaffirms that all measures to protect workers and guarantee the safety of products have been adopted and improved over the past few months, since the beginning of the global pandemic.”

Brazilian relations with China

Trade between Brazil and China is as dynamic as ever, thanks in large part to agricultural commodities such as soybeans and meat. Between January and June, the Asian giant gobbled up 34 percent of Brazil’s overall exports. And chicken exports from Brazil are booming — amounting to USD 788 million between January and July.

But as of recently, relations between Brazil and its biggest trading partner have been tepid at best — and contentious at worst. 

Despite growing dependence on China, the Brazilian government has been adopting an unabashed pro-U.S. stance since Jair Bolsonaro took office. Among his supporters and close allies, anti-China sentiment is rife. The latest example of this came with the country’s support for a proposal by the U.S. at the World Trade Organization that was essentially a broadside directed at Beijing.

This anti-China stance — following the cues of U.S. President Donald Trump — has led to several warnings from the Chinese embassy to Brazilian authorities that feuds could impact the countries’ trading relations.[/restricted]

Latin America

Is Elon Musk coveting Bolivia’s lithium resources? Not really …

“We will coup whoever we want! Deal with it.” This was the Twitter response of Elon Musk, CEO of electric vehicle giant Tesla, when questioned about the alleged U.S. interference in the military coup of Bolivian President Evo Morales in 2019. The accusation — hardly debunked by Mr. Musk’s reaction — was that Tesla waded into the internal affairs of the Andean nation to gain access to Bolivia’s lithium resources — the world’s largest, reportedly making up between 50 and 70 percent of the world’s deposits. 

The conspiracy theory is not terribly complex. First, Tesla’s electric cars are run by lithium battery cells; second, Evo Morales, known for defending Bolivian sovereignty over natural resources, said in an interview to a Brazilian outlet in April that “the coup was against the indigenous and [it was] for lithium.” And suggesting that a coup in Latin America included U.S. involvement is not a stretch by any means.[restricted]

Nicknamed ‘white oil,’ the lithium market is growing at an annual rate of 18.7 percent. As reported by Allied Market Research, it was worth USD 36.7 billion in 2019 and is tipped to reach USD 129.3 billion by 2027.

And Tesla has had a hand in that. 

Valued at USD 34 billion in 2020, the company uses at least 28,000 tons of lithium hydroxide a year, according to Bloomberg. However, Bolivia’s Uyuni Salt Flat — the largest lithium deposit in the world — are not primary resource suppliers for Tesla, leaving that post to Ganfeng Lithium (China), Kidman Resources (Australia), and Pure Energy Minerals (Canada). 

Another component of this wild theory involving Mr. Musk and the endless crisis in La Paz are recent contracts between Bolivian state-owned lithium firm Yacimientos de Litio Bolivianos (YLB) and Chinese companies, suggesting that Bolivia would prefer looking east to strike up lithium deals, as opposed to U.S. firms. 

The overbearing question is whether Elon Musk gains anything from overthrowing a Latin American president in search of lithium. According to Emily Hersh, mining and energy expert and the host of the Lithium Podcast, the answer is no. 

“The coup in 2019 was not about lithium. Being the biggest ore resource doesn’t mean it is the best. Extracting lithium in Bolivia requires an expensive process involving chemistry and energy. And the landscapes in the country don’t help with the logistics,” Ms. Hersh told The Brazilian Report

The perspective of lithium as the commodity of the future is also one of the reasons why politicians like Evo Morales have always put it on a pedestal as a game changer. In 2006, when he was first elected, Bolivia nationalized the production of oil and gas, generated USD 31.5 billion profit over the decade and strengthened the image of the country being “independent” of foreign interests.

But this might not apply to lithium. Ms. Hersh explains that besides similar backgrounds — a developing country defending its sovereignty over a natural resource — lithium won’t be to Bolivia what oil has been to Venezuela, where the commodity makes up over 90 percent of exports.

“The world doesn’t really need Bolivian lithium that much,” says Ms. Hersh. “Many politicians talk about lithium because they know it will put them on the front page of the newspapers. But nobody puts their hands in it and gets it done. Without the proper investment and science (and, basically money), you won’t turn that feedstock into batteries anytime soon.” 

Bolivia's Uyuni Salt Flat — the largest lithium deposit in the world
Bolivia’s Uyuni Salt Flat — the largest lithium deposit in the world. Photo: Ksenia Ragozina/Shutterstock

Things will change, but not much 

After the coup against Mr. Morales and his Movement to Socialism (MAS) party, the previously unknown Jeanine Áñez swore herself in as interim president and a conservative shift began in the country after 13 years of left-wing administrations. Soon, Ms. Áñez started re-establishing relations with the U.S., starting with the appointment of Wálter Oscar Serrate as Bolivia’s first ambassador in Washington since 2008.

While Mr. Serrate was sending a letter condemning the support of Democratic Senators in the U.S. for Evo Morales and calling the former president a “terrorist,” many saw this new relationship as an opportunity for Bolivia and the U.S. to talk business — and lithium may well come up in conversation.

However, Juan Carlos Zuleta, the new head of YLB appointed after the coup, explained that the state-owned company “would apply strict limits to foreign investment” regarding Bolivian lithium. In other words, as Mr. Morales always said, Bolivia’s white oil will remain Bolivian.[/restricted]


Brazil forced to import soy as China expands its appetite

Brazil is one of the leading producers and exporters of soy in the world, yet data from June showed that the country is now importing the oilseed at the highest level in four years. A report from economic research institute Cepea explains that soy exports broke records in the first half of 2020, which, along with droughts in the south of the country, caused shortages for local companies, forcing them to buy in from Mercosur partners.[restricted]

Undeniably, one factor contributing to Brazil’s record exports is the appetite for soy in China. According to data by Brazil’s Economy Ministry, Brazil exported 60 million tons of soy in the first half of the year — 43 million of them to China.

Reuters news agency also reports that June’s soy imports rose to 11.16 million tons in China, 71 percent above 2019 levels. The jump was fostered by Brazilian soy, which sources reported to be cheap at a time when Chinese processors began reestablishing their activities. 

The latest crop bulletin by the National Supply Company (Conab) puts average soy prices at BRL 93.9 per bag, 36 percent more expensive than the same period last year. However, back then, the USD traded at BRL 3.85, on average. It stands at around BRL 5.35 now.

Conab believes exports will continue this fast pace for the coming months, expecting 7 million tons to be sold in July as advanced purchases for the 2020/2021 season are already being traded. In total, 80 million tons of soy will be shipped abroad and 46 million will be used for internal consumption, says Conab.

Soy: the driving force of Brazil’s economy

The good news in the field reflects on the entire productive chain of agribusiness. The Santos Port Authority, responsible for managing the largest cargo hub in South America, reported it had shipped a record of 70.3 million tons of goods in the first half of 2020, despite the great strain the Covid-19 pandemic caused on global supply chains. 

The performance was a result of a 13.6 percent increase in exports, mainly down to sugar and soy complex — which includes oil and soy meal. While sugar exports jumped 40 percent to 8 million tons, soy reached an impressive 22 million tons — a 27 percent increase versus the previous year. 

“The port’s good numbers reflect the strength of agribusiness and the favorable effect of the foreign exchange rate over exports,” SPA chief executive officer Fernando Biral was quoted as saying by magazine Época Negócios. 

At a time when the grimmest projections for Brazilian GDP expect a plunge of up to 10 percent this year, agribusiness remains as important as ever for the country’s economy and such booming results could mean an increasing share in the overall output.[/restricted]


Brazil bans exports of essential health items

Back in April, President Jair Bolsonaro signed into law a bill banning exports of any health item deemed “essential” in the fight against the coronavirus — such as personal protective equipment, ventilators, hospital beds, among others. This ban has finally been regulated, allowing for some exceptions. The Foreign Trade Office, which operates under the Economy Ministry, may authorize exports in cases of “humanitarian emergencies,” previous international commitments made by Brazil, and — more importantly — the domestic supply of specific products.

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China purchases from Brazil could fall USD 2.8 billion, says UN

The Covid-19 pandemic may reduce 2020 China’s commodities purchases from Brazil by some USD 2.8 billion, according to a study by the United Nations. The biggest drop will come in grains (USD 2.709 billion) and processed food exportation (USD 2.245 billion). In the best-case scenario drawn up by the UN, Brazilian sales to China will fall to USD 939 million. The estimates were reached by way of trade information from February and January.

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Brazilian trading numbers drop amid pandemic

Brazil registered a 7-percent decline in exports between March and April, while imports dropped 20.6 percent over the same stretch, according to data published by the Organization for Economic Co-operation and Development (OECD). In comparison to Q1 2019, export and import numbers decreased 5 and 15 percent, respectively.

In contrast to other G20 members, however, Brazil recorded a trade surplus. G20 economies had an average drop of 4.3 percent in exports and 3.9 percent in imports — the lowest number since Q2 2017. Meanwhile, Brazil saw an increase of 0.9 percent in exports and 2.8 in imports from the previous quarter. According to the OECD, Brazil was “initially less exposed to the Covid-19 outbreak than most G20 economies during that period, as the exponential growth [in cases] started in late-April.”

Not just the coronavirus

Though the pandemic has had an impact on Brazilian trade, it has simply exacerbated a downward trend that began in 2018. In Q4 2019, the country registered a drop of 8.1 percent in imports and 1.5 percent in exports. In relation to that, the OECD noted that “the increase in Q1 2020 illustrates a ‘recovery’ effect, but the real levels are still below the ones presented in Q3 last year.”

The two other Latin American G20 countries saw trade deficits in Q1 2020. In full lockdown since March 19, Argentina had the worst performance among the group’s members, registering a 14.3-percent drop in exports and a 1.7-percent drop in imports. In Mexico, where President Andrés Manuel López Obrador initially denied the severity of Covid-19, the country saw an increase of 1 percent in exports, but a 1.2-percent drop in imports.

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Brazilian auto industry registers worst month in history

With a 99-percent fall in motor vehicle production for the past 60 days, April was considered to be the worst month in history for the Brazilian auto industry, according to manufacturers. With only 1,800 vehicles produced in April, Brazil also recorded a drop of 99.4 percent in production in comparison to April 2019. Throughout Q1 2020, overall production has fallen by 39.4 percent.

As one of the main Mercosur sectors, the industry represents 50 percent of all Argentina’s purchases from Brazil, generating a USD 2.7-billion profit for Brazil in 2018. With an incredible drop of 100 percent in production in the neighboring country in April, demand for Brazilian automotive products has also fallen. The collapse of production happens during a moment in which Brazil-Argentina relations have cooled off — with Argentina announcing it is taking a step back from Mercosur trade talks during the pandemic.

Established by President Juscelino Kubitschek in 1957, Brazil has the second-largest automotive industry in Latin America, after Mexico.

Coronavirus Latin America

Argentina exits Mercosur negotiations, upending trade deals

The world won’t stop spinning for Covid-19. From Donald Trump’s threats to “destroy” Iranian ships harassing U.S. ships, to China using the pandemic as a cover to enhance its territorial claims in the South China Sea, several major geopolitical actors believe this is the perfect moment to carry out otherwise controversial moves — with the world distracted by the worst pandemic in a century, negative reactions will be limited. In South America, that is precisely what Argentina has done, with President Alberto Fernández announcing that the country is suspending its participation in all negotiations within Mercosur — the trade bloc formed by Brazil, Argentina, Paraguay, and Uruguay.[restricted]

The decision affects only ongoing talks — deals previously approved, such as last year’s Mercosur free trade agreement with the European Union will be preserved. However, it upends the trade deals currently under construction with South Korea, Lebanon, Canada, and India — as the bloc’s rules require unanimous agreement on trade issues.

Reactions so far have been mild — or non-existent. Paraguay, which holds the bloc’s rotating presidency, issued a moderate statement, calling it a “sovereign decision” of the Argentinian Republic. Uruguayan President Luis Lacalle Pou said he hopes the neighboring country will reconsider its decision, claiming that “together, [the Southern Cone nations] are stronger.” And as for Brazil, by far the largest economy of the bloc, it has yet to make a single statement on the issue — as President Jair Bolsonaro among other things grapples with the loss of his most popular cabinet member.

“It is not that surprising of a move,” says political scientist Maurício Santoro, an international relations professor at the State University of Rio de Janeiro, and a columnist at The Brazilian Report. “The Alberto Fernández administration had voiced its intentions for a more protectionist economic policy, and the pandemic gives him the best opportunity to justify his stance”. The arguments presented by Mr. Fernández to sit out of the Mercosur negotiation table are similar to the ones he used last year when criticizing the Mercosur-EU deal. He declared that now is time for Argentina to protect its small companies and focus on its internal affairs.

The government’s actions have been legitimized so far by the relative success of the administration’s approach to Covid-19. Argentina adopted swift, harsh restrictive measures — being one of the first countries in Latin America to shut down its borders, close schools, and even start monitoring beaches with drones against citizens who didn’t comply with social isolation rules. When the country shut down on March 15, it had counted only 45 cases and two deaths. More than a month later, it has registered 3,607 and 179 deaths, according to the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University.

The neighboring state of Chile in comparison, with a population less than half of Argentina’s, has registered over 12,300 Covid-19 cases and 174 deaths since the start of the pandemic.

What will happen to Mercosur?

“An elephant, a mouse, and two ants”, is how Guillermo Valles Galmés, an Uruguayan delegate to the World Trade Organization and the country’s former Deputy Foreign Minister, describes Mercosur member countries. Brazil’s GDP is 65 times larger than Paraguay’s. It also dwarfs Uruguay’s by a ratio of 34 to 1. 

Argentina is the only country in the bloc minimally capable of rivaling its giant neighbor in economic terms. Still, Argentina’s GDP still amounts to just one-third of that of its counterpart.

The comparison illustrates why most of intra-bloc commerce is limited to the relations between Brasília and Buenos Aires. And that’s why Argentina’s decision to look inwards puts Mercosur in one of its toughest positions to date. 

“While Argentina is not focusing on common trade right now, we don’t know which direction Brazil is going to take. At the moment, we see a struggle between the libertarian Economy Ministry Paulo Guedes and the more developmentalist new Chief of Staff to the president, Army General Walter Braga Netto. We don’t know who is really in charge of Brazil’s economic policy at the moment — and how that affects our foreign trade policy,” says Mr. Santoro.

Mercosur remains the number one destination for Brazil’s industrialized goods, and if trading with the bloc is narrowed, it will certainly have negative effects on producers — especially in the auto industry. But if there was a time for that to happen, it is now, as Asia becomes more and more crucial to Brazilian exporters. “Forty-one percent of Brazilian exports in 2019 went to Asia, a rate that jumped to 45 percent over Q1 2020. Soon, the continent will gobble the majority of our sales abroad,” explains Mr. Santoro.

If there is light at the end of the tunnel, it is knowing that major Asian powers like China and India will keep growing — albeit at a slower pace — while the U.S. and Europe look set to face a lengthy economic slowdown and possibly even depression which could create an opportunity for Brazil to expand its market horizons.[/restricted]

Business Coronavirus

Covid-19 among truckers causing concern for Brazil’s soybean exports

The coincidence of the expected peak of the Covid-19 epidemic in Brazil and Argentina with the soybean export season of April and May has sparked concerns in major buyer China, as roadblocks and sickness among transport workers create logistical problems.

During a press conference on the subject in early April, Wei Baigang of the Chinese Ministry of Agriculture made it clear that the government was focusing on soybeans, one of the few essential foodstuffs that China imports in massive quantities. Imported soybeans are mainly used to feed China’s vast hog population.

“[We] will strengthen coordination with exporting countries and continue to promote plans to revitalize soya at home to ensure supply,” he said, referring to a policy released in October last year that aims to develop Chinese self-sufficiency for key crops. Mr. Wei also said China would resume imports of soybeans from the U.S., following the latest trade agreement between the two countries — which sparked concerns in Brazil.

Meanwhile, agribusiness in Brazil has moved to allay fears of supply shortages. According to Sérgio Mendes, executive director of the Brazilian Association of Grain Exporters (ANEC), coordination between the Ministries of Agriculture, Infrastructure, and Health will stop the crisis from decimating the supply chain.

“They are doing a great job, working quickly and anticipating events with decrees that would normally take weeks,” he said.

However, worries persist. In Brazil — the main supplier of China’s soybeans — truck drivers have complained about their exposure to Covid-19 and the lack of essential services on highways, as most businesses are closed under social isolation measures.

In neighboring Argentina — the world’s third-largest soybean exporter — the government’s Covid-19 containment policies have blocked access to 70 cities, alerting agribusiness to the risk of acute shortages in both the domestic and export markets over the next two months.

Shipments of soybeans, maize, and other agricultural products were also delayed at the end of last month due to sanitary inspections by the Argentinian government, which has tested cargo ship crews for coronavirus infections.

Covid-19, soybeans, and logistics

The pandemic and restrictions on movement have already affected grain exports in Argentina, which saw revenues dip 6.9 percent in March compared to the same period last year.

It was a different story in Brazil. According to the Brazilian Department of Foreign Trade, soy exports grew 37.6 percent last month compared to March 2019.

“We believe that any future specific impacts of Covid-19 could mainly reflect logistics issues related to the flow of exports,” said Herson Brandão, Brazil’s Secretary of Foreign Trade Intelligence and Statistics. “We have information that exports of goods such as soy, petroleum, and iron ore were not affected.”

Chinese media have reported that stocks of essential products are sufficient, in an attempt to quell worries about food security in a country that needs to feed a fifth of the world’s population with only around seven percent of its arable land.

As the pandemic spreads, countries such as Kazakhstan have begun to limit exports to China. But while the Chinese government may have secure supplies of wheat and rice, the same cannot be said of soybeans.

“The countries that need special attention are [in] Africa, South Asia, and Central and South America,” said Fan Shenggen, professor at the School of Economics and Administration at China Agricultural University, in an interview with China Science Daily in late March. “Because these developing countries still suffer from hunger and malnutrition, they have much less capacity to deal with crises than developed countries in Europe and [North] America.”

Government ensures flow of soybean exports, but truckers worry

Officials from Brazil’s Infrastructure Ministry wrote to Diálogo Chino claiming exports of commodities during April and May will be unaffected, and that work continues on the maintenance and improvement of highways, ensuring that soybeans and other raw materials can be shipped as normal.

The ministry has implemented a series of measures since the beginning of the coronavirus crisis, including the nationwide coordination and maintenance of services essential to truckers, such as mechanics’ workshops and tire shops, as well as roadside restaurants, many of which had closed. It has also mapped the 130 support stations that remain open on federal highways.

Truckers were also included in the priority group for the country’s flu vaccination campaign, which would serve to reduce their vulnerability to Covid-19 and enable quicker diagnosis. Drivers have also been benefitted with the temporary suspension of document renewal requirements.

But Brazil’s dependence on individual truck drivers continues to be the biggest weakness of the country’s logistics network. Drivers are subject to working conditions that are often precarious, along with extremely volatile rates for transporting cargo. When truckers revolted and went on strike in 2018, the country came to a near standstill and GDP growth was knocked back 1.2 percent.

In early April, the Brazilian Association of Truck Drivers — which represents 560,000 drivers in the country across its 92 unions — wrote to President Jair Bolsonaro to complain about conditions on the country’s highways and the lack of incentives for this sector:

“If the goal is to invest in fighting the coronavirus, it is important to take care of truck drivers as well as doctors and nurses.”

This article was originally published by Dialogo Chino and is reposted here with permission


Agriculture Ministry to issue electronic sanitary permits for exported food products

The Covid-19 pandemic has forced the Agriculture Ministry to digitize its process for issuing phytosanitary certificates for agricultural products sent for export. As a way to reduce inspectors’ contact with said food products, these permits will now be issued via digital certificates.

The Agriculture Ministry also stated it will advance payments of crop guarantees as a result of the pandemic. BRL 73.3 million will be paid this month to more than 120,000 farmers who saw production reduced due to droughts in the 2018–2019 season.


The troubled relationship between the Bolsonaro family and China

Jair Bolsonaro is the first Brazilian president to be elected with a tough discourse on China, often criticizing Chinese investments in Brazil as a threat to national security and economic sovereignty. Despite that, in his first year in office, he established a pragmatic relationship with Beijing, including meetings with Xi Jinping and a successful trip to the Middle Kingdom.

The risk pervading this approach was his foreign policy of seeking full alignment with the U.S., while Donald Trump was waging a trade war against China. These latent tensions exploded in the controversy surrounding the coronavirus pandemic, with Congressman Eduardo Bolsonaro—one of the president’s sons—engaging in a Twitter brawl with the Chinese ambassador in Brazil.

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The blame game with China

Eduardo Bolsonaro [restricted]is the most-voted member of Congress in the history of Brazil, and something of an informal foreign policy spokesperson for his family. In 2019, his father tried unsuccessfully to nominate him as ambassador to Washington D.C.

Congressman Bolsonaro is such a staunch admirer of Mr. Trump that he has been photographed with the U.S. president’s “Make America Great Again” caps. His anti-China rants are a carbon copy of Mr. Trump’s statements, blaming the Asian country for the pandemic and calling it “the Chinese virus.” In both Brazil and the U.S., this is an attempt to deflect responsibility for the countries’ failures in dealing with the outbreak.

It is doubtful that this kind of blame game may work anywhere when the pandemic is killing hundreds daily. But it is an even worse strategy in Brazil, as Eduardo Bolsonaro quickly learned. Brazil is not a superpower and it is heavily dependent on the Chinese market, the destination of about 30 percent of its exports. Key sectors of the Brazilian economy, such as agribusiness, mining, and oil, have China as their main trade partner and leading investor.

Mr. Bolsonaro’s tweets blaming China for the virus provoked a strong reaction from the Chinese ambassador in Brazil, who decided to publicly respond, criticizing the president’s son on social media. Ambassador Yang Wangming arrived in Brasília during the first month of Jair Bolsonaro’s administration. In the space of six months, he already spoke Portuguese well enough to give speeches and interviews. He has been very active in public diplomacy and is the first Chinese diplomat in Brazil to develop a big following on Twitter—largely due to his criticism of President Bolsonaro’s son, and his posts on how China is fighting the coronavirus.

Brazilian political establishment reacted quickly and sided with the Chinese ambassador. The speakers of the House of Representatives and the Senate, business leaders, and major media outlets all expressed their rejection of Eduardo Bolsonaro’s statements, highlighting the folly of picking a fight with Brazil’s biggest trade partner while the country is on the verge of a return to economic depression due to the Covid-19 pandemic.

Even the vice-president, General Hamilton Mourão, said Eduardo Bolsonaro did not speak for the government and was only getting attention because he is the president’s son—claiming China would pay no notice if his name was “Eduardo Banana.”

A history of mistrust

This was not the first time the Bolsonaro clan has had a diplomatic row with the Chinese ambassador. In 2018, during his election campaign, Jair Bolsonaro visited Taiwan and recognized it as a country, though Brazil does not acknowledge Taiwan as a sovereign state.

China’s diplomats in Brazil then sent a letter to all members of Congress criticizing the trip and stating the importance of the “One China policy” that Brasília follows since 1974—which only considers Beijing as representative of the Chinese people.

Despite the pragmatic Brazil-China relations of the first year of the Jair Bolsonaro administration, the government’s suspicions of Beijing have never totally gone away. The main reason is China’s fear that the president’s rapprochement with Donald Trump may lead to problems for their companies, such as the possibility of Brazil vetoing Huawei from taking part in the country’s future 5G spectrum auction.

Beijing supported its ambassador in the row with Eduardo Bolsonaro, and continue to demand an apology from the congressman. The Brazilian press reported that Xi Jinping refused to take a telephone call from President Bolsonaro. These are signs that China knows what it is at stake for Brazil in the coming crisis, and that it will put more pressure on the country in relation to the complex Brazil-China-US diplomatic triangle. The coronavirus pandemic is a challenge for Donald Trump’s reelection later this year. While in Brazil, the crisis is creating a political storm for Jair Bolsonaro, to the point that there are uncertainties around whether he will finish his term. 

Besides that, the attacks on China due to the coronavirus outbreak touches some deep wounds in the country’s history. During the period that the Chinese call “The Century of Humiliations” (1839-1949), Western powers held many negative views of China’s sanitary and hygiene habits, with stereotypes that the Chinese would be “sick and weak.” 

Some of these old scars are still present in the debate on the current pandemic, which is also becoming part of a larger trend of Sino-American disputes for global leadership. Beijing is trying to deflect the blame for the outbreak, and to present its response as a model for other countries, supporting them with international cooperation—including doctors and medical supplies. With the threat of serious shortages in its health system, Brazil would be wise to leave the door open to this kind of help.[/restricted]


Xi Jinping a “son of a bitch,” say Bolsonaro supporters

Since Wednesday, when Congressman Eduardo Bolsonaro blamed China for the Covid-19 outbreak, tensions between Brasília and Beijing have escalated rapidly. The Chinese Embassy in Brazil swiftly reacted to the words of the president’s son, asking for an immediate retraction—which came from House Speaker Rodrigo Maia.

During a conference call with business leaders, Mr. Bolsonaro was asked to improve relations with the Asian giant—where many inputs used by Brazilian factories are produced. The president replied that his relationship with Chinese President Xi Jinping is “excellent.” 

Meanwhile, Bolsonaro supporters ramped the diplomatic crisis up another notch, placing offensive signs just outside of the Chinese Embassy building in Brasilia. They call both Xi Jinping and Ambassador Yang Wanming “sons of bitches.”

Xi Jinping a "son of a bitch," say Bolsonaro supporters
Xi Jinping, “Son of a bitch,” and “China lied, people died,” say Bolsonaro supporters. Image: Twitter/@Heitormde

Earlier today, newspaper Valor reported that Jair Bolsonaro tried to contact Xi Jinping to bury the hatchet—but the Chinese leader refused to take his call.

As a presidential candidate, Jair Bolsonaro threw diatribes at China time and again. When he was elected president, however, the Brazilian far-right politician toned down his rhetoric, aware that China is Brazil’s number one trading partner—on which Brazil’s commodity exporters heavily rely. Politically isolated due to his failure to handle the coronavirus crisis, Mr. Bolsonaro seems to have returned to his old ways.

Yesterday, Lucas Berti listed in our Covid-19 live blog reasons why picking a fight with China goes against Brazilian interests. You can read here.


From costumes to parades, Brazil’s Carnival is now “made in China”

From the colorful umbrellas used in frevo dances to the parades in São Paulo’s sambadrome, China seems to be creeping into every aspect of Brazil’s Carnival. What started as a result of the deep strengthening of the trade relationship between the two countries now finds a more prominent place in one of the most traditional parties in Brazilian culture.[restricted]

A report by website DialogoChino shows that Brazil began to import party supplies from China in the 1990s, making it the most common source of the country’s Carnival costumes and decorations. Chinese products proved to be more competitive than the locals, as production costs are notoriously cheaper in China. It was only a matter of time before Chinese masks, wigs, and costumes took over Brazilian streets.

Official Brazilian foreign trade data shows that in 1997, Brazil imported USD 1.71 million worth of party goods from China. In 2019, imports leapfrogged to USD 10.14 million. While it is an impressive increase, it’s still short of the USD 14.3 million recorded in 2014, before Brazil entered into an economic recession. 

Carnival experts  

The Chinese became specialists not only in “commodity” party items, but also in products deeply-connected to Brazil’s culture, such as the colorful umbrellas used in frevo displays in the northeastern state of Pernambuco. The musical rhythm—which consists of upbeat brass band marches—is one of the most traditional symbols of Recife’s Carnival, while the umbrellas are key to the performances, used in acrobatic choreographed displays, somewhat similar to the use of castanets in Spanish flamenco dances.

According to a report by news website G1, all of the roughly 340,000 frevo umbrellas imported by Pernambuco in 2019 came from China. Once again, competitiveness is seen as key for success, as they are sold for up to BRL 5.00 in Recife, even considering importing taxes and freight costs.        

Warehouse with costumes ... from China. Photo: Brastock/Shutterstock
Warehouse with costumes … from China. Photo: Brastock/Shutterstock

This came at a cost for local industries, however. The last local umbrella factory, Leite Bastos, shut up shop in the early 2000s due to stiff competition, according to G1. The lack of any domestic firms to take up the mantle in umbrella production may be explained by the local industry’s disinterest in making low-added value goods, said Rafael Araújo, analyst of international affairs at Pernambuco’s Industry Federation (Fiepe), speaking to G1.  

From the shelves to the main stage 

However, China’s role in Carnival is no longer restricted to supplying decorations. In this year’s celebrations, São Paulo samba school Unidos de Vila Maria dedicated their 2020 parade to honoring the Asian country at the Anhembi sambadrome on Saturday. 

According to another report from G1, the samba school received financial aid from Brazil-China foundation Ibrachina, and its artistic team spent 45 days researching in China to create this year’s show. Every samba school parade has to have a theme, and Unidos de Vila Maria entitled theirs “China: the dream of a people rocks the samba and makes the Vila dream,” honoring many icons of Chinese culture: from philosopher Confucius to pandas and the modern city of Shenzhen. 

The samba school aimed to show a modern, open China to the Brazilian public on Saturday, in the words of chief artistic director Cristiano Bara, writing on the school’s offical website. “Today you’re not just the great ‘Red Motherland’. You are the global, multicolored, and multifaceted giant, that wakes up and walks ahead of your time. However, you show yourself with arms wide open to the world, as a living inspiration teaching us how to dream,” wrote Mr. Bara. 

Unidos de Vila Maria will not be the only ones to celebrate China in 2020. Though much less famous, samba school Unidos do Imperador from Nova Friburgo in Rio de Janeiro also chose Chinese history as its main theme, with their song lyrics claiming “today China will dance the samba.”[/restricted]


What to expect from Brazilian agro in 2020?

After a bright 2019, Brazilian corn prices are set to maintain high levels, sustained by a smaller production forecast and booming demand, according to data from consultancies and official estimates. While this is good news for Brazilian agro, smaller supply may have serious impacts on the internal market, affecting the price of products such as meat—which has already suffered significant hikes in recent weeks. 

In its latest report, the Brazilian Institute of Geography and Statistics (IBGE), pegged the country’s grain harvest in 2020 at 240.9 million tonnes, the biggest since records began in 1975. However, [restricted]IBGE sees corn production falling 7.5 percent in comparison to 2019 levels, dropping to 92.7 million tonnes. The culprit is the year’s second corn harvest, which accounts for nearly three-quarters of the total national production. IBGE estimates have it shrinking 9.8 percent, to 67 million tonnes.   

According to Ana Luiza Lodi, a market specialist at consultancy INTL FCStone, the smaller production may be connected to delays in soy planting, which pushed back the second corn harvest. “We expect a smaller production, at 98.76 million tonnes, but not a steep fall. Delaying the planting of the second harvest is always concerning, as it happens in the dry period and the lack of rain may cause damages, but at the moment we aren’t seeing it,” she told The Brazilian Report

Big Agro to suffer from 2019 shockwaves

While production may shrink somewhat from the 100 million tonnes expected for 2019, consumption rages on. According to the National Association of Cereals Exporters (ANEC), Brazilian corn exports doubled from January to November, versus the same period in 2018, as the devaluation of the Brazilian currency made local commodities cheaper and heavy rains and snow delayed the U.S. corn harvest, the world’s biggest. Also, the outbreak of swine fever in China forced Brazil’s biggest trade partner to increase its meat imports, boosting the internal consumption of animal feed.   

As a result, corn prices measured by the ESALQ/BM&FBOVESPA index rose 22 percent this year, a scenario that is set to continue over the first months of 2020. According to Brazil’s National Supply Company (Conab) domestic corn supply will reach an estimated 10.3 million tons, enough for barely more than a month of consumption, “creating a scenario of attention and concern towards the corn supply in the country and sustaining prices in high levels.”

While the first corn harvest is set to hit the market soon, it is unlikely to bring much relief, as it is way smaller than the second one, says Ms. Lodi. “We are not seeing a shortage, but there is a concern about supply until the next harvest comes. Southern states, which rely heavily on meat production and, therefore, consume more corn, may have difficulty in finding supply as they are far from the Center-West production area,” she said. Indeed, Conab data shows that the area has been the main destination of corn imports from Argentina and Paraguay, estimated at 1.3 million tonnes.  

The destiny of soybeans lies in the trade war

While the 6.7 percent growth in soybean production—jumping up to 120.8 million tonnes in 2020—is the highlight of the Brazilian crop, the outlook for demand is a bit foggier, being dependant on developments of the U.S.-China trade war. From January to November, soybean exports fell 13.45 percent, according to Anec, amid spillovers from the tug of war between the world’s two biggest economies.

According to Conab, Brazilian soy exports in 2019 can be divided into two periods. In the first eight months, China imports fell 13 percent versus 2018 (back to pre-trade war levels) amid the African swine flu outbreak that halved China’s hog herds. However, from August onward, as tensions between the Chinese and U.S. governments ramped up, China increased its purchases of Brazilian soy once again.

“From the consumption side, exports are expected to increase, depending on the trade negotiations between China and the U.S., but also on the recovery of China’s hog herds,” wrote Conab. 

Higher cattle prices have different impacts

The increase in Chinese meat consumption had deep impacts in the Brazilian livestock market. The large influx of beef exports boosted by the weak Real, coupled with the lack of mature animals for slaughter, increased prices and even started to put pressure on Brazil’s inflation levels. Prices for fed cattle and beef carcasses traded on the wholesale market of Greater São Paulo hit new records and as of November, the ESALQ/B3 Index for fed cattle reached BRL 231.35, up 35.5 percent for the month. 

For consultancy firm Scot, the beef market is set to follow a trend of “firm prices, with a great possibility of an increase” in 2020. However, while the increase in consumption is good news for producers, meatpackers’ costs have jumped.

“Meatpackers have seen their margins flattened, due to the high prices of fed cattle. Also, they are feeling a reduction in prices offered by China, due to the supply increase after more plants were allowed to export. In this sense, for the industry, export margins are set to go back to ‘more regular’ levels,” according to Scot’s report. “In January, the perspective is that the internal demand will fall, alongside Chinese purchases. So, according to the industry, the beginning of the year will be challenging.”

Biofuels: the next frontier

While the grains market is deeply connected to livestock feed—both in Brazil and abroad—another source of demand is making a strong rise in the local market: biofuels. 

Conab expects the national production of bioethanol made from corn to grow by 70 percent in the 2019–2020 season, versus 2018–2019, to BRL 1.347 billion liters, with more companies investing in “flex” plants—which are equipped to produce bioethanol from both corn and sugarcane. “We are monitoring the sector’s companies and expect many corn bioethanol plants to start operating next year,” said Ms. Lodi.  

Brazil’s Center-West region—the national leader in corn production—also accounts for 94.2 percent of Brazilian bioethanol production and is leading the increase, as the area’s production is set to grow 62.4 percent in the same comparison. 

For soy, great hope lies in biodiesel. Brazil’s fuels agency has increased the minimum share of vegetable oils in biodiesel to 11 percent as of August. This ratio is set to grow to 12 percent in March until reaching 15 percent in 2023. Conab sees this addition as one of the main drivers for internal consumption next year, alongside the probable economic growth and increased meat exports. [/restricted]

Brazil Daily

How optimistic should we be about Brazil’s GDP numbers?

Good morning! We’re covering today Brazil’s GDP numbers (and what is behind their increase). Medical cannabis legalized in Brazil, with restrictions. And a new white whale on Operation Car Wash’s radar. (This newsletter is for platinum subscribers only. Become one now!)

GDP numbers: glass half-full or half-empty?

As we anticipated in yesterday’s Daily Briefing, [restricted]Brazil’s official Q3 GDP numbers showed slow but continuous growth. The economy expanded 0.6 percent over the last quarter—meaning that if growth were to be 0 between October and December, Brazil’s GPD would have grown by 1 percent in 2019.

Why it matters. There are many reasons to celebrate, such as the rise in family consumption (which accounts for two-thirds of the GDP), a 2-percent hike in investments, and a second-straight positive quarter for industry.

Between the lines. Brazil has registered positive GDP results in nine of the 11 quarters since the end of the recession, in Q1 2017. The latest indicators suggest that consumers and companies alike are becoming more confident in the Brazilian economy and that it could properly kickstart soon.

New predictions. Many banks and consultancies revised their predictions for Brazil’s growth this year. Goldman Sachs pushed it up from 1 to 1.2 percent, while Citi changed its own forecast from 0.7 to 1.1 percent.

Yes, but … The virtuous cycle must be sustained—and Brazil still has structural problems that may hamper growth. Exports are down, and a high (and persistent) unemployment rate, coupled with the increase in informal jobs, still makes many analysts rein in their optimism.

Reliability. The GDP numbers may be changed, as the Economy Ministry has recently revised Brazil’s export numbers—three times in less than a week—saying it underestimated the actual revenue … by USD 6.4 billion.

The constant revisions—which affected the performance of the Brazilian currency—have cast doubts among international analysts on the reliability of Brazil’s official data.

Medical cannabis cleared in Brazil

Brazil’s Sanitary Surveillance Agency (Anvisa) has ruled to allow companies to produce and sell cannabis-based medications, including in pharmacies. However, growing cannabis in Brazil remains off-limits, forcing companies to import the plant extract. Just hours after Anvisa’s decision, a federal court granted one pharmaceutical company the right to import hemp seeds, leaves, and fibers.

Why it matters. The decision may ease the lives of several patients battling chronic conditions such as epilepsy, Parkinson’s, cancer, among others. Until now, they had to either pay small fortunes for their medicines or engage in lengthy and uncertain legal battles to have the public healthcare system pay for them.

Brazil could rapidly become Latin America’s biggest market for medical cannabis, with a potential turnover of USD 2.4 billion.

Yes, but … The new regulations require heavy investments and a lot of expertise—which could lead the market to be almost exclusively dominated by Big Pharma. And while medicine prices will certainly go down, the need for importing inputs could keep them out of reach for many patients.

Investments. Brazilian pharmaceutical companies haven’t revealed their plans for cannabis-based products. But Canadian Canopy, a global leader in the sector, has recently opened a unit in São Paulo, investing BRL 60 million.

A new white whale for Operation Car Wash?

A panel of Supreme Court justices accepted an indictment of long-time Senator Renan Calheiros for corruption and money laundering—his first within the scope of Operation Car Wash. He is accused of pocketing BRL 1.8 million, siphoned from a state-owned energy company.

Who is he? Renan Calheiros has been one of the most influential politicians in Brazil since democracy was restored in the mid-1980s. He served as Justice minister, congressman, and has occupied the Senate presidency for four terms. Before taking public office for the first time, Mr. Calheiros declared a Volkswagen Beetle as his sole possession—but he has recently been linked as the owner of dozens of farms and thousands of cattle … hidden under the names of shell corporations.

Why it matters. Few people know the ins and outs of corruption in Brazil better than Mr. Calheiros, himself being at the center of dozens of scandals and criminal cases. In 2007, he was accused of using the Senate Police to spy on his political enemies. Should he decide to collaborate with investigators, Mr. Calheiros would certainly have the dirt to bring down plenty of his peers.

Reaction. The senator seemed unfazed by the indictment and issued a statement recalling that two-thirds of all indictments against him ended up being shelved.

What else you need to know today

Tourism. The tourism sector is poised to have its best performance in four years, with revenue up 3.9 percent between January and September. The São Paulo Federation for Trade and Tourism attributes this to the availability of more credit, low inflation, and decreasing unemployment rates. Still, the sector has yet to reproduce 2014 numbers, when Brazil hosted the World Cup. According to the federal government, the country as a whole receives fewer tourists per year (6 million) than the 7 million who visit the Eiffel Tower.

Exports. Today and tomorrow, the southern city of Bento Gonçalves will be host to a Mercosur summit, during which Brazil and Paraguay will hold a round of negotiations over a trade deal concerning exports of auto parts—one of the few segments not included in Mercosur’s existing trade agreement. One of the major roadblocks is Paraguay’s insistence on importing used cars, which make up for most of the country’s fleet. Asunción also wants preferential tariffs on auto parts produced by maquilas—companies under a special tax system.

Money laundering. After allowing tax authorities to flag suspicious behavior by citizens and companies to law enforcement, the Supreme Court will today decide whether Brazil’s money laundering enforcement agency will be allowed to do the same. The agency is usually the first step into investigating white-collar crime, as it makes prosecutors aware of suspicious financial transactions.

Elections. President Jair Bolsonaro got a partial win at the Superior Electoral Court, as justices decided to accept digital signatures in applications to open new political parties in Brazil. Mr. Bolsonaro is looking to create the Alliance for Brazil party and will first need the signatures of roughly 500,000 supporters in nine states—a process that would be sped up with e-signatures. But the ruling says the process needs regulation before being implemented, and there is no indication as to when this could happen.

Conservatives. Fourteen members of Congress from the Social Liberal Party linked to Jair Bolsonaro were punished for conduct detrimental to the party. Eduardo Bolsonaro, the president’s third-eldest son, was handed a 12-month suspension—which will jeopardize his position as party whip and chairman of the House’s Foreign Affairs Committee.[/restricted]


Trump wants to come after Brazil steelmakers. What to expect?

Monday got off to a turbulent start after U.S. President Donald Trump used his Twitter account to threaten Brazil and Argentina with new import tariffs on steel products. Mr. Trump accused both countries of “presiding over a massive devaluation of their currencies” to make their agricultural products more competitive in the U.S. market, promising a retaliation in line with the stance he has taken towards China.[restricted]

Mr. Trump’s tweets have had a sharp effect on markets—to the point that JPMorgan created the “Volfefe Index,” a portmanteau of the words volatility and Mr. Trump’s infamous “covfefe” tweet in 2017. Many expected Brazilian steel companies to crash today, following Mr. Trump’s morning tweet. 

However, that was not the case. Instead, stocks of the country’s main players went up.

And that’s because of the limited effects Mr. Trump’s promised tariffs would actually have on them.

Back in March 2018, the U.S. president announced a bump in tariffs on steel and aluminum imports—with fees on the latter reaching 10 percent, and 25 percent on the former. As the U.S. industry alone was unable to meet the demand, the White House saw itself forced to loosen its rules, adopting a quota system for Brazil, South Korea, and Argentina, with the first two being among the main exporters to the U.S.

That system ended up increasing global steel prices, which reportedly benefited Brazilian companies.

What impact on Brazil’s steel exporters?

Analysts at XP Research highlighted on Monday that “Brazil [is already] operating on the quota regime using the average of exports in 2018 as a ceiling. As the exported volume in 2019 wasn’t much different than in 2018, the impact of tariffs was small.”

Pedro Galdi, an analyst at Mirae Asset Brokerage agrees that the tariffs Mr. Trump is threatening Brazilian companies with will have a very limited impact. “Gerdau has a unit in the U.S. What would change? Nothing. Usiminas exports roughly 10 percent of its production, with the U.S. representing only a small portion of that—and the same goes for CSN,” he told The Brazilian Report.

Indeed, Usiminas’ Q3 earnings report shows that exports account for only 16 percent of the company’s net revenue. For CSN, this figure is 15.2. Gerdau has plants in the U.S. which are not subject to the tariffs—and accounts for 37 percent of the group’s net revenue.

It is noteworthy that Brazilian steel companies are raising prices, leveling up to international competitors. Usiminas, for instance, has already bumped its fares by 5 percent over Q3, and will do it again in January. And on November 22, Gerdau announced an increase of up to 12 percent, as reported by Reuters.

For the moment, investors are not running for hills—rather choosing a touch-and-go approach, especially after the Brazilian government announced it would reach out to the White House to negotiate a way around new tariffs.

Failed diplomacy for Bolsonaro?

Since taking office, Brazilian President Jair Bolsonaro made the U.S. the center of his foreign policy. But his “America-first” approach appears to have backfired. Time and time again, the White House has shown little appreciation for Brazil as a strategic ally—despite Mr. Bolsonaro’s efforts to please Washington.

In March 2019, Mr. Bolsonaro agreed to give up its “developing country benefits” at the World Trade Organization—which include more room for agricultural subsidies and longer deadlines to implement WTO policies—and agreed to more access for U.S. pork in Brazil, as well as an import quota of 750,000 tons of U.S. wheat with zero tariffs.

In return, the White House promised to support Brazil’s bid to join the Organization for Economic Cooperation and Development (OECD). But in October, the Trump administration instead announced it would back the memberships of Argentina and Romania.

Brazil’s Foreign Affairs Ministry is learning the hard way that, in diplomacy, there are no friends. Just interests.[/restricted]