June 28, 2010

Rumblings of Brazilian Protectionism?

The Agrarian Minister for Brazil, Guilherme Cassel, announced Friday that
he and his governmental peers are extremely concerned that foreign
entities are entering Brazil and acquiring too many tracts of rural farm land.
He claims that Brazil’s strategic interest – that of being able to provide food
for its citizens in the future – is being threatened. No doubt he envisions
that as the world’s population continues to grow and as income levels
increase across the globe, the consumption level of food will also increase
significantly, thus perhaps putting a strain “on Brazil being able to provide
food, natural resources and water for its own people in the future. The
Brazil government’s strategic need to provide and to plan for that provision
of sufficient foodstuffs is paramount.” Minister Cassel’s quote provided by
the newspaper Valor Economico is, “We do not need foreigners to produce
food in Brazil. This is the policy of President Luiz Inacio Lula da Silva.
Because of food security, Brazilian lands must remain in Brazilian hands."
The minister’s spokesperson, Denise Mantovani, stated that 4 million
hectares (10 million acres) had been registered as purchased by
foreigners or foreign owned business entities since 2008. The upshot is, he
announced that an amendment will shortly be debated wherein foreign
farmland ownership will be strictly controlled and limited.

The news hit the press just before the weekend so there has not yet been
any recorded public reaction. However, in light of the booming agricultural
industry and its investment (Brazil enjoyed a US$60 billion positive trade
balance in 2008) and the large proportion of FDI in Brazil dedicated to the
agricultural sector, I know that many global businesses and experts will
react negatively to this effort and I can guess what they will say. First, they
will no doubt state that this is just an excuse to practice another form of
protectionism and that it is another example of Brazil’s chauvinistic
economic and bureaucratic policies that have plagued the country and its
development for decades, just like the Daedalian bureaucracy that the
government refuses to straighten out and streamline. They will add that
Brazil has a larger land surface area than the continental USA, has
generally more fertile soil and it does not have the vast stretches of deserts
and mountains where agricultural exploitation is limited. Thus, the feeling
will be that the current Brazilian administration’s claim that they need to
protect the natural patrimony of their fellow citizens is a nationalistic
reaction to Brazil’s entrance into the global market (much like how some
US citizens reacted in the 1980’s when many Japanese investors acquired
several landmark properties). The comment will be that Brazil’s
government wants to reap the benefits of a globally connected economy,
but that it does not wish to play on an open or a fully accessible playing
field.

Is Minister Cassel’s initiative a cry of agricultural jingoism or a legitimate

concern to protect their resources for future generations? Probably a lot of
the former and a little of the latter. First, one needs to understand that
there is a passionate sentiment of territorial autonomy that has run strong
in Brazil for over 100 years, and that there exists a strong cultural concern
and anxiety for “protecting” the country’s assets from foreign invaders.
(Mexico shares this characteristic. The best example is the strong public
resistance to any form of privatisation of the oil sector which the Mexican
government, under then socialist President Lazaro Cardenas, expropriated
in 1938 to the resounding approval of Mexicans.) One just needs to reflect
on the Brazilian oil sector; only five years ago it was quasi-privatised and
the government still retains the ultimate authority, above private interests.
This latest “incursion” of foreigners into Brazilian land ownership is a sign
to some Brazilians that they could lose control of their own destiny.
However, it is important to note that a law already exists in Brazil that
states that only residents and citizens of Brazil may own rural tracts of
agricultural land. And many foreign companies and individuals have side-
stepped this edict by setting up Brazilian shell companies and using that
legal and fiscal status to acquire large swathes of farm land. The current
government has cried foul and now wishes to stem the tide of the illegal
invasion. Of course, in the industrialised countries these land ownership
restrictions do not exist an open and free market reigns.

The new statute, or amendment apparently, that is being prepared would

further define and restrict the rights of “fiscal shell residents” from further
acquisition and ownership of the agronomical land parcels. The
amendment may even revoke title of land already purchased by foreigners.

How may this affect agricultural investment in Brazil? Probably too early to
tell but it does not sound like a good incentive program for international
investors.