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Luiz Carlos Corrêa Carvalho, Caio

Director of Grupo Alto Alegre and Vice-president of ABAG


Brazil does not know Brazil

The viewpoint of attempting to revive the economy only by interacting at the central banks has led us to deadlocks, because the banks alone will not revive the global economy. Issues such as food and agroenergy, for instance, go hand in hand and must be dealt with jointly.

In a not to drastic scenario, there is a trend towards increases of agricultural commodities, due even to consumption increases in the emerging world, which, to some extent, results in a positive scenario for us. On the other hand, the dependence on oil at US$ 80 to 100 a barrel, allows us to also label the scenario as positive. “ANP” (the Brazilian Petroleum Agency) data shows that in the 20th Century there clearly occurred a decrease of food prices, of agricultural commodities, in the magnitude of about 2% per year.

Thus, this explains, first of all, the difficulty faced by agriculture in this century, because in the case of Brazil, it ended up coping with the burden of the entire industrialization process. However, beginning in the decade of 2000, particularly with the launch of flex fuel cars in Brazil, we experienced a rise in prices, perhaps signaling an essential difference between the 20th and the 21st centuries, i.e., the valorization of agricultural commodities.

Beginning in 2007, one perceives that there is a strong relation between the price of energy and the price of vegetal oils, in our case, of edible oils, which begin following a similar trend, resulting in the global questioning of how the world will be fed, given this new reality. The Economist magazine conducted an in-depth analysis and recommended following the example of Brazil.

Since 1973, Brazil changed its way of proceeding, eliminating subsidies, greatly reinforcing R&D, and thus having become the first country to actually challenge the major five big worldwide exporters. The analysis concluded that this was very good, and that since the world is faced with the slow motion continuity of the crisis, it should learn from Brazil, which was able to make changes quickly and positively.

We are experiencing a time when the price inductors bring about huge impact on agribusiness, along with the growing population enjoying higher income, resulting in a “tight” balance between supply and demand, in a favorable moment for producers. On the other hand, there is an urbanization process taking place, which completely changes consumption around the world.

This is highly favorable, mainly in the emerging world. We may refer to the 21st Century as the demand shock century, unlike what we saw before. The supply of grain is expected to grow 50% and that of meat will probably double by 2050. The bad news is that productivity in the world is somehow stagnated, and also like water, is becoming a risk factor. Brazil, indeed, lacks these specific problems.

From 1960 until now, productivity increased by 75%, but plantation areas by only 25%. The FAO states that in future we will need an increase in area of about 60%. This will result in an even more intensive discussion about food versus fuels. The question that remains is: who can and how can one meet such growth?

First: after 1998, with the end of that terrible interventionist model adopted by the government, one saw sugarcane supply grow 2.5 times. An extraordinary growth that expresses the private sector’s strength once one does away with the chains of the State interventionism we know and experienced.

Second, the industry began to export 70% of its production, while ethanol supplied 85% of the domestic market demand. Between 2005 and 2008, sugarcane grew 12% per year.  We will need a much stronger force to overcome all the difficulties we face in Brazil – the reduction of costs, the lack of policies, lack of access to the government – to be able to build this path.

After the crisis of 2008, the supply of sugarcane actually stagnated. Industrial investment too. In an extraordinary manner, demand continues in high gear, both for ethanol and sugar. In the last 15 years, Brazil supplied each gram of new sugar that entered the market.

On the other hand, we see gasoline consumption grow in the domestic market, which is reason for concern because how is one going to meet this demand? If, in fact, Brazil is the chosen one to meet the demand for food and biofuels, we will have to expand in area and productivity. One should emphasize, we can meet these needs without subsidies and in a sustainable manner.

According to FAO studies, Brazil has idle areas that are sufficient to produce the equivalent of the entire output of the United States and Russia. This is awesome. Thus, what we need to do is to learn the essence of agriculture. In order to talk about this, we “invented” the 4-R mechanism: regularity, repetition, reversion (of the climate) and remodeling. Agriculture requires regularity to contribute equilibrium to the country. It constantly repeats itself and it is this phenomenon that has been able to produce everything we have seen so far. However, it is subject to the reversions of the climate and constantly needs to be remodeled.

So then, the essence of our agriculture is that it needs inventories, it needs to export to correct distortions, for instance, like in the case of ethanol in relation to gasoline. Global markets want supply, which means investments. Another issue is scale. It is inevitable that the reduction of costs presupposes growth of scale. Brazil has the scale needed to supply to this market.

From Brasília we hear criticism about preference for sugar over ethanol. We also receive criticism from the FAO, under the argument that Brazil is reducing sugar production, so the price is increasing too much, and the poor of this world cannot consume it. The global view overturning the local view. This cycle can only be driven by the return on investment we need. The 2008 increase in prices did not actually take place by chance or on the spur of the moment.

It was a clear signal of a new price phase for cultures containing carbohydrates, because carbohydrates are the business of the 21st Century. There is data clearly showing the price development of a base basket of agriculture and cattle breeding products that, beginning in 2007, and even throughout the crises of 2008, 2009 and 2011, continues to develop differently than the prices in our industry.

Between 2005 and 2008, we experienced unbelievable enthusiasm, which caused impressive growth of supply, of plantations, but, beginning in 2009, we experienced, and still experience,  deception. Important is not to continuously justify error, but rather, to prevent it from occurring again. That is why we are discussing, expressing opinions here in this article, to prevent again experiencing the problems we already did in the past.

Hence, after 2008, we will still have to pay this bill for a while, given the imbalance of sugarcane plantations and their low renewal rates. The sugarcane plantations are old, in need of renewal “yesterday”.

Sugarcane is being submitted to unbelievable biological stress, exposed to opportunistic diseases. Growth of mechanical planting continues at a very high  pace, and, therefore, will undergo a learning curve process. In the 2012 to 2015 harvests, we will still see the impact of everything that happened before. Are we lacking commitment by the industry to the very industry? Given that we are experiencing a de-industrialization process in the country, I wonder whether the lack of commitment is universal, which would be very serious, or if this is just a phase we are in, or the consequence of how the industry is structured.

I remember an extraordinary one-time phrase by Gonzagão (a Brazilian musician), referring to the hinterland: “when the green of your eyes reflects on the plantation, I’ll be back, you hear me? I’ll return to my hinterland”. This is what we hope will happen. From a logical point of view, we are ready to return and to do, but it must rain. The policies that have been applied in our industry in the after-“Proálcool” era, make us navigate with the current, but not because the boat engine is moving us.

So what is the new reality? It is precisely a new, strong innovation process taking place in the field of biology. We hope politics too will innovate quickly to meet what biology is being able to accomplish: from sugarcane much is produced, from ethanol chemistry, sugar chemistry to bio-hydrocarbons. This is the view from the bio-refinery, entailing diversification and extraordinary new possibilities in all fields.

We must adjust our old technologies and watch out for technological breakthroughs that are coming. The key for this is low-cost raw material, and obviously, public and private commitments, along with stability combined with proactivity.

Brazil does not know Brazil. We must understand that our future is to be the big supplier of food and renewable energy, throughout the production chain. This demands order, progress, understanding and leadership, To that end, dialogue, trust, and common sense will be the ingredients, currently so scarce, to overcome all difficulties.