Following the election of Brazil’s new President, Jair Bolsonaro, the overall change of government has been viewed with optimism. Key economic factors are beginning to look promising as long awaited fiscal reforms begin to take shape. Rabobank is projecting 2.2% GDP growth for Brazil in 2019 vs an estimated 1.3% for 2018. Both inflation and interest rates are expected to remain stable or will decline. In the case of interest rates, they have declined to 6.5%, the lowest level ever recorded. While a steady recovery will help boost certain agribusiness industries like corn and beef, other industries remain tied to trade war issues such as soybeans, cotton and sugar.
One of the primary objectives that will need to be resolved by the new administration is pension reform. This has been a highly contentious issue as Brazil’s government spending has been quickly outpacing its tax revenue. Brazil’s president has already sent strong signals that change is coming by making comments that people should no longer expect to retire by the age of 55, the age when they can begin collecting social security in Brazil. While this was expected, you can imagine this went over about as well as non-alcoholic beer at a tailgate party. Investors are watching because he has the political momentum behind him. If he can’t get this reform completed now, it may never happen. Government spending will have to be curtailed somehow. The Brazilian government makes up a much larger percentage of job creation than it should. This is never a good sign for a healthy economy. The town that I lived in for ten years in Brazil, has a population close to 100,000 people and employs approximately 1,000 people. I have no idea what all those people do. I tried to look up how many city employees are working for Sioux City, IA, a town of roughly equal size and I think it is a fraction of that amount.
One of the more popular reforms among farmers has been that of eliminating all government support to the MST or “landless workers movements”. For decades now, a small, yet organized group of lower income Brazilians have made headlines by invading mostly non-producing, vacant land areas in the hopes of getting paid off to go away and not cause any trouble. This usually worked, where by then the Landless Workers Movement simply moved on to some place else and repeated the same process. I always found it ironic they referred to themselves as the “Workers” movement, since they didn’t actually hold any job other than ask the government for money. While this rarely affected opened, producing farms, it was still a major annoyance to rural property owners and a concern to foreign investors that often had the misperception that invaders could simply come on to your property at any time. The previous administration put up with this, as it was a way to informally buy votes. By providing financial support under the guise of helping the poor, they were able to buy their loyalty as it was never certain the new administration would continue the same deal. As it turns out, they were right. The new Bolsonaro administration has cut off all financial support and communication with the landless movement, even going so far as to call them “organized crime.” I can’t say that I disagree with that last statement. The former administration essentially acted as big brother to the crime syndicate, enforcing socialist tendencies to maintain their grip on power.
Another hot button issue for Brazilian farmers is that of road freight rates. Transport is almost completely dependent upon truck transportation. Last year a truckers strike created an embarrassing situation where it quickly exposed how vulnerable the country is to a single mode of transportation. Many grocery stores and hospitals ran out of food and medicine within a week. In an attempt to find a hasty solution to the problem, the outgoing administration created a minimum freight tax which passed the burden onto farmers in the form of a weaker basis. Farm organizations have not yet given up the fight and are continuing to lobby the new administration. Considering how successful the truckers strike was last year, they have made it clear that any attempt to undermine their freight rates could result in another strike.
Short term this creates risk to farmers. Long term this may be the impetus they need to finally get off their rear ends and start building up the transportation infrastructure to other parts of the country. If they can’t appease the truckers, then build railroads. The world’s four largest agriculture traders as well as the largest soybean producer in the world, Amaggi, are expected to make a joint bid to operate a road connecting Brazil’s major production areas of Brazil to the northern ports. Included in this bid would also be a an investment in railroad running parallel to the road that runs for nearly 600 miles. I have noted in previous reports that while slow, grain shipments running to the northern ports of Brazil in the Amazon will continue to grow. These northern ports were responsible for 28% of Brazil’s corn and soy exports in 2018. This is impressive considering it was almost nothing ten years ago. The most obvious benefit to this would be a strength in basis which is estimated to be as much as 80 cents per bushel for soybean producers in Mato Grosso. This railroad cannot come soon enough. This is not the only project that is expected to see progress. The new administration is expected to make good on their promises to invest in transportation infrastructure across the country. Brazilians would be wise not to hold their breath. While always hopeful, their political leaders are long on promises and short on results.