Monday, July 18, 2005
Brazil: The amazing land grab
Deadwood, Brazil
by Richard C. Morais
Brazil is fast becoming the globe's agri-powerhouse. Behind its impressive rise: an epic 19th century land grab occuring at a 21st-century pace.
WHen Walter Horita, a second-generation Japanese-Brazilian, staked his first claim in the raw savannah of Brazil's interior, back in 1984, there were no roads, telephones or running water in this stretch of the state of Bahia. Bandits had just murdered his neighbors and taken their land. Undeterred, the 20-year-old lived under a black plastic tarp as he cleared the first 420 acres of armadillos and anacondas for modest crops of soy and rice.
Twenty years later Walter Horita's pilot is flying him in his twin-engine Beechcraft over his 74,000-acre estate, tidy homesteads and blindingly white, high quality cotton fields that are nearing harvest and are collectively worth an estimated $60 million. "That was one of my best buys," Horita suddenly yells over the plane's engines, pointing down at the lush fields.
In 1998 Horita spent $60 an acre on a 17,000-acre farm, which, just seven years later, is worth at least $700 an acre. And there's still room for appreciation. The best cropland in the American Midwest goes for $4,000 to $5,000 an acre, even though the profits in the subsidy-dependent U.S. are a fraction of what Horita achieves in Brazil. The U.S. Department of Agriculture calculates that the subsidy-free cotton farms in Horita's region had 35% profit margins on average last year. Today's low cotton prices have pushed margins down to 15%, but in 2003, because of poor U.S. crops and high demand from Asia, farms like Horita's cleared 60% to 70%.
A giant arbitrage is about to take place on the world agricultural market. Farmers will sell--already are selling--overpriced American and European farmland and are buying underpriced Brazilian farmland. Add to the existing economics a possible reduction in agricultural subsidies--it may yet happen--and you have the makings of a transfer of farm wealth from the northern to the southern hemisphere.
While developing China emerges as a manufacturing hub and India as the service industry's back room, Brazil--in the words of former U.S. Secretary of State Colin Powell--is becoming an "agricultural superpower." In the last several years Brazil has become the world's largest exporter of beef, soybeans, coffee, orange juice, sugar and chicken. The bumper crops are one big reason why President Luiz Inácio Lula da Silva's left-leaning government could claim a 5.1% real GDP growth rate last year.
Soybeans are Brazil's showcase crop. The high-protein bean couldn't tolerate conditions along the equator until two decades ago, when Brazil's agriculture department created strains capable of growing in the country's interior. Today, having added 30 million acres of soybeans since 1995, the nation is the world's largest exporter of soy products.
Brazil is number four in pork, for example, but probably not for long; its global market share has jumped from 4% to 13% since 2000. Last year Brazil established a legal precedent when it successfully challenged U.S. cotton subsidies before the World Trade Organization. "We want farmer to compete against farmer, not farmers against the U.S. Treasury," says Pedro de Camargo Neto, the former agriculture official who originated Brazil's successful challenges to U.S. cotton and European sugar subsidies.
Of course, Brazil practices its own protectionism in other sectors. Also on the debit side: its dysfunctional judicial system, corrupt legislature and mind-boggling bureaucracy. According to the Pensamento Nacional das Bases Empresariais, a national association of small and medium-size businesses, 10% to 20% of Brazil's GDP disappears in graft. A federal minister found 90% of the municipalities he audited had "misused" 20% to 30% of the public resources under their control, and allegations of congressional vote-buying are unraveling President Lula's coalition government. Brazil's tax burden is higher than Germany's. (And complicated: Tax rates on fertilizer changed three times last year.)
Brazil is a violent place, not just in the favelas of Rio de Janeiro. Outside the Ordem Terceira de São Domingos church in Salvador, as if on cue for an approaching reporter, a thug emerging from a bar pulls a rusty revolver from his shorts and aims it point-blank at a man and a barking dog. Brazil's homicide rate is 19 per 100,000, triple the U.S.' rate.
No surprise, then, that farming in Brazil is a rough way to make a living (see box, below). But Brazilians who know how to dodge the criminals and the bureaucrats name their farms Eldorado and Ouro Verde (Green Gold) with good reason. According to a recent Credit Suisse First Boston study, total production costs in the U.S. heartland are $235 an acre; in Brazil's heartland, where transportation to faraway ports is a huge expense, those same costs are still just $162 an acre. The USDA estimates that the average soy farmer in the Brazilian state of Paraná enjoyed a 51% profit margin last year. Corn producers in Bahia cleared 44%; cotton earned 39% in Mato Grosso.
Land holdings are concentrated. The million-acre farm of the Maggi family in Mato Grosso is 50% larger than the state of Rhode Island; many Brazilian farms have between 30,000 and 200,000 acres. Not all of them represent inherited wealth. The feverish run-up in land values has enabled some daring entrepreneurs like Walter Horita to amass huge holdings overnight.
Let's visit the western Bahia town of Luis Eduardo Magalhães (LEM) to see how this boom is playing out. The town of 45,000 more closely resembles Wild Bill Hickok's Deadwood than it does Council Bluffs, Iowa. Two decades ago LEM consisted of a single poacher of emus, surrounded by wild savannah, selling gas from a barrel at a bend in a dirt road. American farmers were among the first to spot the region's reliable sun and rain and the flatness of its plateau. They knew lime could correct the poor soil quality of the savannah that Brazilians call cerrado. When their crops flourished in the "worthless" land they had claimed through a Brazilian homestead act, well-connected bandits called grilheiros--named after the desiccated crickets the bandits used to "age" forged property deeds--murdered three of the four pioneering American farmers. Clay Earl--a son of one of the murdered farmers, who, as a boy, repeatedly helped defend the family farm during shoot-outs--says "it was just like the far West 150 years ago."
The land seized in the Bahian land wars that raged between 1978 and 1985 was eventually parceled and sold off to young Brazilian farmers moving up from the southern states. Because of hyperinflation and Brazil's regular currency crises, farmland is to this day priced in 132-pound soybean "sacks," not cash, and farmers routinely plow their profits back into more land.
Olmiro Flores de Oliveira says when he started in Bahia, "one lunch bought 10 hectares [25 acres]." Today Flores owns 30,000 acres of land--worth 70 times what he paid a decade ago--and he has added to his empire John Deere and Mitsubishi franchises. Jao Vadim (we can't use his real name for security reasons) is a soft-spoken Brazilian who owns 22,000 acres, 13,000 of them virgin cerrado. Vadim is producing 4,700 pounds per acre of cotton and clearing 40% after expenses. Corn at 8,600 pounds per acre clears 34%, soybeans at 3,400 pounds per acre 29%.
The transformation of Brazilian land is in its early stages. The U.S. and Brazil are roughly the same size, but Brazil has only 5% of its land devoted to crops, compared with the U.S.' 19%. Even without touching the environmentally sensitive Amazonian jungle, Brazil could, with modest investment, add another 420 million acres of farm crops--the equivalent of America's entire agricultural space--mostly by converting underutilized pasture land and cerrado.
Last year De Oliveira's Deere dealership in LEM sold 388 tractors, combines, planters and cotton pickers, farm vehicles costing between $28,000 and $340,000 each. "The U.S. land rush took place over a century," says Michael Shean, an agricultural researcher. "It was 10-acre plots awarded by government and half a million farmers going out West in wagons. Brazil, in contrast, has opened up an enormous amount of land in five years, using modern technology and financing."
LEM's population has almost quadrupled in five years and is still growing at a 20% annual clip. In its shantytown mangy dogs and lice-covered children move warily among the red-dust lanes, where there were 300 bars and 97 whorehouses at last count. The latest knifing makes the paper--complete with bloody pictures from the morgue--and the town's evangelical Baptist pastor, normally holding services in his garage, voluntarily locks himself inside the overcrowded jailhouse to preach the gospel to 60 prisoners forced to sleep in shifts on 12 cots.
But, a few streets over, sticks in the ground represent the future agricultural museum and town hall; bulldozers are clearing ground for neighborhoods. Down the road from the Massey Ferguson and Case dealerships, Cargill's silos and Bunge's soybean plant are working around the clock.
A lot of the wealth is hidden. Miguel Carvalho is a 73-year-old farmer with nine children. Outside his homestead is a mud-rutted lane filled with rusted farm equipment; the chair in his office behind the eucalyptus windbreak is tied together with pink twine. No sign that Carvalho is sitting on 1,000 head of cattle, prized coffee bushes and land worth $20 million. Carvalho paid mostly $8 an acre for land worth around $700.
Not far from Carvalho, Paulo (Loco) Borges shuffles in mismatched flip-flops around a mountain of dirty soybeans, cursing the shuddering machine meant to separate the beans from unwanted twigs and debris. Borges sold $12 million worth of land this year.
At LEM's brand-new gated "Cotton Residence," next door to the competing "Soy Bean" and "Corn" developments, opulent villas with satellite dishes and sold-but-not-yet-built-upon lots for millionaire farmers sit behind spitting fountains and guards with pistols at their hips. Last November a farmer's 10-year-old son was kidnapped at gunpoint in the next town over; he was released only after other farmers passed the hat and helped the family scramble together the $200,000 ransom.
Well-financed U.S. and European investors are moving in to compete with Brazilian natives, redeploying their low-cost capital in high-return Brazil. Young American farmers in particular, financed by an older generation of farmers diversifying away from expensive cropland in the U.S., are coming down to Bahia to make their fortune. The Buenos Aires-based Adeco Agropecuaria is already one of the biggest landowners in Argentina, with 222,000 acres, and is now diversifying its commodity and climate risk by moving heavily into Brazil. Hertz FarmManagement, an American firm headquartered in Nevada, Iowa, is sinking clients' money into western Bahia, as HSBC and Holland's Rabobank move into the region alongside the agencies representing Monsanto, Bayer and Syngenta products.
The Hotel Saint Louis is a year-old hotel rising ten stories out of LEM's red-dust streets. Brazilians, Americans, Dutch,French, Swiss, Japanese and Germans are in the garden restaurant, drinking lime juice laced with sugar cane spirits as they swap tales from the front: $100,000 worth of uninsured chemicals stolen from a farmyard; a foreign farmer unwittingly caught up in his neighbor's bank fraud and in danger of having his own cotton crop seized by the bank.
Fortunes will be made here, and fortunes lost. And, probably at a slower pace, fortunes will be lost on the overpriced pampas of Iowa and the Loire Valley. Soybeans and sugar are getting outsourced.
by Richard C. Morais
Brazil is fast becoming the globe's agri-powerhouse. Behind its impressive rise: an epic 19th century land grab occuring at a 21st-century pace.
WHen Walter Horita, a second-generation Japanese-Brazilian, staked his first claim in the raw savannah of Brazil's interior, back in 1984, there were no roads, telephones or running water in this stretch of the state of Bahia. Bandits had just murdered his neighbors and taken their land. Undeterred, the 20-year-old lived under a black plastic tarp as he cleared the first 420 acres of armadillos and anacondas for modest crops of soy and rice.
Twenty years later Walter Horita's pilot is flying him in his twin-engine Beechcraft over his 74,000-acre estate, tidy homesteads and blindingly white, high quality cotton fields that are nearing harvest and are collectively worth an estimated $60 million. "That was one of my best buys," Horita suddenly yells over the plane's engines, pointing down at the lush fields.
In 1998 Horita spent $60 an acre on a 17,000-acre farm, which, just seven years later, is worth at least $700 an acre. And there's still room for appreciation. The best cropland in the American Midwest goes for $4,000 to $5,000 an acre, even though the profits in the subsidy-dependent U.S. are a fraction of what Horita achieves in Brazil. The U.S. Department of Agriculture calculates that the subsidy-free cotton farms in Horita's region had 35% profit margins on average last year. Today's low cotton prices have pushed margins down to 15%, but in 2003, because of poor U.S. crops and high demand from Asia, farms like Horita's cleared 60% to 70%.
A giant arbitrage is about to take place on the world agricultural market. Farmers will sell--already are selling--overpriced American and European farmland and are buying underpriced Brazilian farmland. Add to the existing economics a possible reduction in agricultural subsidies--it may yet happen--and you have the makings of a transfer of farm wealth from the northern to the southern hemisphere.
While developing China emerges as a manufacturing hub and India as the service industry's back room, Brazil--in the words of former U.S. Secretary of State Colin Powell--is becoming an "agricultural superpower." In the last several years Brazil has become the world's largest exporter of beef, soybeans, coffee, orange juice, sugar and chicken. The bumper crops are one big reason why President Luiz Inácio Lula da Silva's left-leaning government could claim a 5.1% real GDP growth rate last year.
Soybeans are Brazil's showcase crop. The high-protein bean couldn't tolerate conditions along the equator until two decades ago, when Brazil's agriculture department created strains capable of growing in the country's interior. Today, having added 30 million acres of soybeans since 1995, the nation is the world's largest exporter of soy products.
Brazil is number four in pork, for example, but probably not for long; its global market share has jumped from 4% to 13% since 2000. Last year Brazil established a legal precedent when it successfully challenged U.S. cotton subsidies before the World Trade Organization. "We want farmer to compete against farmer, not farmers against the U.S. Treasury," says Pedro de Camargo Neto, the former agriculture official who originated Brazil's successful challenges to U.S. cotton and European sugar subsidies.
Of course, Brazil practices its own protectionism in other sectors. Also on the debit side: its dysfunctional judicial system, corrupt legislature and mind-boggling bureaucracy. According to the Pensamento Nacional das Bases Empresariais, a national association of small and medium-size businesses, 10% to 20% of Brazil's GDP disappears in graft. A federal minister found 90% of the municipalities he audited had "misused" 20% to 30% of the public resources under their control, and allegations of congressional vote-buying are unraveling President Lula's coalition government. Brazil's tax burden is higher than Germany's. (And complicated: Tax rates on fertilizer changed three times last year.)
Brazil is a violent place, not just in the favelas of Rio de Janeiro. Outside the Ordem Terceira de São Domingos church in Salvador, as if on cue for an approaching reporter, a thug emerging from a bar pulls a rusty revolver from his shorts and aims it point-blank at a man and a barking dog. Brazil's homicide rate is 19 per 100,000, triple the U.S.' rate.
No surprise, then, that farming in Brazil is a rough way to make a living (see box, below). But Brazilians who know how to dodge the criminals and the bureaucrats name their farms Eldorado and Ouro Verde (Green Gold) with good reason. According to a recent Credit Suisse First Boston study, total production costs in the U.S. heartland are $235 an acre; in Brazil's heartland, where transportation to faraway ports is a huge expense, those same costs are still just $162 an acre. The USDA estimates that the average soy farmer in the Brazilian state of Paraná enjoyed a 51% profit margin last year. Corn producers in Bahia cleared 44%; cotton earned 39% in Mato Grosso.
Land holdings are concentrated. The million-acre farm of the Maggi family in Mato Grosso is 50% larger than the state of Rhode Island; many Brazilian farms have between 30,000 and 200,000 acres. Not all of them represent inherited wealth. The feverish run-up in land values has enabled some daring entrepreneurs like Walter Horita to amass huge holdings overnight.
Let's visit the western Bahia town of Luis Eduardo Magalhães (LEM) to see how this boom is playing out. The town of 45,000 more closely resembles Wild Bill Hickok's Deadwood than it does Council Bluffs, Iowa. Two decades ago LEM consisted of a single poacher of emus, surrounded by wild savannah, selling gas from a barrel at a bend in a dirt road. American farmers were among the first to spot the region's reliable sun and rain and the flatness of its plateau. They knew lime could correct the poor soil quality of the savannah that Brazilians call cerrado. When their crops flourished in the "worthless" land they had claimed through a Brazilian homestead act, well-connected bandits called grilheiros--named after the desiccated crickets the bandits used to "age" forged property deeds--murdered three of the four pioneering American farmers. Clay Earl--a son of one of the murdered farmers, who, as a boy, repeatedly helped defend the family farm during shoot-outs--says "it was just like the far West 150 years ago."
The land seized in the Bahian land wars that raged between 1978 and 1985 was eventually parceled and sold off to young Brazilian farmers moving up from the southern states. Because of hyperinflation and Brazil's regular currency crises, farmland is to this day priced in 132-pound soybean "sacks," not cash, and farmers routinely plow their profits back into more land.
Olmiro Flores de Oliveira says when he started in Bahia, "one lunch bought 10 hectares [25 acres]." Today Flores owns 30,000 acres of land--worth 70 times what he paid a decade ago--and he has added to his empire John Deere and Mitsubishi franchises. Jao Vadim (we can't use his real name for security reasons) is a soft-spoken Brazilian who owns 22,000 acres, 13,000 of them virgin cerrado. Vadim is producing 4,700 pounds per acre of cotton and clearing 40% after expenses. Corn at 8,600 pounds per acre clears 34%, soybeans at 3,400 pounds per acre 29%.
The transformation of Brazilian land is in its early stages. The U.S. and Brazil are roughly the same size, but Brazil has only 5% of its land devoted to crops, compared with the U.S.' 19%. Even without touching the environmentally sensitive Amazonian jungle, Brazil could, with modest investment, add another 420 million acres of farm crops--the equivalent of America's entire agricultural space--mostly by converting underutilized pasture land and cerrado.
Last year De Oliveira's Deere dealership in LEM sold 388 tractors, combines, planters and cotton pickers, farm vehicles costing between $28,000 and $340,000 each. "The U.S. land rush took place over a century," says Michael Shean, an agricultural researcher. "It was 10-acre plots awarded by government and half a million farmers going out West in wagons. Brazil, in contrast, has opened up an enormous amount of land in five years, using modern technology and financing."
LEM's population has almost quadrupled in five years and is still growing at a 20% annual clip. In its shantytown mangy dogs and lice-covered children move warily among the red-dust lanes, where there were 300 bars and 97 whorehouses at last count. The latest knifing makes the paper--complete with bloody pictures from the morgue--and the town's evangelical Baptist pastor, normally holding services in his garage, voluntarily locks himself inside the overcrowded jailhouse to preach the gospel to 60 prisoners forced to sleep in shifts on 12 cots.
But, a few streets over, sticks in the ground represent the future agricultural museum and town hall; bulldozers are clearing ground for neighborhoods. Down the road from the Massey Ferguson and Case dealerships, Cargill's silos and Bunge's soybean plant are working around the clock.
A lot of the wealth is hidden. Miguel Carvalho is a 73-year-old farmer with nine children. Outside his homestead is a mud-rutted lane filled with rusted farm equipment; the chair in his office behind the eucalyptus windbreak is tied together with pink twine. No sign that Carvalho is sitting on 1,000 head of cattle, prized coffee bushes and land worth $20 million. Carvalho paid mostly $8 an acre for land worth around $700.
Not far from Carvalho, Paulo (Loco) Borges shuffles in mismatched flip-flops around a mountain of dirty soybeans, cursing the shuddering machine meant to separate the beans from unwanted twigs and debris. Borges sold $12 million worth of land this year.
At LEM's brand-new gated "Cotton Residence," next door to the competing "Soy Bean" and "Corn" developments, opulent villas with satellite dishes and sold-but-not-yet-built-upon lots for millionaire farmers sit behind spitting fountains and guards with pistols at their hips. Last November a farmer's 10-year-old son was kidnapped at gunpoint in the next town over; he was released only after other farmers passed the hat and helped the family scramble together the $200,000 ransom.
Well-financed U.S. and European investors are moving in to compete with Brazilian natives, redeploying their low-cost capital in high-return Brazil. Young American farmers in particular, financed by an older generation of farmers diversifying away from expensive cropland in the U.S., are coming down to Bahia to make their fortune. The Buenos Aires-based Adeco Agropecuaria is already one of the biggest landowners in Argentina, with 222,000 acres, and is now diversifying its commodity and climate risk by moving heavily into Brazil. Hertz FarmManagement, an American firm headquartered in Nevada, Iowa, is sinking clients' money into western Bahia, as HSBC and Holland's Rabobank move into the region alongside the agencies representing Monsanto, Bayer and Syngenta products.
The Hotel Saint Louis is a year-old hotel rising ten stories out of LEM's red-dust streets. Brazilians, Americans, Dutch,French, Swiss, Japanese and Germans are in the garden restaurant, drinking lime juice laced with sugar cane spirits as they swap tales from the front: $100,000 worth of uninsured chemicals stolen from a farmyard; a foreign farmer unwittingly caught up in his neighbor's bank fraud and in danger of having his own cotton crop seized by the bank.
Fortunes will be made here, and fortunes lost. And, probably at a slower pace, fortunes will be lost on the overpriced pampas of Iowa and the Loire Valley. Soybeans and sugar are getting outsourced.
