The geography and climate of Brazil has provided a flourishing, export oriented agricultural base, with a huge potential for expansion of land under cultivation. Only 125 million acres or 42% of the estimated 300 million tillable acres is currently in production. In contrast, the US acreage of corn, soybean and wheat is approximately 170 million acres, and is slowly decreasing due to urban expansion. The land in the south of Brazil is fully developed with infrastructure on par with the American Midwest. Land prices in the region are also similar to the American Midwest at US$2-3,000 per acre. The center-west region of Brazil is where the majority of quality undeveloped land is located in Brazil. With prices currently ranging from US$2-500 per acre, we fully expect these prices to appreciate to the levels found in the south over the next 10-20 years.
Brazil was discovered in 1500 by the Portuguese explorer Pedro Alvares Cabral and was governed as a series of colonies under the Portuguese crown. The wealth of the colonies was based on a series of commodity booms, principally sugar in the seventeenth century and gold in the eighteenth century.
As in the neighboring Spanish American colonies, by the late eighteenth century the infiltration of ideas from the European Enlightenment was generating a nascent independence movement. On September 7, 1822, Brazil declared independence.
Subsequent periods of republican governments were supported mainly by agricultural development. In 1945, following Brazil’s participation in World War II, military rule was instituted. This period saw considerable economic development, but growing government instability and corruption. The oil crisis of the 1970’s severely affected the Brazilian economy. The world recession leading into the 1980’s generated growing calls for an end to military rule, and in March 1985 power passed to a civilian president.
A constitutional convention drafted and approved a new constitution in 1988, and in November 1989 the first direct presidential elections of the post-military era were held. Despite initial success with inflation control, chronic distortions continued to hinder growth. Elections in October 1994 brought Fernando Henrique Cardoso to power.
Cardoso, who served as the Minister of Finance in the previous administration, introduced the Plano Real, a successful monetary reform initiative. The Plano Real included capital and trade liberalization, elimination of price and salary indexing, strict fiscal control, privatization, banking reform and a more or less fixed foreign exchange rate. This plan has proven successful, and the country has enjoyed single-digit inflation since 1995.
Brazil is the fifth largest country in the world covering nearly half of South America. Brazil’s land mass is about the same as the continental United States. Brazil is a federal republic composed of twenty-six states and the Federal District, similar to the United States. Each state has its own constitution with a governor and state legislature.
The executive branch of the federal government is headed by a civilian president, elected by popular vote every four years. Legislative power is exercised by the National Congress, consisting of a Chamber of Deputies and the Federal Senate. Judicial power is exercised by the Federal Supreme Court, the Superior Court of Justice, the Federal Court system as well as separate courts for military, electoral, and labor matters. There is a state court system with local jurisdiction. The Brazilian constitution guarantees human rights, private property, and equality before the law - for Brazilians and non-Brazilians alike. The current population of approximately 170 million, of which almost one half is under twenty-years of age, provides a large, inexpensive labor base, especially in rural areas.
The Brazilian economy is one of the largest in the world. Over recent decades the country has developed from being primarily a source of raw materials into a diversified manufacturer that is increasingly integrated into global sourcing and production.
How big is the Brazilian economy? Over recent years, the country’s gross domestic product (GDP) has ranked between 8th and 13th in the world. In 2002 alone, Brazilian GDP was equal to US$452 billion, as shown in the table below.
Country US$ billions
United Kingdom 1,552
South Korea 477
Source: World Bank (data for 2002)
If the GDP is compared in ways that compensate for the exchange rate, Brazil’s economic position in the world rankings improves considerably. According to the World Bank ranking of Purchasing Power Parity (PPP), which measures the population’s potential to consume a fixed basket of goods, Brazil commands a 10th position at US$ 1.34 trillion.
Brazil has very substantial potential for economic growth. In comparison to mature economies, where growth is largely vegetative or comes from productivity increases, Brazil has several additional strong drivers for growth. These include:
-Geographic expansion of agricultural and economic activity
-Continued expansion of foreign trade
-Population growth contributing to increased consumption
-Income redistribution in the form of an expanding middle class
A recent survey of leading economists showed a consensus predicting the potential for long-term average annual growth at around 4.0%, thanks in part to recent structural reforms that are making the economy more efficient. Both Moody’s and Standard & Poor’s raised Brazil’s credit rating in September 2004 with a stable outlook.
Most of Brazil's industrial and manufacturing industry has traditionally been concentrated in the South and Southeast regions, specifically in the states of Sao Paulo, Rio de Janeiro and Minas Gerais. But this is now changing, as modern infrastructure and telecommunications make it attractive and possible to place world-class manufacturing operations in other parts of the country. The Northeast, for example, has recently seen an influx of export-oriented automobile, textile and ceramics factories.
The Center-West is Brazil's great new area of agricultural expansion. Development of new strains of seeds and improved fertilizer technology has transformed a vast area, previously thought to have little agricultural potential, into one of the world's major new food producing regions. Two Rivers Farm is in the heart of this region, and will be at the forefront of this expansion.
Brazil's potential as an international tourism destination is enhanced by its 5,000 miles of South Atlantic coastline, much of which offers year-round sun on picture-postcard beaches. Eco-tourism is growing as destinations like the Amazon and Pantanal wetlands become easier to visit. Recognizing the potential, the government has been investing heavily in basic infrastructure, for example upgrading airports and highways and improving sanitation.
The opening of the economy in the early 1990s, relative monetary stability since 1994 and a series of ongoing reforms have attracted growing foreign direct investment. Foreign direct investment surged from less than US$1 billion a year at the start of the Nineties to a one-year record of US$32.8 billion in 2000. Although investment was spurred by privatization and concessions of public services, the greater part of the money went for mergers and acquisitions and new start-ups.
Investment is flowing in from all over the world. The United States, traditionally the leading investor, has been prominent, as have companies from Holland, Japan, Germany and Italy. Recently Spain and Portugal have been among top investors in telecommunications and banking.
Brazil is the largest agricultural frontier in the world yet to be fully developed. Ironically its geography and climate are arguably the best in the world. The best way to illustrate this fact is to rotate a globe and look at the land masses and countries that are located between the Tropic of Cancer and the Tropic of Capricorn. These two lines of latitude are 23.5 degrees north and south of the equator.
The area bounded by the Tropic of Cancer on the north and Tropic of Capricorn on the south is known as the "tropics." This area does not experience seasons because the sun is always high in the sky. The tropics provide an unlimited growing season without the threat of frost or freezing conditions that can greatly reduce or eliminate an entire crop. This maximizes the use of machinery and labor, and eliminates the risk of crop loss due to frost in comparison to the American Midwest.
Brazil is the only country in the world that passes through both the equator and a tropic. The seasons are marked only between dry and rainy periods. Rainfall amounts are 1.5 – 2.5 times the amount of rainfall that we experience in the American Midwest. This combination of consistent rainfall and intense sun produce crops that exceed American farm yields by more than 20 percent.
Brazil, compared to other developing countries, provides exceptional long-term investment potential. This Venn diagram, which correlates land area, population, and GDP illustrates that only the USA, Brazil, and China have the economic and natural resources to be a world leader in agricultural production.
Brazil is one of the world’s main agricultural nations, notable not just for its volume but also for its diversity, which comes from the wide range of climatic regions, tropical through temperate, and the great variety of soil types and rainfall conditions. Brazil's grain harvest topped a record 122 million tons in 2003, with the total climbing steadily. The country is the world’s second largest producer of soy. It has the second largest beef herd and is a leading producer of oranges, corn, tobacco, cocoa, poultry, beef and cotton. Almost every kind of fruit is grown, from tropical varieties in the north (various nuts, melons, mango, papayas, pineapples and avocados) to an enormous output of citrus fruit and grapes in the temperate regions of the south.
Exports by the agricultural and agribusiness sector in 2003 set a new record at US$30.6 billion, against US$24.8 billion in 2002, for a 23.3% increase by value. This represented 41.9% of Brazil’s $1.4 trillion of exports. Main destinations were the European Union (36.4%), NAFTA and Asia (18.1% each), the Middle East (6.8%), Eastern Europe (6.3%) and Mercosul (3.1%).
Brazil’s advantages, as a producing nation, can be seen in the cost of producing soy. In Brazil, the cost of soy production is approximately one-half the cost of soy production in the US, according to the Brazilian Ministry of Development, Industry and Trade.
According to the United States Department of Agriculture, South American soybean harvests have set record highs every year for almost a decade. Exports from the region surpassed U.S. foreign trade for the first time in marketing year 2002/03 (September-August for the United States and October-September for Brazil). For 2003/04, shipments from Brazil alone are expected to make that country the top world exporter. U.S. soybean exports are forecast down in 2003/04 because poor weather cut domestic output. Yet, a recovery in U.S. trade for 2004/05 may only stave off Brazil’s export supremacy for a short time. Brazilian soybean producers are remarkably competitive in terms of relative production costs. Soybean yields in Brazil have exceeded U.S. yields in each of the last 5 years and are still rising as new areas come under cultivation.
The following quotes were made by Robert Lane, Chairman and CEO of John Deere in February of 2004 during their annual shareholders meeting:
“Brazil is becoming one of the great production basins of the world – and an area where John Deere is working hard to expand its presence.”
“Brazil is indeed a land where opportunity exists on a large scale – opportunity that we are seizing.”
-Growing political and economic stability
-Increasing global demand for soy and other commodities
-175 million acres of arable land (equivalent to total US grain under cultivation) has not been cultivated, resulting in low land costs
-Large pool of inexpensive labor
-Ideal geography and climate allowing multiple crop plantings in a single year
Harvest Capital Group welcomes you to come with us to Brazil and catch the vision for an enormous agricultural region that is only now beginning to realize its potential.