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BRAZIL: THE POLITICAL ECONOMY OF AGRICULTURE AND FERTILIZER POLICIES
CINDES March 2012
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BRAZIL: THE POLITICAL ECONOMY OF AGRICULTURE AND FERTILIZER POLICIES
0. Presentation This note summarizes the main findings of three reports prepared by CINDES to OCP, regarding trade and investment policies in Brasil, the political economy of the agricultural policies and the sectoral policies geared at the fertilizer sector in Brazil. Each of the three first sections of the note refers to one of the reports and the forth section concludes.
1. The background: Brazil’s recent economic evolution and main trends in trade and investment policies The Brazilian economy went through a comprehensive transformation during the last two decades, winning a long battle against chronic high inflation rates and poor economic growth. Since 2006, Brazil has been experiencing high growth levels for the country’s patterns – although relatively small if compared to those of China and India. Sound macroeconomic policies have been adopted successively by Cardoso’s, Lula’s and Rousseff’s Administrations. The country has been achieving surpluses in the trade balance and was able to overcome the persistent vulnerability of the foreign accounts that affected the access to external credit by governmental institutions and private companies in the past. Currently the main risks are concentrated in the fiscal policy: Brazil has a very high level of fiscal taxation to compensate for the excessive governmental expenditure. The Government runs a fiscal surplus in primary terms, but at the expense of competitiveness, hindered by the hyper taxation and the overvaluation of the Real. Another consequence of the fiscal policy is the fact that Brazil still practices one of the highest interest rates in the world. The impacts of the surge in the international prices of the commodities and the persistent tendency towards appreciation of the Brazilian currency have been stimulating the debate around the risks of “deindustrialization”. Many influent analysts advocate that there is a “Dutch Disease” process in progress in Brazil, although the evidences are not sufficiently robust. It is difficult to conclude that the country is suffering from “Dutch Disease” in a period when unemployment is at historical lower levels. But, as a matter or fact, this has turned out to be one of the most relevant issues in the economic policy debate in Brazil. CINDES -‐ Centro de Estudos de Integração e Desenvolvimento -‐ Rua Jardim Botânico, nº 635, sala 906.
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In 2010, China reached the first position in the ranking of Brazilian main trade partners, overtaking the United States as the first destination of the country’s exports. The third destination in the list is Argentina. There is an important feature that distinguishes the trade flows with these three partners: the make up of the Brazilian exports. While the Brazilian exports to China are concentrated in commodities, trade with Argentina is more intensive in manufactured goods. The United States used to be an important destination for Brazilian industrial products, although the Brazilian companies have been loosing market share to the Chinese in that market. Brazilian integration in the global economy has been increasing not only through trade, but also through investments. The country continues to attract foreign capitals, but in the last years has turned out to be an emerging investor abroad. Despite this “internationalization” move, Brazilian trade policy continues to be driven by protectionist stances, be it in the unilateral context (import tariffs, antidumping, non-‐trade barriers) or in the multilateral (WTO) regional or bilateral trade negotiations. As a result the country has not succeeded in closing many ambitious trade agreements. The most relevant trade agreement implemented by Brazil is Mercosur – an imperfect customs union, which is completed by a set of bilateral and sub-‐regional free trade deals. This means that Brazil has a network of free trade agreements with almost all countries in South America. There are also more restricted trade preferential agreements with Mexico, Cuba and Panama. The only free trade agreements outside the region were signed with Israel and Egypt – this last one waiting for the Congress ratification. The negotiations with India and SACU resulted in very limited agreements, not only in terms of the number of products covered, but also regarding the level of the preferences granted reciprocally. If protectionism has been a distinguishing characteristic of Brazilian trade policy, the country’s regulation concerning FDI is relatively liberal and notable for its stability. Foreign investment has been regulated by logic of market-‐seeking, the profitability of the investment being guaranteed by the protectionist trade policy.
2. The Brazilian Agricultural Sector: structure, agenda and prospective scenario
2.1. Structure and economic relevance Agriculture has played an ever more important role in the Brazilian economy. Internal migration of rural entrepreneurs moved the agricultural frontier towards the West and North of the country and the use of new technologies developed in Brazil has led to the transformation of traditional cultures and to the expansion of production at an unprecedented rhythm, leading to the consolidation of the second largest agricultural economy in the world.
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In the middle of the 1960s, Brazilian grain production was some 20 million tons, equivalent to 250 kilos per inhabitant. In 2008, grain production reached 144 million tons, tripling per capita production. During this period, total production grew sevenfold and the area planted, only two and a half times. Meat production increased tenfold in the past five years, with expansion of grazing areas of only 15%. In 2011, the cereal, legume and oleaginous harvests reached 160 million tons. These notable increases in production and productivity have contributed in an extraordinary manner to the dynamism of the Brazilian economy, with repercussions on other industries and a shift in the country’s axis of growth with an increase in economic importance of the rural zone and of regions that had previously been less developed. Primary production in this sector represents some 8% of the GDP, but when integration of the production chains is considered – considering agribusiness as a whole – its share of the GDP reached 28% and is responsible for creating some 20 million jobs, equivalent to 1/3 of the total economically active population. In terms of value, in 2009 the agribusiness GDP totaled some 370 billion dollars. This expansion has also served as the basis for the generation of large trade balances in this industry, and, above all, in the country, helping it to overcome historical bottlenecks in the Balance of Payments. Between 1994 and 2009, agribusiness accumulated a trade balance of US$ 453 billion, which, as can be seen in the chart below, was essential for the positive results of the trade balance and for accumulation of international reserves in the country, one of the key elements of Brazilian macroeconomic stability. At the base of this trade balance is the agricultural industry’s vocation for exports. In spite of the fact that 70% of production go to the domestic market, the Brazilian share of the international food market is noteworthy, and the country is the leader for several products. Brazil is the world’s top exporter of poultry, coffee, sugar, and frozen concentrate orange juice; number two in soybeans, tobacco, and beef; and number four or five in maize, pork, and cotton. The Brazilian exports of soy-‐complex, sugar/ethanol, poultry and orange juice represent over 20% of world exports of these commodities. The concentration of key export commodities is noticeable -‐ the top four products represent half of all Brazilian exports of agricultural products. The second effect of this revolution in the field was the ongoing and expressive drop in the cost of food on the domestic market. The retail cost of a broad basic foodstuff basket in the city of São Paulo fell 5% a year in real terms, between 1975 and 2000. This drop was only possible due to the impressive increases in production and productivity in the field. Their impacts on the purchasing power of salaries, in terms of food, are significant and contributed to the increase in the consumption of other goods and services, reinforcing the dynamism of the Brazilian domestic market. Naturally, the Brazilian agricultural industry is heterogeneous and includes both large scale enterprises managed by economic groups, as well as small scale family farms, the production of which sometimes is barely sufficient to meet the family’s needs.
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However, productivity is not directly related to the size of the properties. For example, some units that operate with high productivity indicators are small and medium size family enterprises located in the South. Thus, there are production chains that integrate enterprises of different sizes. Their market oriented production faces common problems like taxation, the cost of credit and bottlenecks in logistics and infrastructure, etc. A study by FGV1, based on primary data, concluded that Brazil has 3.3 million rural producers characterized as low income and operating in small family farms2. This group represents 64.4% of the total of rural establishments in Brazil, but is responsible for only 22.9% of the Gross Value of Production for agriculture. The share of small family producers is important in plantations of tobacco (74%); manioc (48.7%) and for horticulture (36.1%). The other rural producers account for 76.3% of the Brazilian gross agricultural production, although they own 1.6 million properties; in other words, only 30.7% of all the properties. These producers account for important shares of the production of almost all the crops: 99.5% for cotton; 95.4% for sugar cane; 92% for oranges; 84.4% for fruit growing; 80.1% for potatoes; 79.2% for grains; 77.5% for coffee and 61.9% for horticulture.
2.2. The agenda of the agricultural policy Agricultural policy in Brazil is built through the mediation of different views and objectives, which are often essentially conflicting. In fact, in spite of the unquestionable success of Brazilian agriculture and of its positive impacts for the country’s economy, generation of foreign currency and reduction in the cost of food consumed by a population that today is predominantly urban, the “agricultural model” based on large scale production is questioned and criticized by some segments of the government and of the society. This criticism has historically been based on the defense of land reform and on the attack against large unproductive rural landholdings, the so-‐called latifúndio, which characterized the history of Brazil until the agrarian modernization that began in the 1970s. Defenders of agrarian reform held positions of strength in leftist parties and social movements until recently, but this cause has been losing steam recently for a variety of reasons. In counterpart, the criticism of the “exporting agrarian model” gained new strength through the family agriculture agenda and based on environmental and climate concerns. The agenda of agricultural policy in the next years will combine a set of “old” issues with an emerging group of themes that will gain relevance, pushed by new concerns and interests. These two dimensions of the policy are not stagnant. There are interactions between them, and in regards to certain topics, there is an evolution in the direction towards a new agenda or the emergence of a new question within an old topic. __________________________________________________________________________ 1
Instituto Brasileiro de Economia/FGV: Quem produz o que no campo, quanto e onde II: censo agricultural census 2006 - resultados: Brasil e regiões — Brasília, 2010 2 These are the farmers that fit the requirements of the National Program to Strengthen Family Agriculture – Pronaf, an important government program in this segment.
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Old issues remain in the agenda The “old” issues refer, in the first place, to the agenda of rural financing and price support, which make for what can be called the agricultural policy strictly speaking. This dimension of the agricultural policy is centered on the granting of rural credit and on sustaining prices for a small part of production, when they fall below the minimums set by the federal government. Rural insurance, an important instrument for managing production risks, covers only 11% of the area planted. Some critics point to two important deficiencies. The first is the pulverization of the sources of rural credit, which did not exist prior to the start of the 1990s, when agricultural financing was exclusively conducted by banks. The second is the definition of minimum prices, which do not cover production costs of harvests and of agricultural activity. The financial concerns will continue to be an important matter to the private sector and government. Several changes and proposals have been made over recent years, offering a wider variety of instruments and insurance measures to protect farmers. Yet, these have not been capable of significantly reducing the risks inherent to the sector. One may expect a slow improvement in the tools as more market research and studies point to the critical factors that turn costly to the agribusinesses and farmers. Farmers’ debt with continue to be renegotiated and extended through time until they are lowered to more reasonable levels. 2009-‐2 The difficulties in accessing finance and the recurring lack of liquidity of the agricultural industry reinforce the pressure for a new agricultural policy model. Organizations representing agribusiness defend a model based on reducing taxes in the food chain, improving the financing system and on the creation of a rural credit risk center. In recent harvests, the use of investment resources has fallen, which seems to reinforce the diagnosis of the end of the existing financing model. In this scenario, and until there are significant changes in this aspect of the policy, the work of the Frente Parlamentar da Agropecuária will continue to focus on pressure to renegotiate the debts of farmers with public and privately owned banks. At the bottom line, the true strength of the agricultural lobbyists lays in managing to convince the Brazilian Congress to pass measures that reduce the financial problems and debts of the private sector. Another “old” issue of the agricultural agenda concerns the precarious state of the logistical infrastructure for the goods produced in the hinterland. The fact that almost all of the harvests from the Center-‐west are transported by trucks, over 2,000 kilometers to the main urban centers in the South-‐east or to the ports, represents heavy costs to the final price of the goods. Although very little has been done by the government in recent years, a few projects are being developed or are in the initial construction phases. For instance, the railroad being constructed by Vale S/A from the Goiás State to the northern port of Santarém or Belém (both around 1,400km away), will also be used to carry crops from the Cerrado to the northern port for exporting (currently, certain stretches remain to be built). In this case, although it was not a government project, it will provide an important route for
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farmers wanting to export their goods through ports located in the north. Also, there are several logistics projects for using the rivers of the Paraguay-‐Paraná waterway in the western border (passing through MT and MS and Paraguay) to carry crops by ships to destinations to the south, or for exporting. Some improvements will take place in the logistics front, especially those that can be made by the private sector. Public project in transport infrastructure take a long time to be designed and implemented in Brazil and they are often challenged by environmental considerations, whose main effect is to extend these project’s timetable. This topic will remain on the agenda in the agricultural industry, for both large and small landowners, and is expected to become more relevant, as a result of the negative impacts it creates for competitiveness of this industry, on which the Brazilian trade balance will depend more and more. In spite of this, the major deficiencies in the industry, due to its size, the time required to design and implement infrastructure projects and the inefficiency of the government bureaucracy in Brazil, will not be solved in a short period of time. The topic of trade negotiations is also part of the “old agenda” of the industry. This topic, which was important in the recent past to make it feasible to increase Brazilian exports to developed countries in the Northern Hemisphere, lost some of its relevance in recent years. On one hand, the increase in commodity prices reduced incentives for exporters of these products for negotiations to access the markets. On the other hand, Asia has become the most dynamic market for this industry and this situation will only become more consolidated in the future, which will reduce the interest in negotiations with developed countries even more. Another “old issue” that will remain in the agenda is the one focused on the rural poverty elimination and social development programs implemented over recent years, especially since President Lula entered office, should continue in the coming years. An important aspect of this policy is its impact on keeping the population in the rural areas, so they do not migrate to the cities, preserving their contribution to agriculture, which is significant in some segments. Recent analyses show that retirement payments and government transfer payments account for 52% of the income of producers in the lowest income ranges (classes D and E – below 947 reais). Elimination of these programs would have an important impact on the capacity for these production units to survive. New issues in the agenda Aside from the “old” agenda, a new one is developing in Brazil. Its main components can be described as follows: -‐ The issue of innovation faces an important challenge in the construction of a legal and institutional framework that favors the expansion of agricultural activity in a way that uses scientific knowledge more and more intensively. It should be remembered that the support of EMBRAPA has been decisive for Brazilian success. Thus, the preservation of its capacity to act is strategic for the continuation of this trend. However, there is also a need for legal
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frameworks that provide legal certainty for research and economic development of the new opportunities associated with cloning, transgenics and access to genetic heritage. -‐ The environmental and climate issue – concerns with environmental and climate impacts of the agricultural activities will play a growing role in agricultural policies, a trend already noticeable nowadays. The pressure to include the environmental and climate concerns as a relevant feature of the agricultural policy will come from the civil society and its organizations, but also from MMA and other government bodies. The new frontier expansion will probably face more concerns and monitoring of environmental impacts, which did not occur in the last agricultural expansion to the Center-‐West. The main objective is to lower deforestation by controlling the sensitive region in the south of the Amazon forest, and by intensifying cattle grazing into smaller pasture areas (it is estimated that 70 – 90 million hectares of pastures could be converted to cropping land). This latter measure will free up land for more crop plantations. The Brazilian cattle ranchers use enormous areas of pastures, and the density of cows per hectare is the lowest in the world. Many experts agree that the best solution to Brazil’s problems of land occupation, agricultural expansion and deforestation is to intensify pasture usage. Another item related to climate change and its mitigation is the REDD mechanism, which offers incentives to land owners to protect their forests. While the farmers want a financial incentive to protect their trees, and forego the revenue from selling their wood, the government wants to achieve the carbon emission reduction goals that they set in 2009 (of lowering CO2 emissions by 36-‐38% by 2020). Knowing that deforestation, forest burning and land-‐use change represents 75% of national carbon emissions, it is certainly a key element of the debate. The Brazilian diplomacy and some private sector representatives have participated in the UNFCCC discussions on REDD mechanisms, hoping to create such incentives and apply them in Brazil. So far, these discussions are still ongoing and have made only moderate progress in the international talks. Great care will be needed to ensure effectiveness of these incentives in Brazil because of the difficulty in applying environmental rules in the country, especially when financial benefits are involved. Nonetheless, one can hope that these instruments will be improved by fine-‐tuning through time. -‐ The fertilizers issue: Recently, concerns related to the fertilizer industry and its relationship with agriculture and ranching have been gaining importance. On one side, the Federal Government has manifested concern over the impacts of the concentration of the supply of fertilizer and on Brazilian dependence on imported fertilizers over agriculture and over food security. To this end, the government has already analyzed and proposed measures to deal with the concentration of supply of fertilizers in a few companies, with the foreign dependence and the associated international price fluctuations. -‐ Social conflicts: As the agrarian reform agenda and constituencies are losing political impetus, the historical “class conflict” in the rural society has shifted towards the opposition between the agribusiness and the small farmers (peasants). The main expression of this new issue (or new version of an old issue) is the controversial theme of land propriety rights, dealt with in the previous section. Beyond this conflict, however, both sides share common interests when dealing with “horizontal issues” (financing, infrastructure and taxes).
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-‐ Compliance with export markets requirements: If it seems true to assert that trade negotiations have lost the priority they use to have for the Brazilian agribusiness in the Nineties, the market access issue remains a relevant one. However, this issue seems to be taking a new content. In fact, the general trend over the past couple of decades has been for countries to replace the tariff protection resulting from the WTO’s Uruguay Round by sanitary and phytosanitary barriers in order to continue protecting their agricultural sectors. At the same time, developed countries’ consumers are pressing their governments to improve mechanisms to make imported food safer and to make sure that these goods are produced according to sustainable production method and processes. The multiplication of public and private standards in the food sector is the best indicator of the growing relevance of this social trend. The best response by Brazilian exporters to this challenge is to improve sanitary monitoring and processing technology in order to comply with these growing demands, and enter the foreign markets. Also, through bilateral negotiations, cooperation and signing Mutual Recognition Agreements, the Brazilian government makes it harder for foreign sanitary departments to halt Brazilian imports due to, allegedly, inadequate sanitary conditions. Beyond these measures, the agribusiness will have to improve the mechanisms of private certification already in force for many exported commodities in Brazil as an answer to the qualitative shifts in the external demand. In summary, mapping of the agricultural policy for the coming years shows that this agenda is becoming more complex and that traditional topics will remain important, but new topics will also emerge and gain relevance. When considering old topics, only the matter of land reform will tend to become less important, although the social issue will not disappear, but rather acquire a new shape, as it is articulated around the opposition between agribusiness and family agriculture. This opposition itself is mitigated by the convergence of interests between the two sectors in several issues on the agricultural agenda. Among the new topics, issues related to the environment and to climate change also gained importance on the agenda, and this trend is likely to continue. The voluntary emissions reduction goals presented by Brazil at the COP-‐15 in Copenhagen are strongly based on a reduction in deforestation. This phenomenon is associated with the expansion of large and medium scale agricultural production, and to a lesser degree, on a cut in emissions by agriculture itself. In this matter, the question of growth in agriculture tends to become a permanent source of controversy and of pressure. Nevertheless, the capacity for political resistance of the agricultural industry, notably agribusiness, to this more restrictive environment should not be underestimated, as the process of parliamentary negotiation about the new Forest Code shows. A massive vote in the House of Representatives, well beyond just the size of the FPA, sanctioned the proposals of the industry, in spite of an intensive campaign in the media and on the streets against these proposals. It was followed by negotiations when the new legislation was sent to the Senate, but it appears that the agriculture industry was able to preserve its interests in the new bill.
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In spite of this recent political victory, it seems clear that agribusiness, more than family agriculture, is today facing difficulty in dealing with a more restrictive environment, in regulatory terms, and less permissive, in political terms. Its political positions and strategies, especially in Congress, appear to the public to be examples of intransigence and the incapacity to negotiate. Although the economic benefits to the country of the consolidation of competitive agribusiness are recognized, the political activities of the industry’s leasers reduce the legitimacy of its agenda and make it appear to be exclusively focused on the defense of its specific interests and on the refusal to negotiate with other interests and viewpoints.
3. The Brazilian strategy for the fertilizer sector: diagnosis and policy dilemmas During 2009, the Brazilian government initiated discussions to elaborate a national policy for the fertilizer sector. The economic reasons for this movement were clear: international prices, which had been increasing most part of the last decade, reached a peak during 2008. At the same time, Brazil, which had been a traditional net importer of fertilizer, was increasing its imports at accelerating rates due to the expansion of agricultural producers’ gross revenue. As a consequence, economic authorities were concerned about the increasing amounts of foreign exchange allocated to fertilizer imports, although, from a macroeconomic point of view, Brazil was running overall trade surplus; and current account deficits were being financed by voluntary capital inflows and foreign direct investment. The price hike of fertilizers products also stimulated in certain areas of the Brazilian government the idea of creating a state-‐owned company in order to regulate the local fertilizer market, to increase supply of certain raw materials and intermediate products and to cushion price movements to protect agricultural producers from price and cost volatility coming from international fertilizer markets. It could be affirmed that all interested actors inside the Brazilian government shared a common diagnosis about the problem. Government authorities understood that imports of basic raw materials and some intermediate inputs of the fertilizer chain put Brazil and Brazilian agricultural producers in a situation of excessive dependence of international markets, which were characterized by highly volatile prices and oligopolistic supply. Also, some authorities considered that Brazilian agricultural producers were caught by few international players of fertilizer raw material and intermediate inputs, on the cost side, and few international trading companies, on the marketing side. Moreover, some of those players were extremely powerful because they were playing at both sides of the financial equation of agricultural producers. Although there was a common diagnosis inside the government, it is possible to envisage that the National Plan for the Fertilizer Sector and the state-‐owned enterprise meant different policy solutions to this combination of domestic supply restricitions plus market imperfections of the fertilizer sector. None of these proposals was implemented as initially conceived. In what follows, both proposals are discussed and a short discussion of the implicit current policy is presented.
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The “state-‐owned enterprise” issue Thinking about the creation of a state-‐owned enterprise is a return to a type of development idea which was predominant in Brazil during the sixties and seventies. It is possible to identify two main economic concepts behind this proposal. The first one is that prospecting and exploring meaningful mineral fields and the sourcing of strategic minerals could not be left to market mechanisms. The elements of this economic concept are: markets do not work properly and are imperfect for several reasons, knowledge of strategic deposits and reserves is not spread evenly and concentrated foreign suppliers can play strategically against the country needs. This idea of state-‐controlled sourcing of a strategic mineral has been behind Petrobras’strategy, particularly, since the seventies. At that time, when there were almost no-‐known oil reserves in the country and prices were raising, Petrobras went abroad to search for reserves and to explore oil deposits in order to guarantee the necessary supply for Brazil. Petrobras also conducted the search of domestic reserves with a mimimal participation of foreign companies, at least till the nineties. This strategy in the oil sector has been sucessful and it was the main suport and evidence for the tentative of creating a state-‐ owned enterprise for the fertilizer sector. The second economic concept behind this proposal is that the state-‐owned enterprise should act as a price-‐buffering mechanism between international and domestic markets, subsidizing domestic prices at moments of high international prices and earning extraordinary profits in the reverse situation. From our point of view, this concept was the main weakness of the state-‐owned proposal, because the current Brazilian fiscal situation does not allow the country to maintain prolonged subsidies on domestic fertilizer prices in case of high international prices. Of course, it is always possible to think of temporary and small buffering mechanisms. Besides that, the operation of such firm would demand huge initial investments, which would not be easily available from Brazilian Treasury or from the National Bank of Development (BNDES). Two other economic reasons were discussed in relation to the need of a state-‐owned firm: the low profitability of certain segments of the fertilizer chain and the large investment requirements to produce certain intermediate products, which could preclude the participation of the private sector. The National Plan for the Fertilizer Sector The discussion of a national plan for the fertilizer sector (NPFS) was an initiative led by the Agriculture Minister of that period, Reinhold Stephanes (March 2007-‐April 2010). He gathered a group of agriculture and soil specialists, mainly from EMBRAPA (Brazilian Agricultural Research Corporation), and started discussions with related stakeholders in order to define guidelines of governmental action. For those behind the NPFS, the government should invest in the identification and prospection of mineral deposits, creating knowledge about potential reserves and exploration possibilites, but the exploration and production of mineral deposits should be
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left to the private sector with modern regulation, clearly defined periods and conditions of concession. In the accumulation of mineral-‐reserve knowledge, the state has a role to play because it is a highly risky activity for the private sector. However, the proponents of the NFSP did not advocate that exploration and production should be conducted by a state owned firm. That was a central difference with those proposing a state-‐owned enterprise. Few things are publicly known about the proposal and the ideas of the NPFS. As mentioned, the NPFS was finished and submitted to President Lula. Now, it is a confidential document of the Brazilian government. Why, although finished, was the Plan not carried on? From Agriculture Ministry (2009) and newspapers articles, two potentiallty controversial points appears: the regulation of research and exploration of reserves and the distribution inside the government of regulatory functions related to fertilizer minerals. In relation to the regulation of research and exploration of reserves, it is possible to retrieve from the available material the following proposals or ideas. - A new general law regulating the activities of prospection, exploration and production in mineral deposits, mainly defining time and concession conditions. - A new regulation for phosphate and potassium deposits, which were to be prospected and explored by private actors, Petrobras and Vale. More specifically, they wanted the Ministry of Mining and the National Department of Mineral Production (DNPM) to fix the duration of the exploratory phase and the starting moment for the production phase. - A more aggressive policy of prospection and exploration of potassium deposits. This meant: liberalization to other companies’ prospection of certain areas inside of Vale’s concessions; creation of regulatory stimuli for prospection in the surrounding of Vale’s areas and for Petrobras, the Research Company of Mineral Resources (CRPM, the Brazilian Geology Service) and other private companies to prospect in the known potassium areas by the sea, between Alagoas and Espirito Santo. - Definition of a prospection and exploration policy for the potassium deposits in Amazonas (feasibility study taking into account the environmental impacts and definition about the prospection requests). - Concessions to private sector the exploration of phosphate deposits in Maecuru, Pará, and those in Paraíba and Pernambuco. The strategy of modifing regulatory procedures in order to increase prospection and exploration activities – the main weakness of the Brazilian supply restriction, according to the NPFS proponents – clearly raised conflicts with Vale (opening space for prospection activities in its areas), the Mining Ministry and CPRM (proposing to modify existing regulatory procedures and to compel acting more actively in prospection and exploration concessions). Also, the NPFS proponents wanted a separated legislation regulating prospection, exploration and production of fertilizer minerals. They understood that a new mineral code would take many years to be approved in the Congress. That was not the strategy of the Mining Ministry, which wanted a unique Code ordering the legislation of minerals in the country.
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Regarding the distribution of regulatory functions related to fertilizer minerals inside the government, the proponents of NPFS apparently came to the conclusion that the present organizational structure, funds and strategies of national geology service (CPRM) were not adequate for fertilizer mineral prospection, so a specific research company might be necessary. Although, there is no clear indication of further governance conflicts, it appears that the proponents of NPFS wanted a more active role of the Agriculture Ministry in the definition of a regular policy for fertilizer minerals. After analysing the pieces of available information, one may conclude that had the NPFS been implemented, other stakeholders with activities and regulatory interests in prospection, exploration and production of fertilizer minerals would have been affected. None of those main proposals discussed above was implemented as conceived. As was explained, each idea had controversial aspects, as well as financial or consistency problems. Besides that, the international prices returned to lower levels and the sense of urgency vanished. Regarding the mineral regulation, at the beginning of 2010, the Mining Ministry finished a proposal for a new Mineral Code. Although, it had been intensively discussed since 2008, the proposal prepared by the Ministry was maintained inside the Executive branch for further discussions and adjustments, and the submission to the Congress has been postponed3. The proposal of reform is composed by three law projects. The first of them is the general legal framework for mineral prospection, exploration and production. The second one alters the Financial Compensation for Mineral Resources Exploiting (CFEM) and the third one creates the National Agency of Mining The general legal framework recovers some elements of the NPFS, such as the concern with policy coordination (contemplated with the National Council), the duration of the prospecting process and the improvement of mineral field concessions. More specifically, the following elements are publicly known from the proposed legal framework: - Creation of the National Council of Mining Policy, to advise the President in the formulation and implementation of sectorial policies. - The Mining Ministry would be the concessionary power and would define the guidelines for concession bids (auction system for blocks), and the rights of prospection, exploration and production. - Companies would be allowed to mining, but not individuals. - Foreign companies may operate if they are constituted as Brazilian companies. - The prospecting period would be of 5 years and could be prorogated by three years __________________________________________________________________________ 3
The last revision of the Mineral Code is from 1967 (Decree-‐Law 227/1967). The Secretary of Geology, Mining and Mineral Transformation, Claudio Scliar, is the authority in charge of the proposal inside the Mining Ministry.
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if the need is proved. The exploration and production period would be of 35 years and could be prorogated. Definition of concession fees and requirements of minimal investments, in the case of prospection and exploration, in order to avoid the speculative use of the land or blocks. Creation of Special Mining Areas of strategic minerals, such as phosphate and potassium, in order to prospect and explore. Those areas would have auction rules with defined period to select the winner. Sanctions for not fulfilling the obligations of the concessions.
In relation to the Financial Compensation for Mineral Resources Exploiting (CFEM), it would be increased from 2% to 4% on average (the percentage varies depending on the type of ore), and it would be over gross revenues instead over net revenues as presently. A special participation of the Union is also discussed. The pressures for increased royalties come from the notion that mining royalties in Brazil are low if compared to the amounts charged in most countries and from comparisons with the amounts received from oil royalties. But, according to a study commissioned by the Brazilian Mining Institute (IBRAM) to Ernst & Young, the tax burden on mining activities in Brazil is one of the three largest in the world, which, by itself, demonstrates that mining contributes to the government coffers with values that far exceed those paid as royalties. Also in the understanding of IBRAM, comparisons of the CFEM with oil royalties would be misplaced, since the oil and gas sector has tax benefits on imports of inputs, and a tax substitution regime non-‐existent on mining, among other advantages. In relation to the regulatory agency, the proposal is to convert the National Department of Mineral Production (DNPM) in the new monitoring and regulatory agency. According to newspaper information, this is one of the controversial issues because the transformation will have a significant budget impact. As seen, the proposal of the new Mineral Code and the accompanying laws incorporated some of the modernization aspects of the NPFS. In May 2011, the Mining Ministry presented its National Mining Plan 2030 (NMP 2030), where the production of mineral raw material to be used as input in the agriculture production, particularly phosphate and potassium ores, is considered as a strategy question for the federal government. In the case of phosphate, the NMP 2030 expected a reduction of imports from around 50% of domestic consumption to 15% or 20% in five to six years, if the announced projects were implemented.
4. Conclusion
Agriculture has played a growingly important role in the recent performance and dynamics of the Brazilian economy. Its contribution to trade balance and to the financing of Brazil’s imports has been very expressive and recently concerns related to the fertilizer industry and its relationship with agriculture and ranching have been gaining importance. On one side, 14
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the Federal Government has manifested concern over the impacts of the concentration of the supply of fertilizer and on Brazilian dependence on imported fertilizers over agriculture and over food security. To this end, the government has already analyzed and proposed measures to deal with the concentration of supply of fertilizers in a few companies, with the foreign dependence and the associated international price fluctuations. The emerging scenario for the fertilizers sector is characterized by expressive movements of the main sectoral players and it opens new opportunities to firms whose strategies can be perceived in Brazil as able to provide stability and predictability in terms of the supply of fertilizers to the country’s agriculture.
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