Brazil: Carnival atmosphere or another Latin lesson for ag?

In the first defection from a government sworn into power just last week, Suely Araujo, head of Brazil’s environmental protection agency, resigned on Monday after allegations of overspending were leveled at her agency on Twitter by the country’s newly inaugurated President, Jair Bolsonaro.

Elected in October after a campaign focused largely on corruption, crime and social issues, Bolsonaro won support from the local agribusiness community, in part by pledging to transfer control over the designation of territories reserved for indigenous peoples from the Justice Ministry to the Agriculture Ministry.

Rhetoric criticizing homosexuals, praising Brazil’s previous military dictatorship and suggesting a loosening of gun laws helped Bolsonaro’s campaign attract the attention of international observers, who, even before de Araujo’s resignation, were already indicating they plan to monitor closely how much rainforest is converted to farmland under his administration.

For agricultural investors, Bolsonaro’s election – and the noise that appears likely to accompany his administration – marks an important milestone that will shape the risk environment in a pivotal market.

Up & down

Sebastian Popik, founder of Sao Paulo-headquartered Aqua Capital, told Agri Investor in November that, while early focus on pension reform and reducing deficits had helped Bolsonaro win support among Brazil’s centrists, it was too soon to say if he would be able to sustain the coalitions necessary to actually carry out reforms over the long term.

That prevailing uncertainty is the latest in a series of quick turns in sentiment regarding Brazil’s agricultural sector observed over just the past few years.

At the 2016 Agri Investor Forum in Chicago, a sense that the worst of Brazil’s corruption scandal had passed and the economy was stabilizing helped make optimism about Latin America a key theme. During the year that followed, however, the country’s corruption scandal came to focus on Brazil’s meat industry and the optimism that had then extended as far as positive assessment of the country’s growing middle class gave way to political concerns that slowed activity dramatically.

After closing Aqua’s fund on $370 million in June, Popik told Agri Investor that the firm had done so “in spite of the macro, not because of the macro,” comparing the political and economic forces the firm had faced during its fundraise to a “tsunami.”

In mid-2017, a different manager long active in Brazil told Agri Investor that after years during which they viewed South America’s largest market as too expensive and competitive, several factors had conspired recently to make the country the world’s most attractive market.

The manager described how currency devaluation and liquidity constraints on local investors had opened up distressed opportunities that helped outweigh Brazil’s well-known infrastructure constraints. In addition, the source said, because many international investors had crowded into a very competitive market over the previous decade before a devaluation of the real, by 2017, much of the competition were nursing wounds and very reluctant to re-invest in Brazil.

In response, the source said their firm had focused its strategy on converting what had been degraded pastureland in the country’s North into highly productive farmland.

Echoes in the market

During the closing months of last year, a consistent theme emerged in conversation with sources active in three key agricultural investment markets.

Asked to assess the impact of dramatic changes to the political environment in the US, Poland and Brazil, separate sources offered almost identical assessments; though each government had pursued policies that sources found personally troubling, it was undeniable those same administrations were also helping create economic opportunities in agriculture.

Bolsonaro’s election, and the early departure of Araujo, suggest Brazil is likely to emerge as a key test of how agricultural investors respond to the confusing swirl of populism currently shaping key ag markets.

The fundamentals of soil quality and climate that make Brazil an obvious destination for global agricultural investors do not depend on the character of its national government. Periods of loosened regulation and a pro-business policy approach could present valuable opportunities for investors to secure assets likely to appreciate when political normalcy and cyclical growth eventually return.

At the same time, Brazil is also a market where political crisis has intervened to shape the business environment in material ways within recent memory and the risks that investors are paid to balance can credibly be thought to include the threat of physical violence.

As investors generally priding themselves on taking a genuinely long-term view, managers active in Brazil’s agricultural sector will be challenged to decide for themselves whether Bolsonaro’s unorthodox rhetoric and approach present an opportunity to break new ground and form sustainable long-term partnerships, or just the latest storm of uncertainty to be endured.