Brazil’s New Forestry Code: Implications For Food Prices; + BMI Comments On BP’s Prospects

Brazilian President Dilma Rousseff recently vetoed some important provisions in Brazil’s new forestry code. The key issue is re-forestation. Farmers in the Amazon region are currently required to maintain a certain level of forest cover (around 50% of total farmland).

The controversy stems from whether this should include farmland that would be used for crops, or, can it include ‘useless’ land (for example, hillsides or land near rivers) as part of total forest coverage? This issue has not been decided.

So what will happen to the bill?

The most contentious parts of the bill have been sent back to Congress, but we do not expect significant changes until after the next election in 2014, as Rousseff will want to balance the opposing demands of farmers and environmentalists. She will be particularly keen to show support for small farmers, who make up a large proportion of crop farmers in the Amazon region (livestock farms are generally larger).

Why is this important?

The changes in the forestry code particularly affect soybean farmers, and Brazil is a leading world producer in a soybean market that is relatively small (global soybean production in 2011/12 was less than one-third of global corn production).

Brazil is already a frequent user of GM seeds for soy, so strong production growth over the long term will have to come (at least in part) from increasing the area dedicated to soybeans. As such, overly onerous forest laws could reduce production over the long term.

If Brazilian production growth slows significantly and soybean prices rise, this could cause food inflation concerns in China, which accounts for 60% of all soybean imports. Soybeans are imported to feed the country’s enormous pig herd, and reduced pork production due to higher soy prices could lead to rising food inflation and potentially impact economic growth in future years.

The risk is low at this point. But the controversy will drag on for months and lower average food prices in 2013 could eventually lead to more support for tougher environmental legislation.

BMI On BP Prospects

Meanwhile, BMI Oil and Gas Analyst Ryan Turner appeared on BBC TV earlier on Tuesday commenting on BP’s Q3 2012 profits, the company’s recent deal with Rosneft, and BP’s long-term drivers of growth. The video clip can be found here.