Brazil Government To Auction Rice in An Attempt To Stabilise The Price

Brazil's state-owned National Supplies Co. will auction 55,000 metric tons of rice today, the country's ministry of agriculture said yesterday. The government currently has a stock of 1.4 million tons of rice, equivalent to 10 percent of Brazil's annual consumption. The stocks to be auctioned are held in Rio Grande do Sul and Santa Catarina states.

The measure is an attempt to keep prices down and establish a reference price for rice, the statement said, citing Paulo Morceli, basic foods manager of Conab, as the supplies company is known. According to information on the Conab Web site, the rice will be auctioned at 28 reais ($16.98) for a 50-kilogram bag.

The most recent decision of the Brzilian government is just one more example of the way national governments are coming under pressure to offer a response to what is now a global problem: the rising demand for energy and agricultural products. One of the obvious reasons for the sharp rise in demand for agricultural products is the rise in living standards of much of the planet's population when coupled with the fact that food consumption forms a much greater part of the extra income earned in a poor country than it does in a rich one. As a rough and ready rule, the poorer the country the greater the share of every extra dollar earned which will be spent on food.

The poorest of the world’s poor are the 1.1 billion people with income of less than a dollar a day. Around 700 million—almost two-thirds—of these people live in rice-growing countries of Asia. Rice, the dominant staple in Asia, accounts for more than 40% of the calorie consumption of most Asians. Poor people spend as much as 30–40% of their income on rice alone. Ensuring sufficient supplies of rice that is affordable for the poor is thus crucial to poverty reduction. Given this, the current sharp increase in rice price is a major cause for concern.
International Rice Reasearch Institute

Rice As An Example of What is a Global Problem

Thailand's benchmark 100 percent B grade white rice was quoted at a record high of more than $1,000 per tonne recently as a result of constrained supply and rising demand as governments in one rice producing country after another consider taking steps to restrain exports. The price was up from around $950 per tonne a week earlier and $383 per tonne in January. Thailand is the world's number one rice exporter and exports almost twice as much rice as India, its nearest rival.

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In fact Thailand produces about 22 million tons of milled rice annually and exports about 10 million tons. The sharp spike in prices was produced by a report from a World Bank official earlier in the week, and prices did subsequently fall back again after Finance Minister Surapong Suebwonglee siad reassuring words to the effect that Thailand has no plans to limit rice exports.

``If a key exporter like this limits foreign sales, it would be very much like Saudi Arabia reducing oil exports,'' said James Adams, vice president of the bank's East Asia and Pacific department.

Several of the world's food producers - including Egypt, Vietnam, China and India - have recently placed restrictions and limits on food exports in an attempt to contain domestic prices and to reduce protests from urban consumers. Brazil - which this year should harvest an 11.9 million ton rice crop, up from 11.3 million last season - was busy backtracking at the end of last week on an earlier decision to restrict exports. Brazil's Agriculture Minister Reinhold Stephanes followed the example of his Thai counterpart and stated that Brazil would not, in the end, curb exports. Pakistan is also stepping up to the plate in what has virtually become a global emergency and has stressed it has plans to export 2.5 million metric tons this year, according to farm minister Chaudhry Nisar Ali last week.


Vietnam, however, which is the world's third-biggest rice exporter (after Thailand and India), is going to go ahead and reduce rice shipments by 11 percent this year to 4 million tons to ensure supplies and attempt to curb inflation that is its highest in more than a decade (see more on Vietnam in this post). In doing this Vietnam is following in the footsteps of the world's number two rice exporter - India - whol last month put significant restrictions on the export of rice.

Indonesia, which is the world's third-largest rice producer (as opposed to exporter), also intends to hold back surplus rice from export this year in order to bolster domestic stockpiles, according to President Susilo Bambang Yudhoyono speaking on April 18. Export restrictions are particularly threatening to the large rice importers whose populations ofetn depend of the staple for their basic food supply. The Philippines was the world's largest largest importer last year, followed by Nigeria. The Philippines received offers for only two-thirds of the grain it sought to buy on April 17.

Rice is in fact - after wheat - the world's second cereal product. At the beginning of the 1990s, annual production was around 350 million tons and by the end of the century it had reached 410 million tons. World production totaled 395 million tons of milled rice in 2003, compared with 387 million tons in 2002. This reduction in total output which occured around the turn of the century is largely explained by the strong pressure which have been placed on land and water resources, which led to a decrease of seeded areas in some Western and Eastern Asian countries.

Production is geographically concentrated in Western and Eastern Asia, and these retgions now account for more than 90 percent of world output. China and India, between them host over a third of the global population and supply over half of the world's rice. Brazil is the most important non-Asian producer, followed by the United States. Italy ranks first in Europe.


Growth in rice production has, however, been far from linear. Historically, production in ex-Japan Asia has increased steadily but at the end of the 1990s Asian output started to stagnate and in particular in China where rice areas have declined as a consequence of water scarcity and competition from more profitable (oleaginous) crops.

The international trade in rice is estimated between 25 and 27 million tons per year, which is only a very small part (5-6 percent) of total world production., and this makes the international rice market one of the smallest in the world when compared with other grain markets such as wheat (113 million tons) and corn (80 million tons). It also means that the price level is very sensitive to comparatively small changes in the level of exports coming from some key exporters. As can be seen from the chart below, global stocks of rice have declined substantially since the turn of the century. While in part this can be explained by product market efficiencies and the sustainability of lower inventories, it does mean that the sensitivity of the traded rice price to any supply side products has risen considerably of late. Also of note is the way in which stocks of rice have fallen inside China, reflecting the problems the country is having in finding the food to meet the needs produced by the rising living standards of its population (with pressure to transfer land from rice production to other crops or to commercial uses).

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Besides the traditional main exporters (Thailand, Vietnam, India and Pakistan), a relatively important but still limited part of the rice which is traded worldwide now comes from developed countries in Mediterranean Europe and the United States. There are two major forces behind this: new food habits in developed countries and new market niches in developing countries.


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As we have seen, rapid eceonomic growth across Asia is now putting enormous pressure on food prices. Consumer prices in China, the world's fastest-growing major economy, soared 8.7 percent in February, the fastest pace in 11 years. In Thailand, inflation is running at 5.3% (March) but this is still enough to worry the government, while in Vietnam, inflation jumped to 19.4 percent this month, the fastest pace since July 1995. Vietnamese food prices jumped 30.6 percent from a year ago, with the component including rice leaping 30.1 percent from March 2007 and 10.5 percent from February 2008.


The Food and Agriculture Organization said in February that 36 nations including China face food emergencies this year. World rice stockpiles may total 72.1 million metric tons by end of July, the lowest since 1984, the U.S. Department of Agriculture said.

Prices of agricultural commodities are also being driven by investors looking for alternatives as the dollar and stocks drop. Global investments in commodities rose almost 33 percent to $175 billion last year, according to Barclays Capital. The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials climbed to a record on Feb. 29 and is up 16 percent so far this year.

But not everyone wants to restrain exports. Rubens Silveira commercial director of Rio Grande do Sul state's Rice Institute said the state - Brazil's No.1 rice grower - should export about 10 percent of this years crop at current prices, and argued that these exports will both help support domestic prices and provide incentives to producers to invest in improving output. Mainstream economists tend to agree with him:

``Limiting exports is pure politics and bad economics since export controls destroy the incentive of farmers to plant more rice,'' Nobel laureate Gary Becker, an economist at the University of Chicago, said in an interview. ``But governments tend to favor the urban workers over the farmers, since urban groups are more politically active.''

And it isn't only rice that is under pressure. Wheat prices are also rising fast. Wheat for July delivery was trading at around $8.1750 a bushel on the Chicago Board of Trade last week, down from the February peak, but still up 62 percent in the past year. Global wheat production is expected to rise 6.8 percent in the 2008-09 season as record prices spur farmers to sow more, the International Grains Council said last week. Wheat output is expected to climb to 645 million tons from 604 million tons this season, according to the London-based council. Inventories are forecast to gain 12 percent to 128 million tons, led by an increase in the U.S.

Global wheat production will advance approximately 6 percent in 2008 over 2007 - to an all-time high of 640 million metric tons - as record prices spur farmers to grow more according to Rabobank estimates. That is 37 million metric tons up on output in 2007 . Plantings will also gain 5 percent and global stockpiles will rise 9 percent they suggest. But then we might like to note that even with a 6% growth rate in output (which is no mean rate of increase) prices have still risen by 62 percent. This gives us some measure of the scale of the problem.


The prices of wheat, corn, rice and soybeans have all risen to record levels this year on shrinking global stockpiles and rising demand from the food, feed and biofuel industries. The rally has meant higher costs for everything from Italian pasta to Japanese noodles, and spurred street protests from Haiti to Ivory Coast.

``We have been neglecting our basic rice production infrastructure and research and development for 15 years,'' said Robert Zeigler, director-general of the International Rice Research Institute in the Philippines. ``

India's output is increasing rapidly, but so is demand there, as high rates of economic growth boost incomes. Indian wheat output may climb to 76.8 million tons this year, according to India's agriculture secretary PK Mishra. That's up on the 74.8 million tons estimated in February and up from 75.8 million tons last year. Indian rice output is also expected to rise to a record 95.7 million tons, from the 94.1 million tons estimated on Feb. 7. That's 2.5 percent more than the 93.6 million tons produced a year earlier, but still far from enough to stabilise Indian wholesale prices which are now running at the fastest pace in nearly three years.



I have a much fuller study of the whole issue of global living standards, population growth and agricultural output in my "Food Prices, Farmland, Global Rebalancing and Rural Labour Shortages" post on the Demography Matters blog.

Petrobas Stock on the Way Up

The biggest oil discovery in the Western hemisphere in three decades and speculation about the existence of an even larger deposit has turned Petroleo Brasileiro SA into the world's most expensive energy producer, at least in terms of its share price to profits ratio. Petrobras shares currently trade at 17.2 times profits after rallying 87 percent over the last year. (By way of comparison Petrobras's price-earnings ratio was 8.77 a year ago and under 5 back in June 2004).This makes Petrobas shares effectively twice as expensive as Russia's Lukoil and or the netherland's Royal Dutch Shell, and 50 percent more expensive than Exxon Mobil - which only this week announced that total output was down 10% in the first three months of 2008 when compared with a year earlier - as investors focus on the Rio de Janeiro-based company's oil finds rather than its falling profits. Lukoil trades at 7.77 while Royal Dutch Shell is at 7.6 times earnings. Irvine, Exxon's PE ratio is 11.60. The remainder of the world's 10 largest oil producers are also cheaper than Petrobras at this point.

Exxon’s overall oil and gas production fell 5.6 per cent from the year-earlier quarter. Production in Africa, a key new area of investment, fell 20 per cent as high oil prices and contract stipulations forced it to hand over more of its production to host country governments. Venezuela’s nationalisation of its oil fields also hurt the group’s volumes, as did declines at Canadian gas fields. Unlike Royal Dutch Shell, which is stressing its research in second generation biofuels, and is a leader in making natural gas into transport fuels, Exxon has long argued that traditional alternatives, such as wind power, have proved uneconomic. But it says it is researching future fuels that it is less ready to talk about publicly. The figures are likely to increase pressure from investors for Exxon to raise dividends. It devoted $8bn to buying back its own shares and $1.9bn to dividends while adding another $6.9bn to its now $40.9bn cash pile.

The Brazilian government's controlling stake in Petrobras may add to the stock's attraction on speculation the company will get favorable treatment in exploiting oil. President Luiz Inacio Lula da Silva's administration pulled 41 exploration licenses from an auction after Petrobras found the Tupi oil field Nov. 8, a discovery that caused the stock to jump 14 percent, the biggest rise in nine years. Tupi, 155 miles (250 kilometers) off Brazil's coast, may have 8 billion barrels of recoverable oil.

Petrobras shares rose another 5.6 percent on April 14 after the head of Brazil's oil agency said the offshore Carioca prospect may hold the equivalent of 33 billion barrels of crude, large enough to be the world's third-biggest field. Chief Executive Officer Jose Sergio Gabrielli said later Petrobras is still exploring to determine Caricoa's size.


The strong performance by Petrobas helped lead Brazil's Bovespa to a 6.3 percent jump on April 30, making it the world's best-performing equity index this year among the 20 biggest markets, after Standard & Poor's assigned the country an investment grade credit rating. Brazilian markets were closed yesterday for a holiday.

Petrobras, now the world's ninth-biggest company, with a market value of $248.3 billion, is still half the size of Exxon, the largest oil producer. However Petrobas's valuation surpassed PetroChina's last November - after shares of the Beijing-based oil company posted their biggest monthly retreat ever.


Fourth-quarter profit at Petrobras declined about 3 percent as costs increased faster than sales. The company produced an average 2.34 million barrels of oil, natural gas and natural-gas liquids a day in March, down from 2.35 million barrels a day the month before.

However Brazil's biggest company by market value looks less expensive when viewed relative to the oil it owns. Petrobras trades for the equivalent of 34.91 reais (or $20.58) per barrel of proven reserves. That's cheaper than Exxon's $22.19 a barrel and Royal Dutch Shell's $23.80 per barrel of oil equivalent in reserve. Under this measure, Petrobras is still more expensive than BP and Lukoil, which fetch $14.75 and $4.71 a barrel.

It should not be forgotten however that pumping oil from the most recent Brazilian discoveries, parts of which are 32,000 feet (9,800 meters) below the ocean's surface, will require boring almost twice as far down as the world's deepest offshore well. So there are tachnological issues to take into account here. But still, once these are resolved (assuming they are) Petrobas seems to have its hands on rather a lot of oil at just the time when global demand seems set to rise and rise.

Brazil Debt Raised To Investment Grade By Standar and Poor's

Brazil yesterday received an investment grade credit rating for the first time from Standard & Poor's, sending the benchmark stock market index to a record and yields on dollar bonds to an all-time low.

Brazil, whose economy grew last year at the fastest pace since 2004, should be able to maintain annual growth of as much as 4.5 percent, S&P said in a statement. The country's long-term foreign currency debt rating was raised to BBB-from BB+. Foreign direct investment, which reached a record of $34.6 billion last year, is likely to cover the country's current account deficit this year, the ratings company said.

Brazilian exports have tripled since President Luiz Inacio Lula da Silva took office in January 2003 on rising world demand for soybeans, iron-ore, beef and cars. Brazil, once the world's largest emerging-market debtor, became a net foreign creditor for the first time in January as international reserves swelled to a record $171.6 billion from $37.6 billion at the start of Lula's first term. Credit-rating increases usually result in lower borrowing costs for nations and companies.

The Bovespa climbed 6.3 percent to 67,868.46 in Sao Paulo trading, making the index this year's best performer among the world's 20 biggest stock markets. The real strengthened 2.6 percent to 1.6623 versus the U.S. dollar, the biggest one-day gain in the currency since Aug. 17, when the Federal Reserve unexpectedly cuts its discount rate.

The yield to the 2015 call date on Brazil's 11 percent bonds due in 2040 fell by 21 basis points to 5 percent in New York, according to JPMorgan Chase & Co. The price rose 1.602 cents on the dollar to 136.301 cents, the highest since the country issued the securities in 2000.

Brazil's federal debt was 1.36 trillion reais ($813.8 billion) in March, the Treasury said April 24. Foreign debt was 106.3 billion reais. Brazil is rated Ba1, or one level below investment grade, by Moody's Investors Service. Fitch Ratings ranks the country at BB+.

Brazil's rating is now in line with those of Colombia and Romania and is four steps higher than its level in July 2002. In Latin America, Mexico and Chile, whose economies are smaller than Brazil's, have a higher rating.

Brazil's economy expanded 5.4 percent in 2007 and is expected to grow 4.6 percent in 2008, according to estimates of about 100 economists in a central bank survey.

The acceleration in growth prompted Brazil's central bank on April 16 to raise its benchmark lending rate for the first time in three years as inflation accelerated above their 4.5 percent target. Rising food costs and consumer demand pushed inflation to a two-year high of 4.73 percent in March from an eight-year low of 3 percent in the prior year's period. Economists now expect policy makers to raise their target rate to 13 percent by year- end, with annual inflation estimated to reach 4.79 percent this year, a central bank survey published April 28 showed.

High government spending and public debt remains Brazil's ``foremost credit weaknesses," S&P said. Net government debt reached 47 percent of the country's gross domestic product in 2007, ``higher than in similarly rated credits and above 20 percent for the BBB median,"

Update

The FT had an interesting article on this topic today. Perhaps the central point was this one:

Brazil is still a long way from the top-notch triple A ratings of the developed economies, such as the US, Britain and Germany, but its rise out of junk or speculative grade is important as it allows some of the biggest pension and insurance funds to invest in the country. Many of these big institutions are not allowed to channel funds into countries rated below investment grade because of the dangers that these economies will default, losing their clients vast sums of money.

Also today Moody's announced their view on investment grade for Brazil. Moody's - which rates Brazil's foreign currency debt Ba1, one rank below investment grade - stated that Brazil must reduce debt and spending while lengthening the maturity of its government securities before it can earn an investment-grade credit rating. Standard & Poor's last week raised Brazil to investment grade, citing pragmatic fiscal policies and stronger economic growth.

``There are two elements that are important when you move a rating -- you need all the support behind the improvement of fundamentals, and those elements are there in Brazil,'' according to Mauro Leos, vice president and senior credit officer at Moody's in New York. ``You also need a serious reduction of liabilities.''

An increase in government spending as a percent of gross domestic product over the last five years, largely because of higher pension payments, is the principal challenge, according to Moody's.

``The upward trend in primary spending, which went from 15 percent of GDP in 2003 to 18 percent in 2007, reflects the evolution of pension payments.... Still, Brazil's debt ratios remain high relative to the Baa investment-grade peer group and, in some cases, when compared with the Ba non-investment-grade peer group......Standing at some 56 percent of GDP, Brazil's government debt ratio compares with a 34 percent debt-to-GDP ratio for the Baa investment-grade peer group.''


Moody's will evaluate improvements in Brazil's fiscal accounts through the third quarter this year and then decide if the country can receive a positive outlook.Should a positive outlook be awarded, Brazil would then be placed under review before it could claim an investment rating.

Pension payments, which account for more than 40 percent of primary government spending, have increased in absolute and relative terms because more than half of benefits paid are indexed to the minimum wage, Moody's said. The minimum pension has experienced over 10 percent real annual growth since 2003 when President Luiz Inacio Lula da Silva took office.

A commitment to primary surplus targets and declining interest rates have been helping contain the debt-load, and the ratio of gross debt to GDP declined to 55.6 percent in 2007 from 58.4 percent in 2003.

Brazil Central Bank Raises Interest Rates

As indicated on this blog yesterday Brazil’s central bank have increased interest rates - although they surprised markets with a 0.5 percentage point increase, double the amount most economists expected. The rise brought to an end more than two years of rate cuts amid mounting concerns that consumer price inflation will exceed the government’s target this year.

The bank’s monetary policy committee (Copom) had held its target overnight rate, known as the Selic, at 11.25 per cent since the autumn of last year, after two years of cuts from a peak of 19.75 per cent. The bank in October held the benchmark rate at 11.25 percent, ending the longest monetary easing cycle since Brazil adopted inflation targets in 1999.



The real closed at R$1.66 to the dollar on Wednesday, its strongest level in nine years, on the back of the expected rate increase.

The Copom said it had opted for a 0.5 point increase as it wished to act immediately by introducing significant part of the monetary tightening that would be necessary to reduce the risk of rising inflation and reduce the size of the total increase to be implemented in the Selic rate.

Latin America's biggest economy grew 6.2 percent in the fourth quarter of 2007, more than twice the pace of the past decade. Bank lending, which has almost doubled in the past three years and is fueling purchases of cars and other big-ticket items, is powering economic growth and sparking inflation. Brazil's economy expanded an average of 3.8 percent from 2003 to 2007, the second slowest in South America. Argentina led the region with 8.8 percent, followed by Venezuela with 7.9 percent and Uruguay with 6.9 percent, according to International Monetary Fund data.

A surge in food prices and rising consumer demand have pushed annual inflation in Brazil from an eight-year low of 3 percent in March 2007 to a two-year high of 4.73 percent in March, above policy makers' year-end target for a third month. Brazil has the second slowest inflation in the region, after Mexico, according to Bloomberg data. In Chile, inflation has jumped to 8.5 percent in March from 2.6 percent in the year- ago month.

Over the past two years consumer demand has taken over from the export sector as the main driver of growth in Brazil. Falling unemployment, rising salaries and cheaper credit have driven a consumption boom, especially of credit-sensitive items such as cars and household electrical goods. About 2.4m vehicles were sold in Brazil last year – an increase of nearly 28 per cent over 2006. Strong demand continues across the economy this year. Retail sales in February were up by 12 per cent, year on year.

Lending by banks has climbed at least 20 percent in each of the past three years. Car sales jumped 30.5 percent in February from the year ago month, while home appliance and furniture sales climbed 17.8 percent, according to figures from the national statistics agency.

Brazil Retail Sales February 2008

Brazil's retail sales in February rose at the fastest pace since June 2004, raising expectations that the central bank will raise interest rates tomorrow. Retail, supermarket and grocery store sales, as measured by the volume index, jumped 12.2 percent in February from February 2007, the national statistic agency said this morning. The pace of economic expansion does seem to be slowing, however, since seasonally adjusted sales fell 1.5 percent on a month by month basis in February from January. Sales in the quarter which ended in February were up 0.3 percent compared with a 1.4 percent jump in the previous quarter.

Policy makers, led by central bank President Henrique Meirelles, are now widely expected to increase the benchmark interest rate tomorrow for the first time in three years. The consensus seems to be an expectation for the bank to increase the rate to 11.50 percent from the current record low 11.25 percent.

Brazil's annual inflation has steadily accelerated since November. Consumer prices in the 12 months through March rose 4.73 percent, the highest since March 2006, and greater than the central bank's target of 4.5 percent, plus or minus 2 percentage points.



What is Latin America's biggest economy grew 6.2 percent in the last quarter of 2007, more than twice the pace of the last decade. Commodity exports and bank lending, which has almost doubled in the past three years and is fueling purchases of cars and other big-ticket items, is powering economic growth.

Yields on interest-rate futures rose after the report was released. The yield on the overnight contract for May delivery increased 2 basis points, or 0.02 percentage point, to 11.43 percent.

The yield on Brazil's zero-coupon bonds due in January 2010 rose 4 basis points to 13.37 percent, according to Banco Bradesco SA.

Brazil's real gained on the news and was up 0.2 percent to 1.6832 per dollar at 4:48 p.m. New York time, from 1.687 yesterday. It had risen by as much as 0.6 percent earlier in the day. Brazil's currency has appreciated by 20.2 percent over the past 12 months, the second-best performance (after the Swiss franc) among the 16 most traded currencies.


Brazil's Bovespa index also rose for the first time in three days, gaining 464.94, or 0.8 percent, to 62,618.39. 37 stocks rose and 26 fell.