South America Calling

Brazil goes to the polls on Sunday to elect a new president.

The race is extremely tight with the incumbent, Dilma Rousseff, holding a four- to six-point lead over opposition candidate, Aecio Neves, in most polls.

The election has polarized Brazilian society with public arguments between supporters in the bars of Sao Paulo not uncommon.

But what does the race mean for Brazilian agribusiness?

Katia Abreu, the president of the Brazilian Agriculture Confederation, may have declared support for Rousseff, a leftist candidate, but most of agribusiness supports Neves, who is viewed as pro-market and business-friendly. This became clear at a CNA meet-the-candidates event in Brasilia in August where Neves received several standing ovations while Rousseff was only politely clapped during her speech.

SUGAR AND ETHANOL SQUARELY BEHIND NEVES

One part of agribusiness that is overtly pro-Neves is the sugar and ethanol sector.

Rousseff's policy of controlling gasoline prices to keep inflation in check has effectively capped ethanol prices. With margins tight and no potential upside on ethanol prices, many of the less-efficient distilleries are struggling -- a recent consultancy report estimated 30 operations are near bankruptcy -- and investment in new mills and distilleries has stalled.

In contrast, Neves has declared that the government has to help the ethanol sector grow and promised to review price policy.

LESS DIFFERENCE ELSEWHERE

Elsewhere in the farm sector, the opposition to Rousseff is less ferocious.

Agriculture has been pretty well served since Rousseff's Workers' Party came to power 12 years ago. The availability of official subsidized credit has increased dramatically, allowing farmers to better cover operating costs and invest in machinery and storage. Meanwhile, Rousseff's administration announced massive plans to improve Brazil's poor port and internal infrastructure, which is Brazilian agribusiness' Achilles heel.

For her second term, Rousseff has promised more of the same, committing to continue building rail, waterway and port infrastructure.

Unfortunately, it is one thing to announce projects; it is another to implement them. Agribusiness has been exasperated at the slow pace with which the government has rolled out infrastructure and its inability to clear red tape.

For example, the North-South railway and the BR-163 highway, which create corridors for soybeans from the Cerrado to northern ports, are years behind schedule. Meanwhile, large parts of Brazil's grand ports plan, announced in 2012 and pegged to attract $40 billion in investment, have yet to be regulated.

Neves has pledged to get these and other projects moving again. He has also proposed the creation of a super-Ministry of Agriculture, which will become a top-echelon ministry alongside the Planning and Finance Ministry, where the budget purse strings are traditionally held.

The candidate says that agribusiness should have influence in government commensurate with its importance to the economy -- agriculture accounts for about a quarter of Brazil's GDP.

That is, of course, music to the ears of Brazilian farmers. But they are well aware that these are election pledges, which can soon evaporate once Neves gets into power.

Interestingly, on a recent trip to southwestern Goias state, part of the Center-West grain belt, it was clear that most farmers were against Rousseff. Their main gripe was not infrastructure, but rather her party's sympathy for land invasions by landless workers and support of indigenous causes.

EXCHANGE MOVES

The election has caused great volatility in the Brazilian real.

The currency has weakened on every poll showing Rousseff in the lead and strengthened with every Neves surge. With most polls over the last two months showing Rousseff winning, the real has fallen 10% against the dollar.

Investors see Rousseff as antagonistic toward big business and fiscally profligate, while Neves is tougher on inflation, tighter on government spending and could even push much-needed structural reforms.

A weakening real makes Brazilian farmers more competitive internationally.

However, it doesn't necessarily follow that a Rousseff victory means a weaker real than a Neves victory. The Rousseff-appointed central bank has been supporting the real over the last years in an effort to control inflation, while it is Neves that has vowed to allow the real to weaken from its currently artificially strong level to make local industry more competitive. Truth is, the end result might be similar as Rousseff will also probably have to let the real weaken next year in the face of a strengthening greenback and increasing market pressure.

AGRIBUSINESS INFLUENCE GROWING

Whatever happens Sunday, it is clear that the political influence of agribusiness is growing. A decade ago, the idea of a super-Ministry of Agriculture was unthinkable. Meanwhile, the farm lobby can now count on an impressive 202 members (37% of lower house members and 14% of senators).

Let's see if the farm candidate prevails, and what happens next!

Alastair Stewart can be reached at alastair.stewart@dtn.com

(AG)

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