MATO GROSSO DO SUL STATE HIGHLIGHTS BRAZIL'S AGRICULTURAL

UNCLAS SECTION 01 OF 04 SAO PAULO 000199 SIPDIS SIPDIS SENSITIVE STATE FOR WHA/BSC, WHA/EPSC NSC FOR TOMASULO SOUTHCOM ALSO FOR POLAD USAID FOR LAC/AA E.O. 12958: N/A TAGS: PGOV EAGR ECON EIND ETRD BR SUBJECT: MATO GROSSO DO SUL STATE HIGHLIGHTS BRAZIL'S AGRICULTURAL BOOM REF: A) Sao Paulo 170 B) Sao Paulo 177 SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY Summary -------------- ¶1. (SBU) Brazil's continued position as a leading international agricultural powerhouse is fueled by the rapid economic expansion in states such as Mato Grosso do Sul (MS). Driven by high commodity prices as well as tourism to the world's largest wetland space, the Pantanal, MS is undergoing an economic boom. Experts say this is just a preview of the state's potential and confirm that dozens of initiatives are underway to turn MS into an even larger source of meat, soybeans, paper, and ethanol. Additionally, innovative infrastructure projects are transforming MS from an agricultural region into a state with industrial potential. Foreign interest, especially from East Asia, is increasing, but regional commercial and business issues may complicate the picture. The protectionist policies of Evo Morales in neighboring Bolivia and the potential for similar trade policies emerging out of Paraguay, may curb growth in some sectors. End Summary. Agriculture Leading Economic Explosion -------------- ¶2. (SBU) Mato Grosso do Sul State (MS) is located in Brazil's central-west region and borders Bolivia and Paraguay. With 576,400 square miles (slightly larger than the size of Germany) and fertile fields, the state is identified as Brazil's cattle country and one of its major breadbaskets. MS's population of 2.3 million is heavily involved (almost 50 percent) in services and tourism because of the presence of the Pantanal, the world's largest wetland area covering 75,000 square miles in three countries. Agriculture represents another third of the workforce, with about a fifth involved in the industrial sector. Of MS's total exports, soybeans account for 35 percent, pork and chicken 20 percent, beef 14 percent, mineral ores 8 percent, leather 7 percent and wood 5 percent. (Note: MS accounts for only 1 percent of Brazil's GDP. End Note.) ¶3. (SBU) During a three-day visit to Campo Grande and environs (see reftels),Poloff met with a range of government and business officials to get a sense of the opportunities and challenges the state is facing. According to First Secretary Dacio Queiroz da Silva of the MS Federation of Agriculture and Livestock (FAMASUL), MS's rich soil means that the state will continue to serve as one of Brazil's agricultural powerhouses. Silva noted that while vital to the state's economy, the 25 million head of cattle are actually decreasing in relative importance to sugar because sugarcane for ethanol production has become a more profitable use of farmland. Soybean planting is also growing thanks to the spike in world prices, and the state government is evaluating paper products as a new target industry. (Note: Silva's overall assessment of continued agricultural growth was ebullient. He only briefly touched on conflicts - which he neglected to acknowledge often turn violent -- between landowners and the indigenous, per ref B. End Note). State Plans Large Infrastructure Upgrades -------------- ¶4. (SBU) State Secretary for the Environment, Cities, Planning, and Science and Technology Carlos Alberto Negreiros Said Menezes explained that MS was leading the charge for large infrastructure projects. Menezes said that MS has shed its image as a mismanaged and unproductive state unable to secure federal funding for infrastructure programs even when the governor and president were of the same party. He noted that the state is focusing on several mega-initiatives to develop its overall economy, including a pipeline to bring in diesel from other states and transport ethanol. SAO PAULO 00000199 002 OF 004 Simultaneously, MS is amplifying the state electricity grid to provide renewable alternative energy for new local businesses as well as to other parts of Brazil. MS is constructing a major highway running from the capital city of Campo Grande to the state's eastern border in order to secure a new commercial link to Sao Paulo. According to Menezes, MS will build an additional expressway along Paraguay's northern border, the state's southern edge, to increase trade between Brazil and Paraguay and introduce more of a state presence in this crime-riddled frontier. MS will construct a railroad running south to Parana State to connect with an existing rail to the major port of Paranagua. (Note: Current high transportation costs are limiting competitiveness and expansion. As an example, soybean from MS are exported through Paranagua in Parana State and incur transportation costs equal to two-thirds of their original value or 40 percent of export value. End Note.) Construction of a new cargo terminal and lengthening of existing runways at the Campo Grande International Airport will also encourage business growth, Menezes said. Menezes stated that funding for these new initiatives is coming from federal government-supported programs and the Brazilian National Development Bank (BNDES),the current MS administration's clean-up of previously wasteful state spending, and well as new sources of government revenue generated from a growing number of businesses. ¶5. (SBU) In addition to these large-scale programs, Menezes said that the state hopes to boost the economy by expanding ports and smaller highways and railroads, as well as tripling the number of sugar mills to produce ethanol. MS expects to increase its annual production of ethanol from 600,000 to 2.5 billion liters in the next two years and build a new ethanol pipeline for overseas shipments through the port of Paranagua. (Note: Brazil produced 20.75 billion liters of ethanol in 2007, of which Sao Paulo State accounted for 12 billion. End Note.) Noting the more than one million acres owned by International Paper in MS, Menezes said that the state is planning to plant thousands of trees in its southern region to develop wood and paper processing. In December 2006, the company began construction of a major pulp and paper mill in Tres Lagoas on the Sao Paulo State border in order to take advantage of Sao Paulo's infrastructure, an investment estimated at USD 1.5 billion. Campo Grande Leading the Charge -------------- ¶6. (SBU) Economic Development Agency of Campo Grande (ADCG) President Paulo Salvatore Ponzini stated that MS's internal border with Sao Paulo state makes it an attractive destination for Brazilian investors. ADCG Administration, Planning and Finances Coordinator Sergio da Rocha Bastos added that MS uses tax incentives to attract investment from other states, including the opportunity for some businesses to start up and operate tax-free for ten years. (Note: There is an ongoing lawsuit between the states of Amazonas and Sao Paulo in which Sao Paulo offered similar tax incentives. By law, Amazonas is the only Brazilian state permitted to offer tax incentives to encourage investment. End Note.) MS's lower labor costs also provide a competitive advantage over Sao Paulo and Minas Gerais states. Campo Grande is developing a high-tech park to attract new opportunities as well, particularly cable television companies seeking alternatives to the saturated markets of Sao Paulo and Rio de Janeiro states. ¶7. (SBU) According to Bastos, Campo Grande is exploring technology as a way to enhance its position as the focal point of this rich agricultural state. Campo Grande is investing USD 25 million in building a "logistics platform" to link the state's highways and railroads in a logistics hub that would centralize collection, packaging, and customs preparation for immediate export through Brazil's two major ports of Paranagua (Parana State) and Santos (Sao Paulo State). Bastos claimed that this hub would facilitate higher-quality and more efficient service. SAO PAULO 00000199 003 OF 004 Challenges to Reach Potential Remain -------------- ¶8. (SBU) ADCG's Bastos admitted that the state government has to overcome significant hurdles in order to reach its full economic potential. MS must build and upgrade miles of highways and connect more of the state's cities with Campo Grande, build more schools, encourage the role of women in the economy, and create a state-wide development agency as well as an international trade promotion entity. The city has begun addressing some of these issues through projects supported by BNDES. Campo Grande has started constructing kindergartens with a view towards offering more employment opportunities for women, has initiated a major sewage system overhaul, and is investigating ways to eliminate the city's slums through an Inter-American Development Bank initiative encouraging poorer city dwellers to get involved with park protection efforts. Foreign Interest in Mato Grosso do Sul -------------- ¶9. (SBU) ADCG's Bastos noted that foreign investors are increasingly interested in MS, particularly because of its agricultural strength and its geographic location in the center of South America which potentially makes it a distribution center for the continent. Bastos explained that MS is focusing on becoming a South American export hub for Asia and wants to use Campo Grande's logistics platform to serve as the focus of this effort. Chilean entrepreneurs have approached his office seeking to encourage Campo Grande's logistics platform to consider connecting to the port of Iquique in Chile to export Brazilian goods to Asia. Bastos told Poloff he has also received Chinese business and official delegations interested in corn and beef exports. Singaporean bankers have visited and are considering investing part of a USD 200 million hedge fund in MS's meat production sector. State Secretary Menezes told Poloff that Japanese investors are interested in bio-diesel and ethanol exports via Paranagua, and South Korean business leaders are looking at railroads and an unspecified transport route that would cross Paraguay into Chile to offer an alternative to international shipping through the Panama Canal. Relations with Bolivia and Paraguay -------------- ¶10. (SBU) State Secretary Menezes complained that since Evo Morales became president of Bolivia, bilateral business cooperation has faced a number of hurdles. For example, Brazil and Bolivia were discussing gas cooperation, but Morales pulled out of negotiations when he assumed the presidency. A possible new road linking eastern Bolivia with Paraguay and Brazil in order to increase tri-lateral trade has also yet to make serious headway due to Morales, Menezes claimed. MS hopes to address these challenges and to revive regional trade through an Integration Zone of the Central Region of South America (ZIRCOSUR) in which 34 regions and states from Argentina, Bolivia, Brazil, Chile and Paraguay would cooperate. FAMASUL's Silva said that farming opportunities in Bolivia have become increasingly difficult for Brazilians because of policies President Morales has carried out discouraging foreign investment, especially near the border. Silva fears that should Fernando Lugo win the presidential elections in Paraguay, he will adopt similar policies discouraging Brazilian investment because, according to Silva, Lugo views Brazilian farmers as "the enemy." Industrial Role in Economic Growth -------------- ¶11. (SBU) While acknowledging agriculture's role in contributing to the state's impressive economic growth, Federation of Industries and Commerce of Mato Grosso do Sul (FIEMS) President Sergio Marcolino Longen highlighted MS's efforts to encourage opportunities in addition to agriculture. FIEMS is developing a variety of programs SAO PAULO 00000199 004 OF 004 to persuade residents to look beyond agriculture and develop service-related technology and logistical expertise for infrastructure projects, he said. The organization wants to overcome the state's long-standing agricultural tradition and move toward semi-industrial sectors over the next five years. Longen said that MS wants to begin processing all meat products within the state. MS wants to increase steel production and become self-sufficient in energy (biomass and petrochemicals) by 2010. Comment -------------- ¶12. (SBU) MS's economic growth is part of a national trend in which Brazilian states are focusing on developing their limited infrastructure to create opportunities for market expansion. As elsewhere in Brazil, improved infrastructure is a major key to economic growth potential. Mato Grosso do Sul's case is interesting because while tourism and services account for almost half of the state economy, experts are looking beyond tourists and small business to larger industries and agricultural operations that produce goods that the state can market abroad. Should MS succeed in linking its highways, ports, and pipelines with its neighbors and improve distribution of its agricultural products overseas, the state could transform itself from a regional commodity producer to a solid international player. WHITE