Fragiler-than-it-seems-Brazil, continued

I've worried before about whether Brazil's economic and political progress would falter if commodity prices swooned. Via MR, this FT article not only puts a number on that...

Plug in 2005 commodity prices, for example, and Brazil’s $23bn trade surplus would become a $20bn deficit.

... it also calls out another worrisome trend, the explosion of consumer leverage.

Bank credit is now growing at a 20 per cent annual clip.

That has given Brazil’s economy an appearance of strength, but also risked stretching it thin. Typically, Brazilians now spend a quarter of disposable income on debt payments. At the height of the US credit boom, by contrast, American households spent about 15 per cent.

With the real now at 1.57 vs. the dollar - higher than it ever got in 2008 - I am pondering whether now is the time to trim my Brazil investment exposure...

Could U.S.-Brazil relations watershed survive commodity crash?

A very high percentage of "Event X was a true watershed" articles turn out to be crap, but this one on U.S.-Brazil relations (via MR) is pretty good. (Maybe because that narrative device is totally extraneous - this change has been coming for years and Obama's visit didn't actually change that much). Worth reading in full, but the punch line is:

... the major strategic interests of the US and Brazil are so closely aligned that cooperation between the two countries will be one of the building blocks of the new century... [Brazil’s] its instinct for “order and progress” (the slogan appears on its flag) dovetails very closely with what the United States wants to see in the world.

I agree except for a nagging doubt - with Brazil's economic ascendancy so dependent on commodities, how much of this unravels if resource scarcity isn't all it's cracked up to be and prices crash? After all, we've heard the same arguments before (ahem Paul Ehrlich).

Let me back up a bit to build up the logic. Brazil has historically been commodity-dependent...

In the 19th century Brazil was part of Britain’s ‘informal empire’; Britain was the dominant foreign investor in the country and Britain controlled the markets for the primary commodities (sugar, rubber, cotton, coffee) whose falling and rising prices set the tempo for Brazil’s growth. But the system seemed rigged in Britain’s favor; Brazil could never escape its role as a commodity producer — a hewer of wood and a drawer of water in the international community. Brazil did the backbreaking labor; Britain grew rich.

... but isn't it still? I don't have the stats on hand about how much soy, iron ore, etc. etc. Brazil exports, but it's a lot; it's not clear to me that the economy has fundamentally transformed, rather than simply ridden the latest commodity wave on the way up.

The premise continues that Brazil has demonstrated a successful new model...

Lula’s Brazil stuck up for Venezuela at international gatherings and danced with it at parties. But all the while, Lula’s Brazil was destroying the political logic of the Bolivareans by demonstrating that a pluralistic democracy integrated into the global market can do more for the poor than incompetent populist blowhards. Chavez talked; Lula delivered

(again, on the back of a commodity boom...)

What that means is that Brazilians, even those on the left like former president Lula, are now less inclined to think that Brazil needs to overturn the global economic system.

I have lived in Brazil and I agree with this sentiment, and that "Brazilians have an immense capacity for hard and focused work." But in a world with lower commodity prices (and, again, I don't think this is the most likely scenario, but remember it's been less than 30 months since crude oil was in the low $30s), how will the Brazilian economy hold up, and if it falters, won't that popular support as well?

This is very much a preliminary perspective and I would welcome debate and pushback on it.

Commodity dependence of Brazil

The Globalizer, via MR:

When Lula won the presidency in 2002, Brazil’s main trading partners were the United States (25.5%), the Netherlands (5.3%), Germany (4.2%) and China (4.2%).

Over the eight years, the U.S. share collapsed, while the Chinese share more than tripled. By 2009, Brazil’s main trading partners were China (13.2%), the United States (9.6%), Argentina (7.8%) and the Netherlands (5.0%).

The writing was on the wall. As long as demand in these two nations continued for commodities, Brazil will continue to grow — but if demand were to fall abruptly, the situation could get difficult.

Brazil is currently a darling of economic and political progress, but lots (most? >100%?) of the underlying growth has been driven by commodity exports, and that story has ended badly before.

This article on Lula, also via MR, is also worth reading - it starts:

... in democratic conditions, to be more popular at the close than at the outset of a prolonged period in office is rare. Rarer still – indeed, virtually unheard of – is for such popularity to reflect, not appeasement or moderation, but a radicalisation in government. Today, there is only one ruler in the world who can claim this achievement, the former worker who in January stepped down as president of Brazil, enjoying the approval of 80 per cent of its citizens. By any criterion, Luiz Inácio da Silva is the most successful politician of his time.

Quote of the day: Easy problems to solve

Lula no doubt came to this conclusion on his visits to the United States, where racism has been eliminated since the election of Barack Obama.

That's FP Passport on Lula's choice of successor and the supposed death of macho.

Quick-and-dirty calculation of ag footprint

Following a comment discussion on resource footprints over at Greed, Green and Grains, I felt the urge to do a very rough calculation of the relative per capita agricultural footprints of a few countries (U.S., China, India, and Brazil). Here’s what came out:

	U.S.	Brazil	China	India
Caloric consumption (Kcal/capita/day)	3,855	3,118	2,970	2,348
Ag footprint (Kcal/capita/day)	6,024	4,819	3,979	2,597
Relative ag footprint (U.S. to country)	1.0x	1.3x	1.5x	2.3x
Relative oil footprint (U.S. to country)	1x	~5x	~12x	~30x

I’m not surprised by this result – back-of-the-envelope is that U.S. eats ~70% more calories, gets 23% of calories from meat/dairy compared to 6% in India, and uses 3.4 kg of feed per calorie of animal product vs. 1.8 kg since U.S. is more heavily weighted toward meat. Add these factors up and the overall gap not much bigger than double.

I didn’t include waste because while consumer waste is much lower in developing countries, harvest and post-harvest waste is much higher. Even if we do assume the U.S. wastes 40% and India only 10% of food production, the ratio only jumps to 3.3x – still an order of magnitude less than the oil consumption differential of ~30x.

India is about as extreme an example as you can get – not only low average caloric intake (people tend to forget that India has worse malnourishment than Sub-Saharan Africa), but abnormally low meat consumption when adjusted for income level due to cultural/religious factors. So unless my calculations are totally off (and I’ll lay out the details below, so someone can point out if they are), we can say with confidence that rich-poor differential in per capita agricultural footprint is an order of magnitude smaller than the rich-poor differential in energy footprint.

(If you adjust calories consumed for local yields, the gap will be even smaller due to low agricultural productivity in many developing countries… but that's an entirely different topic.)

Calculation details
To simplify I made the assumption that a calorie of grain has a fixed “agricultural footprint.” I used FAOStat data on per capita caloric consumption and FAPRI data on per capita meat and dairy consumption. Conversions for calories/kg and feed conversion are from internet and personal knowledge – please let me know where they’re wrong.

Animal product	Kcal/kg	kg feed/kg product
Beef	1,500	8.0
Pork	2,800	4.0
Mutton/Goat meat	2,070	4.0
Chicken	1,440	2.0
Milk	600	1.5
Cheese	3,300	1.5
Butter	7,720	1.5

I’m missing fish and eggs. There are probably other errors as well – tell me!

Oil footprint, by the way, is based on barrels of oil consumed per capita per day.

Update: How convenient - the FAO's 2009 State of Food and Agriculture report (entitled "Livestock in the balance") has a chart showing calories of livestock products consumed by region. My estimates were within 100 calories for each, which gives me incremental confidence in my answer above.

Does the oil curse exist?

The oil curse is a generally accepted truth - there are is no shortage of anecdotes from countries with oil (e.g. Brazil, Nigeria) and concern from those who might discover it (e.g. Greenland). The comparative growth trajectories of Latin America and China/India draw a striking (if not statistically rigorous) contrast between natural resource wealth and economic growth.

But at Aid Watch, Adam Martin questions whether the curse does in fact stand up to analytical scrutiny. He argues that empirical work on the oil curse confuses abundance with dependence and cites three recent papers that show that "even natural resource dependence does not undermine democratization." He later clarifies for commenters:

- I’m not claiming there are no ill effects associated with natural resources. I’m saying these studies failed to find evidence that resources systematically effect democracy, growth, or development, and most of the popular studies that do have fundamental flaws.

- It’s also not the case that these studies (or I) claim that there are NO countries that fit the Curse story, but that it’s not the systemic phenomenon other studies had argued for.

It's quite an interesting and counterintuitive finding. I am inherently skeptical of cross-country regressions, especially when they run counter to things that so many people have seen firsthand in practice. But it is good to keep an open mind, and I applaud Martin for arguing the other side of the story.

Cosan and Shell hook up

From the department of long overdue business news... Cosan and Shell have decided to merge their fuel retail businesses in Brazil in a deal worth $12 billion, and the market liked it:

Shares of Cosan jumped more than 6 percent in Sao Paulo, while Shell rose nearly 1 percent in London.

Cosan, a leading Brazilian sugar conglomerate, also bought Exxon's fuel retail business in Brazil a few years back, surprising industry watchers who expected an oil and gas player to come out atop the bidding. Brazil's energy story is more nuanced than the simple triumph of biofuels, but nevertheless the ascent of a sugar company to prominent status in the country's fuel retail industry is striking and has no analogy worldwide, as far as I know.

Oil curse in Brazil

Municipalities that receive oil windfalls report significant increases in spending on infrastructure, education, health, and transfers to households. However, the windfalls do not trickle down and much of the money goes missing. Indeed, oil revenues increase the size of municipal workers’ houses but not the size of other residents’ houses.

That is Francesco Caselli and Guy Michaels, via Chris Blattman.

They also mention more media mention of corruption and federal police operations in municipalities with higher oil outputs. On the latter I am skeptical - I used to live in Rio, and I don't think the favelas and their problems have anything to do with the area's substantial resource income - but nevertheless their overall findings ring true to me.

Good news on the Brazilian Amazon

A new study has two pieces of great news about deforestation in the Brazilian Amazon (in bold):

Brazil has lowered deforestation rates 64 percent since 2005. This remarkable achievement was possible through a government crack-down on illegal activities in the region. It was helped by a retraction of the cattle and soybean industries, and a growing effort to exclude deforesters from the beef and soy markets. The article describes how Brazil could build upon this progress to end forest clearing by the year 2020, and the additional funding that will be required to reach this goal.

The study estimates that $6.5 to $18 billion will be needed from 2010 to 2020 to achieve the end of deforestation, resulting in a 2 to 5 percent reduction in global carbon dioxide emissions. The steps include the support of low-deforestation livelihoods for forest peoples and smallholders; identifying and rewarding responsible cattle ranchers and farmers; improved enforcement of environmental laws; and investments in protected area management. This estimate utilizes a sophisticated economic model of the Amazon region that estimates and maps the value of forgone profits from ranching and soy farming that are associated with forest conservation.

The former is quite impressive; the latter is fantastic (if true) because in the grand scheme of climate change and the resources that could be dedicated toward mitigating it, $7-18 billion is really not that much money.

Via Climate Progress.

Growing the ethanol market

U.S. ethanol is not cost-competitive abroad, where it competes on an even playing field with Brazilian sugarcane ethanol, so to grow (and reach the RFS mandates) it needs to grow the domestic market:

"Without increasing the blend of ethanol to E15, it will be impossible to achieve the targets set in the Renewable Fuel Standard and there will be no market for cellulosic ethanol," said Jeff Broin, POET chief executive officer. "POET is spending tens of millions of dollars to commercialize the production of ethanol from harvest leftovers but needs E15 to be certain there will be a market for the product."

The clever (but erroneous) framing is that not meeting the ethanol RFS would be the end of the world.

Update: I learn a few things from a comment exchange with Geoff Styles.

R: I recently read Turning Oil Into Salt (which has a lot to like and a lot to dislike - I wrote a rambling review for anyone interested), which would have you believe that the incremental cost of making a car flex-fuel is minimal (in the low hundreds of dollars range above a normal car). If this is true (and I would be interested to hear informed views on whether it is), it would be worth at least looking at the cost/benefit of mandating or incentivizing flex-fuel vehicles, particularly if the alternative to satisfy the ethanol lobby is an E15 ruling that doesn't make economic and/or environmental sense.

Geoff: The Big 3 have already committed to making half their new cars flex-fuel, and with GM and Chrysler beholden to the govt. a 100% target won't be far behind. But even if 100% of all new cars were FFVs starting this year, there would still be many millions of cars vulnerable to damage from higher ethanol blends for many years to come. The problem isn't the FFVs, of which there are already enough to boost E85 sales dramatically. It's making the entire E85 proposition, with its high costs for service station owners and consumers alike more attractive. Does 75% of the energy of gasoline for 86% of its cost sound like a good deal to you?

R: Agree that E15 could be bad for legacy vehicles (I was thinking of FFVs as an alternative demand sink to raising the blending limit to 15%). I think raising the limit would be a bad idea.

And agree that expanding E85 infrastructure will take investment, but the economics of ethanol itself could become attractive enough to justify that investment (and the energy-adjusted price ratio with gasoline has and will continue to fluctuate based on ag supply-demand, crude prices and refining economics).

I don't really like corn ethanol, but if it's a choice between E15 or more FFVs to satisfy the ethanol lobby, the latter sounds more attractive to me.

Geoff: R,
When you put it that way, I agree, though the old saw about horses and water comes to mind. There are sufficient FFVs on the road already to absorb 10x the E85 currently sold. Understanding why they're not buying more of it could be key to figuring out how to make it work on a mass-market level. Is it a critical mass issue on either infrastructure or vehicles, or do consumers just not like the value proposition and attributes?

R: I hadn't realized there were already so many FFVs in the U.S. - sounds like that can't be a constraint now. Do you have any idea how much ethanol E85-equipped stations sell? That might shed some light on whether the issue is midstream infrastructure vs. poor value proposition.

Update 2: ... in which my poor reading skills and attention to detail are exposed:

Geoff: R,
The figure is cited and linked in the posting.

R: So it is :) Good stuff.

Turning Oil Into Salt (5): Alcohol as fuel

Given the low incremental cost of making vehicles flex-fuel, the key barrier to the liquid fuels half of the Open Fuel Standard aspiration is sourcing the non-oil-based fuel itself. The authors focus on two in particular, methanol and ethanol.

Their section on methanol is OK, but I still have questions around the feedstock. The throwaway line on biomass that “The raw material is plentiful, and most of the biomass products are currently discarded” is facile and unhelpful, as anyone familiar with the economics of biomass-to-power will know (the upshot is, not many plants are being built in the U.S. because the feedstock isn’t free and thus the economics aren’t great). Coal-to-liquids and gas-to-liquids technology is indeed fairly mature, but the current cost is not great and the GHG emissions (particularly for CTL) are terrible. And while the U.S. has abundant coal, their argument on gas sourcing is inconsistent, as I mentioned before.

Their section on ethanol is way off, and the worst part of the entire book. They correctly rail against ethanol tariffs, but become apologists for ethanol subsidies, calculating the absurd claim that $6 billion in ethanol subsidies reduced the world price of oil in 2008 by enough to save the U.S. alone $60 billion on fuel imports (“ten times the subsidy”). They misleadingly quote the energy requirements of gasoline vs ethanol:

The amount of fossil fuel in mega joules needed to make one mega joule of gasoline is 1.19 versus 0.77 for corn ethanol and 0.10 for cellulosic ethanol.

(That 1.19 includes the mega joule of energy from combusting the gasoline, which is why the wording is misleading.)

Even more flawed, though, is their thinking on the “food vs. fuels myth”:

How could that drastic increase in the price of food commodities from fish to rice possibly be attributed to ethanol? Nobody was growing corn in rice paddies or making biofuels out of fish.

Yikes. Agricultural commodities are largely fungible, like oil, from both the supply and demand sides. Increased corn cultivation reduces the land available to grow other cereals like wheat, and higher prices affect the prices of substitutes like rice as consumers shift their consumption patterns in response. Farmed fish are often fed corn, as are industrially-raised cattle, pigs and poultry, which are meat substitutes for fish. Ethanol is certainly not responsible for all of the rise in food prices, but the most credible estimates link it to ~30% of the rise in grain prices (more for corn and less for wheat and rice.

This lack of understanding infects their analysis of CO2 emissions from indirect land use change and deforestation. Yes, Brazilian sugarcane is not grown near the Amazon, but it displaces commercial soy and corn farming, which in turn displaces lower-value farming and ranching activities and pushes them further into the Amazon. Throughout the world, increasing food production in response to higher prices often means extension onto marginal land (which in turn is often forest). Yes, this effect is hard to measure precisely, but that does not mean it doesn’t exist.

Finally, like many others, they take a rich-world-centric view of food price increases (“farm commodity prices have almost no effect on the retail consumers”). Yes in America, but in poorer countries where food purchases account for >50% of income and raw commodities make up >65% of end food prices, that is not the case – food price rises have a huge negative impact on nourishment, nutrition and overall welfare, which is not something to be casually ignored.

Turning Oil Into Salt (2): Fuel choice via the Open Fuel Standard

The heart Turning Oil Into Salt’s thesis is the idea fuel choice via the Open Fuel Standard (OFS). This basically means turning car engines into flexible platforms that can use a wide variety of energy sources, incentivizing competition and reducing the strategic predominance of oil. One attraction is that it avoids the picking winners syndrome/game that seldom ends well.

One major pillar is flex-fuel vehicles, a la Brazil. I didn’t realize it cost only $100/car, for corrosion-resistant fuel line and a different fuel sensor, to make a car flex-fuel, and if this is true I think the argument for flex-fuel vehicles is strong (although of course consumers will be the ultimate arbiters). The authors’ other push is for flex-fuel vehicles to be certified for a wide range of alcohols (e.g. methanol, their favorite case study), which certainly makes sense if it is similarly inexpensive (is it?).

The other pillar is electric vehicles – unsurprisingly – but more specifically plug-in hybrid electric vehicles (PHEVs), to overcome the issue of limited range which plagues pure EVs. This is also not a new idea, but for me it gains new life in the context of a broader push for an Open Fuel Standard.

Flex-fuel PHEVs could get 500 mpgg (miles per gallons of gasoline, as the authors say) – note that this is not a measure of energy efficiency, but rather of lessening strategic dependence on oil. That said, it is also easy to see this resulting in higher systemic efficiency (using braking energy and charging on off-peak hours) and lower GHG emissions (if electricity generation is clean and if biofuels are environmentally friendly).

The other tiny obstacle, of course, is making flex-fuel PHEVs economical. More on this here.

Stylized biofuels fact of the day

From a recent speech by BP Biofuels CEO Philip New (couldn't find a link):

The Brazilian government points out that 99.7% of the country’s
sugarcane plantations are as far from the Amazon as the Vatican is from the Kremlin.

And even better news is that the government plans to keep it that way.

Update: A reader asks, "The Amazon river or the edge of the Amazon rain forest?" It's not specified in the speech (found a link), but I believe he means the forest - the river wouldn't make much sense.

Chart of the Day: World Resources by Country

The World Bank's PSD blog passes on this neat chart showing world resources by country. It's a bit easy to jump to conclusions without appreciating the underlying detail, though.

Another interesting observation is that Brazil has almost 20 percent of the world's water resources (roughly on par with Saudi Arabia's share of oil reserves). Perhaps another reason to study Portuguese?

I imagine most of Brazil's water resources are in the Amazon basin and the Pantanal, though, where they're not currently being used for agriculture (responsible for ~70% of human water use, and probably more in ag powerhouse Brazil) and couldn't be without major environmental damage.

Heat and ag yield, cont.

Michael Roberts' great paper with Wolfram Schlenker on the effect of detrimental increased heat on crop yields (which I first excitedly blogged here) is getting a lot of (well-deserved) attention.

First, Ezra Klein cites the work in the Washington Post, and, despite a few minor inaccuracies by Klein, Michael is deservedly proud of having cracked into the mainstream media.

Second, the paper was noticed as far away as Brazil, whence came a letter to the editor challenging that Brazil (being warmer and high-yielding) refutes the Schlenker/Roberts conclusion, or at least casts into doubt its generalizability. But their quick-and-dirty analysis seems to corroborate their original findings:

First, they cherry picked the state and the year from Brazil. Mato Grasso is the highest yielding state in Brazil and 2008 was a remarkably good year for them, due to unusually good weather. Other states in Brazil have average yields that are about half those of Mato Grasso.

Second, Mato Grasso yields were higher than average yields in the U.S. as a whole, but not higher than the best yielding states in the U.S.

Third, if we narrow our comparison by looking a particular state—Illinois, the number two yielding soybean state in the U.S.—and also look more closely at the data, Mato Grasso doesn’t look much warmer. In fact, the southern half of Illinois, which has average yields comparable to those in Mato Grasso, also has comparable exposure to extreme heat. (Northern Illinois is cooler and higher yielding than both Mato Grasso and Illinois). This can be seen from careful inspection of the maps below (click the figure for more detail). It turns out that there aren’t any soybeans grown in the hottest part of Mato Grasso. It’s not clear whether the commenters took into account the locations in Mato Grasso where soybeans are actually grown.

Look for more back-and-forth discussion on this interesting area, and the Schlenker/Roberts contribution in particular.

Brazil's "ethanol subsidy"

Morgan Downey looks at the fact that ethanol is cheaper than gasoline in Brazil and concludes that Brazil, a vocal critic of ethanol subsidies in the United States, is slyly (and hypocritically?) subsidizing its own ethanol by taxing gasoline.

It may be true that Brazil taxes gasoline (something that might be nice for us to do in the U.S. as well), but the fact is that sugarcane ethanol production costs are often lower than even untaxed gasoline production costs at crude prices above $50/bbl. The key driver is feedstock cost (sugarcane), which tends to swing between a floor of its value to produce sugar (most ethanol mills can produce sugar instead if they prefer) and a ceiling of its value as fuel (in which case the miller and blender receive no margin). There are limits on the mobility of sugarcane, however – it must be crushed within 48 hours of harvesting or it rapidly loses its sugar content – which means that in practice mills often have pricing power over the nearby sugarcane growers, who have little other choice of buyer for their production.

Ethanol is also cheaper than gasoline on a volume basis because it has a lower energy content – about 70% of gasoline – so in an equilibrium market ethanol prices will be about 70% of gasoline prices (but Downey recognizes this).

Another factor which could effect the price is where in the country he was – São Paulo is the center of cane-growing, for example, and tends to have ethanol prices below the 70% parity due to oversupply, whereas more remote regions (like the northeast) tend to be above 70% parity due to transportation costs.

It could be the E25 tax is the primary factor, but it’s hard to determine how much without the amount of the tax, which Downey doesn’t provide.

My overall point is that there are many supply-demand factors which impact ethanol prices, and so a difference cannot be automatically attributed to government intervention without considering other plausible causes.

Brazil proposes restricting land for sugarcane

The Brazilian government announced on Sept. 17 a proposed law that will restrict the lands permissible for sugarcane farming and processing.

If passed, the bill sent to the National Congress by President Luiz Inácio Lula da Silva will prohibit the construction or expansion of sugarcane farms and production plants in any area of native vegetation, or in the Amazon, Pantanal (Brazilian Wetlands) or Upper Paraguay River Basin regions. Coupled with the areas unsuitable for sugarcane farming, the bill would effectively make 92.5% of Brazil’s national territory off-limits for sugarcane farming and processing.

This is good news for both the local and the global environment (not to mention existing sugarcane growers in Brazil). While the massive deforestation of the Amazon that contributes the lion's share of Brazil's greenhouse gas emissions isn't performed by cane-growers, it is less easy to make the case that growing cane cultivation isn't an indirect cause (by displacing soy, which in turn displaces ranching and lower-value crops - the sorts of things people do cut/burn down the forest to grow).

The research underpinning the proposed law proudly incorporated a relative of the triple bottom line:

ZAE Cana is the largest crop survey in Brazil’s history and the first ever to incorporate economic and social considerations into its proposed model for the sustainable development of the industry.

Having lived in Brazil, I can say that there is an impressively high public and political awareness of environmental issues. Many Brazilians are quite proud of being a flex-fuel nation with predominantly renewable power generation (mostly hydro). And of course you get things like this.

Shifting climate coalitions

In the U.S., Duke Energy publicly breaks with ACCCE (who brought you Frosty the Coalman and the recent forged climate letters from the NAACP). From the NRDC, Alcoa may have quietly quit ACCCE as well.

In Brazil, meanwhile, a new Brazilian Climate Alliance of 14 organizations was just announced (see the highlights of its position paper at the link). GHG emissions are a different animal in Brazil - 75% are from deforestation, driven mainly by agriculture and rural poverty, while the energy matrix (both power - 80% hydro - and transportation) is the greenest of any major country. It will be interesting to see how this alliance plays out with its powerful agribusiness and biofuels interests.

Food industry consolidation

Agricultural input markets tend to be fairly consolidated. The seeds market, for example, is dominated by 4 big players. 6 companies control >75% of the crop protection market. Fertilizer saw the CF/Terra/Agrium takeover drama unfold over the past year, and PotashCorp controls something like 60% of the world's potassium supply.

Farming itself is incredibly fragmented (part of the reason farmers are generally not hugely profitable, heavily-subsidized ones in the U.S. and Europe excepted). Downstream of farming has the ABCDs of food trading (ADM, Bunge, Cargill, Dreyfus), and increasing consolidation among food processors as well. The latest example is Brazilian meatpacker JBS's $2.5bn bid for bankrupt Pilgrim's Pride. $2.5bn is a lot of money for a bankrupt company, and unsurprisingly the combined entity would be huge:

Combined, Pilgrim's Pride and JBS's U.S. unit -- which includes sales at the JBS business in Australia -- would have posted about $20 billion in revenue last year. Tyson's fiscal 2008 revenue was $27 billion.

I predict this is not the last consolidating move in the food sector.

Consolidation generally means two things - economies of scale, and margin pressure on the more fragmented steps of the value chain. In this case, that is farmers, which is concerning because the majority of yield upside in the world is for poor smallholder farms in South Asia and Africa, and the majority of the world's very poor and undernourished people live in rural areas and have livelihoods connected directly or indirectly to farming.

Brazil's oil policy: cost vs. jobs

Brazil has prioritized local job creation over speed and lowest cost to develop its considerable pre-salt oil reserves.

Brazil has instated heavy local content rules for production of equipment such as oil platforms to ensure the development of the deep-sea reserves provides jobs and economic growth while fortifying domestic industry.

Note the euphemistic use of the word "rhythm" by Petrobras CEO Jose Sergio Gabrielli:

"The rhythm (of bidding) for those new areas will be heavily determined by the capacity of domestic industry to provide goods and services for the gigantic investment program," Petrobras Chief Executive Jose Sergio Gabrielli said in a conference call. "That is for me the driving force for the rhythm of bids in those areas."

This may seem like a poor decision from the traditional Western capitalist mindset - it will both delay the onset of production and result in higher costs than internationally open bidding would. But the Brazilian government - particularly Lula's, which has deep left-leaning roots despite its generally careful and centrist stewardship of Brazil's economy - is trying to optimize a different objective function. Local oilfield equipment manufacturing will need to spring up to supply the demand, creating jobs and potentially companies that can then compete internationally as other countries make ultra-deepwater discoveries. Viewed through that lens, the local content rules make more sense.

And while Petrobras would object if they were an independent private company, I suspect they are actually largely aligned with the government. After all, the chairwoman of their board, Dilma Rousseff, is Lula's heir apparent. And more broadly speaking, the culture of Petrobras is of a proud organ of the state. A friend who works there once described it to me as a bizarre combination of world-class technical expertise and massively inefficient and overstaffed management bureaucracy.