Brazilian-Beef-Final_Optimized1

P OST - P R O J ECT R E P L I C A T I O N O F S A VING S GROUPS IN UG A N D A
DEFORESTATION AND
THE BRAZILIAN BEEF VALUE CHAIN
Datu Research
October 2014
A
D A TURESE ARCH.C O M

This research is prepared on behalf of the Environmental Defense Fund:
http://www.edf.org/
Datu Research provides economic analysis to inform strategies to protect natural
resources, improve food security, and develop local economies.
AUTHORS
Shawn Stokes, Marcy Lowe, and Sarah Zoubek, with contributing research from Eduardo
Rodrigues da Costa, Russell Owen, and Luiz Alberto Teixeira Pinto Junior.
ACKNOWLEDGEMENTS
The authors are grateful to the many ranchers, beef processors, palm oil processors,
tanneries, supermarkets, NGOs and universities who provided their valuable time and
expertise. Many thanks also to Andrew Hutson and Jake Hiller for helpful review of early
drafts.
The opinions or comments expressed in this study are not necessarily endorsed by the
facilitating or partner agencies mentioned or individuals interviewed. Errors of fact or
interpretation remain exclusively with the authors. We welcome comments and
suggestions.
Inquiries can be directed to mlowe@daturesearch.com
LIST OF ABBREVIATIONS
ABC
Low Carbon Agriculture
ABRAS
Brazilian Association of Supermarkets
ADM
Archer Daniels Midland
BNDES
Brazilian National Development Bank
CAR
Rural Environmental Land Registry
EID
Electronic Identification System
EMBRAPA Brazilian Agricultural Research Corporation
FIESP
Federation of Industries in the State of São Paulo
GTA
Animal Transport Guide
GTPS
Working Group for Sustainable Beef
IBAMA
Brazilian Institute of Environment and Renewable Natural Resources
IFC
International Finance Corporation
ILUC
Indirect Land Use Change
INCRA
National Institute for Colonization and Agrarian Reform
INPE
National Space Research Institute
IRR
Rural Income Tax Credit
ITR
Tax on Rural Properties
LAR
Environmental Rural License
LAU
Environmental License
MV
Green Municipalities
NGO
Non-Governmental Organization
PES
Payment for Ecosystem Services
PRONAF
Program for Strengthening Family Agriculture
REDD+
Reducing Emissions from Deforestation and Forest Degradation
ROSP
Roundtable on Sustainable Palm Oil
RTRS
Roundtable for Responsible Soy
SEMA
State Secretary of the Environment
TAC
Terms of Adjusted Conduct
© October 2014. Datu Research LLC.

DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
TABLE OF CONTENTS
5 Executive Summary
1 Where is Beef-Driven Deforestation Heading?
7 Progress since 2004
8 Initiatives by government, NGOs, and industry
9 A shifting clandestine market
2 Deforestation Threats within the Beef Value Chain
11 Power dynamics between processors and ranchers
13 Public sector regulations and inefficiencies
15 High costs of adopting a deforestation-free operation
17 Ranchers’ declining profitability
19 No price premium for compliance
3 Deforestation Threats Emerging Outside the Beef Value Chain
20 Speculation-driven deforestation
25 Growth in demand for other commodities
27 Rapidly expanding role of palm oil
4 The Intersection of Beef and Palm Oil
31 Planting on degraded ranch land
33 Ensuring that small producers capture value
33 Avoiding pitfalls of monocropping
34 Stepping up the public sector role
5 The New Deforestation Reality
35 Emerging complications for enforcement
38 Increasing awareness by retail industry and consumers
6 A Jurisdictional Approach
40 Zero net deforestation
40 Effects on producers, retail buyers, and consumers
41 Challenges
7 Conclusion
44 Appendix A. Corporations that Source Beef Products from Brazil
47 References Cited
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
FIGURES
7 Figure 1. Brazilian Amazon deforestation,
2004-2013
9 Figure 2. Clandestine beef market, 2007-2013
10 Figure 3. Up to 15% of beef from licensed ranchers
may appear as part of the clandestine market
11 Figure 4. Brazilian beef value chain
12 Figure 5. Market share of top three processing
firms
14 Figure 6. Per-hectare cost to obtain ranching
licenses in Pará, according to ranch size
15 Figure 7. Leakage: Illicit cattle enters legitimate
supply chains via licensed ranches
39 Figure 20. Attributing deforestation will soon be
challenged: example of beef and palm oil
TABLES
13 Table 1. Ranchers’ costs to comply with
regulations on deforestation
19 Table 2. Laws and initiatives to promote
deforestation-free ranching are all stick and no
carrot
22 Table 3. Policies that facilitate speculative
deforestation
32 Table 4. Increased acreage from projected
expansion of corn, soy, sugarcane and palm oil,
percent increase over 2012-2013
16 Figure 8. Initial production costs of ranchland
management: deforestation versus pasture
intensification
17 Figure 9. Five years of cattle production: costs
of managing pasture versus costs of clearing land
18 Figure 10. Profitability of ranching in Mato Grosso,
Pará and Rondônia, R$ per arroba, 2007-2013
21 Figure 11. Deforestation in Pará, August 2012 –
January 2013
23 Figure 12. Price of ranchland and farmland in Mato
Grosso and Pará, 2006-2010
24 Figure 13. Speculators anticipate future demand
from displaced ranchers
25 Figure 14. Growth in Brazilian corn and soy
production, by region
27 Figure 15. Growth in Brazilian sugarcane
production, by region
29 Figure 16. Brazilian palm oil value chain
30 Figure 17. Growth in palm oil production, by
major corporations, 2012-2020
37 Figure 18. Present opportunities for illicit
commodities to enter legitimate supply chains
38 Figure 19. Future opportunities for illicit
commodities to enter legitimate supply chains
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
LIST OF INDUSTRY INTERVIEWS
INDUSTRY
Beef Processor
Beef Processor
Beef Processor
Beef Processor
Beef Processor
Beef Processor
Beef Processor
Beef Processor
Beef Processor
NGO
Palm Oil Processor
Palm Oil Processor
Rancher
Rancher
Rancher
Rancher
Rancher
Rancher
Rancher
Rancher
Rancher
Rancher
Supermarket
Tannery
STATE
Pará
Pará
Mato Grosso
Mato Grosso
Mato Grosso
Mato Grosso
São Paulo
São Paulo
São Paulo
Pará
Pará
Pará
Pará
Pará
Pará
Pará
Pará
Pará
Mato Grosso
Mato Grosso
Mato Grosso
Mato Grosso
Pará
Pará
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
EXECUTIVE SUMMARY
After decades of aggressive deforestation in the Brazilian Amazon, efforts to prevent deforestation are yielding
positive results. From 2005 to 2013, the rate of deforestation dropped considerably, falling nearly 80% (INPE,
2014). At the same time, the beef industry—responsible for nearly 75% of previous deforestation—continued to
rapidly expand production, proving it possible to produce more beef without more land (Boucher, 2011a).
Despite these impressive gains won by years of effort by government, NGOs, and the beef industry itself, the
deforestation problem is far from solved. Sharp increases in demand from non-Western countries potentially
undermines recent tactics most effective in reducing deforestation—pressure from Western companies that
demand deforestation-free supply chains. Russia's recent embargo of Western beef has increased demand for
Brazilian beef by over 10% creating alternatives that do not require deforestation-free operations (Ward, 2014).
The industry continues to face challenges as it adjusts to its new operating environment, leaving ample
opportunity to backslide on recent progress. This report focuses on ranchers—the entities capable of preventing
deforestation—and processors, the entities with the most direct leverage over ranchers.
Consolidation of beef processing firms has intensified a power dynamic in which ranchers have dwindling
bargaining power and ever fewer options for selling their cattle. The market share of the three largest processors,
JBS, Marfrig and Minerva, grew from 24% in 2011, to 37% in 2013 (BeefPoint, 2013). Several ranchers and
midsize processors expressed concern, fearing that the three top firms could be an oligopoly in the making. Many
small and midsize processors feel that unlike large processors, they have restricted access to finance, reducing their
ability to monitor for deforestation.
Several regulatory inefficiencies increase costs for ranchers who comply, even while allowing impunity for
violators. Since 2009, the evolving mix of deforestation laws has created a number of bureaucratic hurdles.
Ranchers must acquire an array of federal and state licenses to operate. Although some requirements are
straightforward and used in all states, others can be confusing, overlapping, or unevenly enforced from region to
region. Agencies are notorious for bottlenecking paperwork, or worse, losing entire applications. And illicit cattle
operations still have ample opportunity to enter legitimate supply chains. It is not difficult, for instance, to
circumvent the GTA system to track cattle from the ranch to the slaughterhouse. Falsified GTA lists with the origin
and destination of cattle are easily obtained, costing as little as R$ 200.
Choosing pasture management over clearing new land represents daunting costs for ranchers. A crucial element is
land tenure, and the institution of land tenure in Brazil is deeply flawed. Several ranchers interviewed for this study
have been waiting for years—sometimes more than 20—to receive a title to their land. Without a title, banks will not
approve ranchers for the credit they need to make the costly transition to a deforestation-free operation. Depending
on the terrain, the estimated cost to deforest 145 hectares of new land—the cost the rancher is accustomed to—is
between R$ 65,250 and R$217,500 (Desmatamento, 2006; EMBRAPA, 2003). These gross costs do not
account for earnings from the sale of timber, which may actually yield a net profit for clearing forest. By contrast,
pasture management for 145 hectares will cost roughly R$ 412,000, a significant premium (Costa & Factori, 2011).
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Many ranchers interviewed for this study complained that they receive no price premium for adopting a
deforestation-free operation. Worse, given the high costs to comply with regulations and the ease with which
unlicensed ranchers can sell cattle, ranchers have perverse incentives to revert to deforestation. For those
committed to maintaining legitimate operations, many are reducing their beef focus, shifting some of their land
to more profitable—and possibly less closely regulated—activities.
In sum, beef-focused efforts to combat deforestation to date are creating unintentional impacts on ranchers’ land
use decisions, raising the possibility that future deforestation threats will merely shift out of the beef industry and
into other sectors. Unfortunately, several dynamics external to the beef industry are already lining up to accelerate
this shift. Among them are land speculation, the growth of other commodities, and the rapidly emerging role of
palm oil.
Deforestation fueled by land speculators is increasing rapidly in Brazil. As the country’s agricultural
export market grows, and government and industry build new infrastructure for commodities exports,
speculators anticipate future demand in the North, including demand from displaced ranchers currently
operating in the South and Center-West regions. In the state of Pará from August 2012 to January 2013,
an estimated 80% of deforestation was speculative in nature, occurring around infrastructure projects
such as Transamazônica and highway BR-163. Only about 20% of deforestation comprised expansion of
existing agricultural operations (Brandao Jr., 2013; Mansur, 2013). The recent capture of a highly
organized deforestation gang reinforces the notion speculative deforestation has surpassed traditional
drivers. Responsible for an estimated 10% of recent deforestation in Pará, the gang systematically burned
public land, divided it into parcels, and sold it to farmers and ranchers (BBC, 2014).
Production of Brazilian agricultural commodities is expected to increase substantially during the next ten years,
creating additional drivers for deforestation. According to the Federation of Industries in the State of Sao ˜ Paulo
(FIESP), just four crops—soy, corn, sugarcane, and palm oil—will require more than 10.5 million additional
hectares of land by 2023 (FIESP, 2013).
Palm oil, relatively new in Brazil, is positioned to grow faster than any other commodity. The government of Pará
estimates that by 2022, oil palm plantations for biofuel will cover 700,000 hectares, which would place Brazil
third in global palm oil production, behind Indonesia and Malaysia (Frayssinet, 2013). To ensure that palm oil is
an environmental win for the Amazon and an economic one for ranchers and farmers, it is necessary to see that
only already-degraded land is used. The net effect of palm oil could turn out positive or negative for forests,
depending in large part on whether it creates economic opportunity for small producers; if they do not have
economically viable alternatives, they will only end up illegally clearing new land.
As more ranchers turn to producing oil palm or other crops, it will become increasingly difficult to attribute
deforestation to a specific commodity, making commodity-by-commodity enforcement methods less effective. An
alternative that merits further study is to complement future efforts to build deforestation-free supply chains with
enforcement and certification mechanisms focused not by commodity, but by jurisdiction.
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
1
Where is Beef-Driven Deforestation Heading?
Brazil’s Amazon region is the largest continuous area of tropical rainforest in the world, comprising
roughly 40% of global tropical rainforests (Kirby et al., 2006; Ometto, 2011). While the forest
extends over nine countries, 70% of the Amazon lies within Brazil’s borders. The Brazilian Amazon
originally occupied over four million km 2 —an area roughly equivalent to half of continental Europe
(Assunçao, 2013). However, in the past 40 years the region has suffered severe deforestation.
Until 1970, expansion into the Brazilian Amazon was relatively slow, claiming an average of 10,000 km 2
of forest per year (Hargrave & Kis-Katos, 2013). Beginning in the 1980s, as deforestation became
closely associated with agricultural markets, the annual rate of deforestation increased rapidly. During
this time, drivers of deforestation grew increasingly complex and interrelated. Unresolved land tenure
issues, poverty, expanding infrastructure, and demand for agricultural commodities acted together to
fuel deforestation in Brazil, eventually peaking in 2004 at a rate of over 27,000 km 2 per year
(Hargrave & Kis-Katos, 2013; INPE, 2013). During that time, Brazil lost approximately 18% of its
original forest cover (Assunçao, 2013).
PROGRESS SINCE 2004
After decades of aggressive deforestation in Brazilian Amazon, efforts to prevent deforestation are
yielding positive results (see Figure 1). From 2005 to 2013, the rate of deforestation dropped
considerably, falling nearly 80% (INPE, 2013). At the same time, the beef industry—responsible for
nearly 75% of previous deforestation—continued to rapidly expand production, proving it possible to
produce more beef without more land (Boucher, 2011a).
Square Kilometers
30,000 FIGURE 1.
Brazilian Amazon
deforestation,
25,000
2004-2013
20,000
15,000
10,000
SOURCE: INPE 2014
5,000
2004
2005 2006 2007 2008 2009 2010 2011 2012 2013
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
Initiatives by Government, NGOs, and Industry
Several factors contributed to the decline in deforestation. Starting in 2004, the Brazilian government
implemented several forest conservation policies, collaborating with state and municipal entities to restrict
deforestation. Shortly after, the Brazilian National Institute of Space Research (INPE) implemented new
satellite technologies to monitor the rate and location of land clearing, which made it much easier to enforce
the new regulations. A case in point is the federally-mandated Rural Environmental Land Registry (CAR).
The CAR uses a property’s GPS coordinates to monitor deforestation via satellite imagery. If the Brazilian
Institute of Environment and Renewable Natural Resources (IBAMA) detects deforestation on a rancher’s
property, it fines the rancher and revokes the license (IBAMA, 2014). By some estimates, conservation polices
and improved monitoring are responsible for up to half the reduction in deforestation (CPI, 2012; UCS,
2011).
Beef industry initiatives also contributed significantly to the recent fall in deforestation. For decades prior, the
industry largely ignored calls to clean up its supply chain. However, after a 2009 Greenpeace report identified
several multinational brands and retail chains linked to beef-related deforestation, the government and major
retailers pressured the industry to make changes (Greenpeace, 2009). Brazilian federal prosecutors
threatened major processors with billions in fines if it did not take immediate action (Brasil, 2013). Large
retailers such as Walmart, Carrefour, and Tesco banned Brazilian beef from suppliers identified in the report.
The World Bank revoked US$ 90 million in loans from Bertin, the then-largest processor (Adam, 2009).
The beef industry responded, with the three largest processors—JBS, Marfrig, and Minerva— signing a
moratorium on any products coming from newly deforested lands (Walker et al., 2013). To date, 140 beef
processors in four Amazonian states—Pará (120), Mato Grosso (17), Rondônia (2), and Amazonas (1)—have
signed the Terms of Adjusted Conduct (TAC), a federal agreement that provides credit, promotion, and
technical assistance in exchange for a commitment to deforestation-free operations (Brasil, 2013).
Additionally, JBS, Marfrig, and Minerva initiated regular third-party audits of their suppliers.
In the nearly five years since the Greenpeace report, the industry has taken significant steps to monitor its
supply chain against deforestation—yet pressure on the industry continues. In March of 2013, the
2,800-member Brazilian Association of Supermarkets (ABRAS) declared it would no longer source beef
raised in the rainforest (BBC, 2013). In April of 2013, federal prosecutors fined 26 producers in Mato
Grosso and Rondônia US$ 236 million for purchasing beef from areas linked to deforestation and slave labor
(Murphy, 2013).
The industry has responded by fortifying systems to monitor their supply chain. In December of 2013, JBS,
Marfrig, and Minverva agreed to standardize their audits, making it easier for suppliers and retailers to ensure
a deforestation-free product. Results from the new audits came out in April of 2014, and demonstrated the
firms continue to make significant progress (Greenpeace, 2014). While not as extensive, almost every other
small and midsize processor--such as Mafrinorte and Mafripar in Pará, and Superfrigo and Redentor in Mato
Grosso--has implemented systems to audit their suppliers.
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
A shifting clandestine market
Accompanying these industry changes is a decline in clandestine beef—a market that, existing
outside the official, registered market, is less likely to respond to regulatory or public pressure to
prevent deforestation. Figure 2 shows how the clandestine market, at one time responsible for
almost half of Brazilian beef production, has contracted in recent years, declining from 27% in
2007 to just 13% in 2013 (IBGE, 2013). To estimate the clandestine market’s size, researchers
compare heads of cattle slaughtered to number of leather hides reported (Walker et al., 2013). In
theory, the two numbers should match, yet because leather is not as closely regulated, more leather
hides are reported than heads of cattle. The difference, therefore, is recognized as a proxy for the
size of the clandestine market for beef.
40,000,000 FIGURE 2.
Clandestine beef market,
35,000,000
2007-2013
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
27%
21% 20% 18% 13% 13%
SOURCE: IBGE 2013
Hides (Official)
Slaughters (Official)
Slaughters (Clandestine)
2008
2009 2010 2011 2012 2013
While a clandestine market of 13% is relatively low—compared to a high of 44% in 2002—the actual
size may be even smaller. In many cases, fully licensed ranchers may not report a portion of their
beef, making it only appear to be part of the clandestine market.
On average, processors reject about 15% of cattle due to quality issues such as gender, low weight,
and hide quality (Industry interviews). With few legitimate buyers available, licensed ranchers face
limited options for selling these rejected cattle (see Figure 3). Most ranchers say they have the cows
processed at the municipal slaughterhouse and then sell the beef to local stores. Several ranchers
and processors interviewed said municipal slaughterhouses frequently underreport the number of
cattle—sometimes by as much as 80%—to help ranchers avoid taxes. Many legitimate cattle thus go
undocumented.
Other ranchers say they may sell their rejected cows to local butchers, who sell the meat in their
shops. As a third option, some ranchers slaughter the cows on site, sell the meat to a local butcher,
or give the meat away to family, friends or employees. In each of these cases, cattle from fully
licensed ranchers can mistakenly be attributed to the clandestine market. This suggests that the
clandestine market, often thought to reflect non-compliant beef, may be somewhat overstated.
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
FIGURE 3.
Up to 15% of beef from licensed ranchers may appear as part of the clandestine market
SOURCE: Industry interviews
MUNICIPAL SLAUGHTERHOUSES
Municipal slaughterhouses often give
tax breaks to ranchers in exchange for
cash. A common practice is to document
only a portion (e.g., one of every five cows),
saving the ranchers a percent of their
tax liability.
15%
OF BEEF IS REJECTED
FOR QUALITY STANDARDS...
LOCAL BUTCHERS
Rancher sells rejected cattle to local
butcher who slaughters the cattle
and sells the meat.
ON-SITE SLAUGHTER
Rancher processes beef on site and either
sells it to local stores or gives it away
to employees.
Paths via which registered beef can be undocumented
and mistakenly attributed to the clandestine market
Sharp increases in demand from non-Western countries potentially undermines recent tactics most
effective in reducing deforestation--pressure from Western companies that demand deforestation-free
supply chains. Russia's recent embargo of Western beef has increased demand for Brazilian beef by over
10% creating alternatives that do not require deforestation-free operations (Ward, 2014).
2
Deforestation Threats within the Beef Value Chain
To understand the dynamics of a given industry, it is useful first to map out the value chain. This
can lend insights into how the target good is produced and why certain methods are used. Several
factors, such as government regulations, production costs, and private sector quality standards,
influence industry practices. Relationships between lead firms and their suppliers help explain
which segments control and influence others, shedding light on how industry practices are likely to
evolve over time.
The Brazilian beef value chain is depicted in Figure 4. Moving from left to right, the chain begins
with firms that provide inputs such as fertilizers, machinery and vaccinations. Ranchers, simply put,
raise cattle. Some ranchers specialize in a single aspect of ranching, for example, calving—providing
calves to other ranchers—or “finishing,” providing the last stage before cattle go to slaughter. Cattle
move to subsequent stages via traders, auctions, finishing lots, and processors. Ranchers who
specialize in finishing cattle may never need some inputs, such as genetics.
Processing consists of primary and secondary processing. Primary processing occurs in the
slaughterhouse, producing fresh and frozen meat and all other meat byproducts. Secondary
processing transforms the products of primary processing into food for human or animal
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
consumption, or nonedible goods such as cosmetics and leather. Increasingly, midsize and larger
slaughterhouses are vertically integrating their operations to accommodate secondary processing.
Firms such as Marfrig, Marfripar, and Marfrinorte have expanded to produce processed frozen
foods. JBS has acquired several tanneries to manufacture leather.
FIGURE 4.
Brazilian beef value chain
SOURCE: Adapted from (Neves et al., 2012) and industry interviews
INPUTS
RANCHERS PRIMARY & SECONDARY PROCESSORS SALES
GENETICS
MINERAL SUPPLEMENTS
FEED SUPPLEMENTS
VITAMINS & ADDITIVES
ANIMAL HEALTH
PESTICIDES
FERTILIZERS
FORAGE SEED
AGRICULTURAL LIME
DIESEL OIL
FENCING & POSTS
CALVES
YOUNG BULLS
COWS
FINISHED STEER
FRESH/FROZEN MEAT
ORGANS & GLANDS
INDUSTRIAL MEAT
FEET, INTESTINES,
STOMACH, ETC.
TALLOW
TRIPE
INDUSTRY BYPRODUCTS
MEAT MEAL & BONE MEAL
BLADDER
BLOOD MEAL
PROCESSED FOOD
CANNED FROZEN CURED
PET FOOD
COSMETICS
PHARMACEUTICALS
LEATHER
COMMERCIAL FOOD
SERVICE INDUSTRY
RESTAURANTS
INDUSTRIAL KITCHENS
FOOD RETAILERS
GROCERY
BIG BOX
CONVENIENCE
NON-FOOD RETAILERS
BIG BOX CONVENIENCE
TRACTORS & AUXILIARY
EQUIPMENT
SISBOV EAR TAGS
SUPPORTING INSTITUTIONS—BANKS, INDUSTRY ASSOCIATIONS, UNIVERSITIES
PUBLIC SECTOR—FEDERAL, STATE AND MUNICIPAL GOVERNMENT
INTERNATIONAL AND DOMESTIC NON-GOVERNMENTAL ORGANIZATIONS
The chain ends with sales, including restaurants and retail outlets such as grocery and big-box
stores. On the periphery of the value chain are entities that have a direct influence on the industry.
These include supporting institutions such as banks and industry associations, the public sector,
and non-governmental organizations (NGOs).
This report focuses on ranchers—the entities capable of preventing deforestation—and processors,
the entities with the most direct leverage over ranchers.
Power dynamics between Processors and Ranchers
Starting in 2005, Brazilian beef processors have grown and consolidated rapidly, leaving ranchers
´
with fewer options for selling their cattle. Figure 5 shows the rapid growth in market share for the
three largest processors—JBS, Marfrig, and Minerva—up from 24% in 2011 to 37% in 2013
(BeefPoint, 2013). In some states such as Mato Grosso, Mato Grosso do Sul, and Goais, their
market share is as high as 68%.
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
FIGURE 5.
Market share of top three processing firms
SOURCES: (BeefPoint, 2013; JBS, 2014; Marfrig, 2012; Minerva, 2012)
MATO GROSSO
68%
Market Share
(JBS, Marfrig)
GOIAS
60%
Market Share
(JBS, Marfrig,
Minerva)
MATO GROSSO
DO SUL
49%
Market Share
(JBS, Marfrig,
Minerva)
24%
NATIONAL
MARKET SHARE
JBS
Marfrig
Minerva
JBS
Marfrig
Minerva
37%
NATIONAL
MARKET SHARE
2011 2013
Several ranchers and midsize processors expressed concern about this trend toward consolidation,
many referring to the three top firms (JBS, Marfrig and Minerva) as an oligopoly in the making.
Ranchers feel the consolidation distorts prices and has turned them into price takers (BeefPoint,
2013). In a 2011 survey, 43% of ranchers in Mato Grosso cited “consolidation of processors” as one
of the main problems hindering their productivity (BeefPoint, 2012). Ranchers still have a degree
of bargaining power during the dry season, when fewer cattle are available. However, several
processors have plans to invest in finishing lots that will stabilize supply, effectively eliminating
ranchers’ only bargaining edge.
Many ranchers in Pará fear that the “big three” will soon move into their geography. To prepare,
they have begun to bypass processors and instead sell to live cattle exporters. This, in turn, has
alarmed Pará’s small and midsize processors. Already having to compete with the big three, they will
now also find a shrinking supply of cattle destined for slaughter, since many will be diverted instead
to live cattle exporters.
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Small and midsize processors also complain that, while small and midsize processors have difficulty
accessing affordable credit, development banks continue to invest heavily in JBS, Marfrig, and
Minerva. Between 2008 and 2010 the Brazilian National Development Bank (BNDES) invested
US$ 4.7 billion in JBS (Forero, 2013). In 2013, the International Finance Corporation (IFC), a
World Bank affiliate, acquired a 3% share of Minerva for US$ 19.65 million and approved
financing for an additional US$ 60 million (Jelmayer, 2013). This inequitable access to finance
makes it difficult for small and midsize processing firms to compete. It also restricts their ability to
afford implementing systems to monitor for deforestation.
Public sector regulations and inefficiencies
Several weaknesses in regulatory rules and enforcement increase costs for ranchers and allow
impunity for violators. Since 2009, the evolving mix of laws regulating deforestation has created a
number of bureaucratic hurdles for ranchers and processors. Ranchers must acquire an array of
federal and state licenses to operate, including the environmental license (LAU) in Mato Grosso,
environmental rural license (LAR) in Pará, and the Animal Transport Guide (GTA). Although
some of these are straightforward and used in all states—for instance, the GTA, which documents the
movement of cattle throughout the country—others can be confusing, overlapping, or unevenly
enforced from region to region. Table 1 lists ranching licenses required in Mato Grosso and Pará
since 2009, along with fees and wait times, which vary according to ranch size and individual
experience. At a minimum, the initial expense of regulatory compliance costs a rancher R$ 16,500
and can reach as high as R$ 28,000.
TABLE 1.
Ranchers' costs to comply with regulations
SOURCE: Industry interviews
LICENSE AGENCY COST WAIT IMPLICATIONS
LAU - Licença Ambiental
SEMA
Única (environmental license) (Mato Grosso) Variable 1 – 5 years
CAR – Cadastro Ambiental Rural
(Environmental Rural Register) SEMA R$ 300 – R$ 3,000 3 months – 1 year
LAR – Licença Ambiental Rural
SEMA
(Environmental Rural License)
(Mato Grosso)
R$ 3,000 – R$ 7,000 4 months – 2 years
• Buyers will not
accept cattle
• Rancher hires
service to
expedite process
Geo-Referencing INCRA R$ 10,000 – R$ 15,000 1 – 2 years
Land titles INCRA Variable 1 – 20+ years
• Rancher cannot
access credit
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
Many industry representatives reported that only the smallest ranching operations remain unlicensed.
One possible discouragement for small ranchers to seek licenses may be the fact that many licensing
fees are fixed on a per-producer basis, resulting in disproportionately high per-hectare costs for
smaller operations. As shown in Figure 6, a 500-hectare ranch pays R$ 12.6 per hectare, a cost that
goes down for much larger operations (Imazon, 2014).
R$ 12.6
FIGURE 6.
Per-hectare cost to obtain ranching
licenses in Pará, according to ranch size 1
Figures do not include geo-referencing
costs to map property
R$ 5.3
SOURCE: (Imazon White Paper,
forthcoming)
R$ 2.6
R$ 1.7
500 2,500 5,000 10,000
HECTARES OF PASTURE
Ranchers say that although licensing fees are significant, they do not compare with the time and
opportunity costs that result from government inefficiencies. Processors require most of these
licenses, so ranchers cannot sell their cattle without them. The longer a government agency takes to
issue a license, the longer the rancher must wait to generate revenue.
Agencies are notorious for bottlenecking paperwork, or worse, losing entire applications. To avoid
this, some ranchers drive weekly to the state capital to push the paperwork along. More often, ranchers
hire services, such as Seta Ambiental, to shepherd applications for a fee. In extreme cases, ranchers
resort to paying bribes to acquire the documents they need. Many licenses require ranchers to renew
each year, starting the process over again.
The institution of land tenure in Brazil is also deeply inadequate. Several ranchers interviewed for
this study have been waiting for years—sometimes more than 20—to receive a title to their land.
Without a land title, banks will not approve ranchers for the credit they need to make the costly
transition to a deforestation-free operation.
Many industry leaders expressed that they would have more patience with these inefficiencies if the
system worked. Unfortunately, it does not. While most operations are licensed, a persistent minority
of illicit cattle operations still have ample opportunity to enter legitimate supply chains. Figure 7
1
Figures do not include geo-referencing costs to map property
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
FIGURE 7.
Leakage: Illicit cattle enters legitimate supply chains via licensed ranches
NON-LICENSED
RANCHERS
Identifies a neighboring
licensed ranch willing to
channel non-licensed cattle
LICENSED
RANCHERS
Offers to channel
non-licensed cattle through
licensed property for a fee
PROCESSOR
Believes all cattle is from
a licensed ranch and does
not contribute to deforestation
describes a phenomenon known as “leakage,” also referred to by several ranchers and processors
simply as jeitinho brasileiro, or “the Brazilian way.” Leakage occurs when a licensed rancher offers to sell
cattle from an unlicensed ranch, causing processors to believe the cattle is licensed. The ease with
which one can circumvent the GTA system to track cattle from the ranch to the slaughterhouse
´
facilitates leakage. Each carrier must present an official list with information regarding the origin
and destination of cattle, gender, and reason for transport—yet falsified GTA lists are easily
obtained, costing as little as R$ 200 (Industry interviews).
Not only is leakage easy to achieve, it also goes largely without punishment. The fine-collecting
record of the Brazilian Institute of Environment and Renewable Natural Resources (IBAMA) is
dismal. In 2010, the agency issued more than R$ 1 billion in fines in the state of Pará, citing
violations for deforestation, illegal fires, and illegal wood sales. Of all fines issued, the agency
collected just 0.2% (Moukaddem, 2011). Industry representatives say that even violators who do
eventually pay are rewarded for late payment; the longer they wait, the likelier they can negotiate a
smaller fee.
High costs of adopting a deforestation-free operation
When beef processors signed the TAC in 2009, the costs of preventing deforestation, and the
responsibility of enforcement, shifted from government to the beef industry. Processors assumed
the role of enforcer, increasing their administrative costs to monitor suppliers. Most new costs were
incurred by those who had to comply with the new regulations--ranchers. Because processors had
consolidated into ever-fewer available buyers, ranchers of any significant size had little choice but to
quickly meet processor requirements. Virtually overnight, ranchers needed to stop clearing land,
adopt an entirely new method of raising cattle, and register their land with the licenses and
certifications their buyers required. All of these involved unprecedented costs.
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
145 HECTARES
R$ 412,000
PLANTING
OF PASTURE
R$ 217,500
R$ 65,250 - R$ 217,500
MACHINERY
R$ 107,046
DEFORESTATION
PASTURE
MANAGEMENT
INFRASTRUCTURE
R$ 87,379
FIGURE 8.
Initial production costs of ranchland management: deforestation versus pasture intensification
SOURCE: (Costa & Factori, 2011; Desmatamento, 2006; EMBRAPA, 2003)
145 Ha figure based on model from Costa & Factori, 2011. The top-end cost to deforest land is R$ 1,500/Ha.
When multiplied by R$ 1,500, our example of 145 hectares equals R$ 217,500, coincidentally, the same cost of planting
pasture on 145 hectares of land.
To make the transition to a deforestation-free operation, ranchers must adopt a pasture
management system that will produce enough grass to fatten cattle. This requires a notably higher
investment than the cost to deforest new land. Figure 8 illustrates two scenarios for a given rancher.
Depending on the area and terrain, the estimated cost to deforest 145 hectares of new land—the cost
the rancher is accustomed to—is between R$ 65,250 and R$ 217,500 (Desmatamento, 2006;
EMBRAPA, 2003). These are gross costs and do not account for earnings from the sale of timber,
which may actually yield a net profit for clearing forest. By contrast, pasture management for 145
hectares will cost roughly R$ 412,000, a significant premium over the gross cost to deforest the
same acreage (Costa & Factori, 2011). Of the initial investment in pasture management, more than
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
FIGURE 9.
Five years of cattle production: costs of managing pasture versus costs of clearing land
SOURCE: (Costa & Factori, 2011; Desmatamento, 2006; EMBRAPA, 2003)
DEFOREST
(5YRS)
R$ 217,500
FERTILIZE
(5YRS)
R$ 252,720
R$190,000 R$200,000 R$210,000
R$220,000 R$230,000 R$240,000 R$250,000 R$260,000
half (R$ 217,500) is spent on planting. Remaining expenses are for assets such as fences, watering
stations, and machinery, which depreciate over approximately ten years (Costa & Factori, 2011).
After their initial investment in pasture intensification, ranchers must maintain the land, which
requires the additional annual cost of fertilizers (see Figure 9). Deforestation, on the other hand,
can support cattle for at least five years without further investment (Hecht, 1985). At an annual
expense of R$ 50,544, fertilizing the pasture over five years costs R$ 252,720, considerably more
than even the highest one-time cost to deforest 145 new hectares of land(Costa & Factori, 2011).
Ranchers’ declining profitability
Figure 10 sums up the effect these dynamics have had on ranchers’ profitability. The cost of raising
cattle in Amazon states has increased substantially in recent years, in many cases surpassing the
market price for beef (Del Isola, 2014). In the three Amazon states with the highest number of
cattle, the cost of producing one arroba (unit of measure equal to 15 kg) doubled from 2007 to
2013 (Del Isola, 2014). Ranching in Rondonia ˆ has not been profitable for over three years, and it
appears Mato Grosso and Pará may be heading in the same direction.
“Inputs have become increasingly expensive recently, especially costs to improve
productivity. Ranching is not a good business nowadays. So some smaller ranchers
still consider deforestation the best way to expand production without having to
invest in the land.” - Rancher, Pará
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
FIGURE 10.
Profitability of ranching in Mato Grosso, Pará and Rondônia, R$ per arroba, 2007-2013
1 arroba = 15 kg of beef
SOURCE: (Del Isola, 2014)
R$
Pará
150
100
50
0
JAN - 07
APR - 07
JUL - 07
OCT - 07
JAN - 08
APR - 08
JUL - 08
OCT - 08
JAN - 09
APR - 09
JUL - 09
OCT - 09
JAN - 10
APR - 10
JUL - 10
OCT - 10
JAN - 11
APR - 11
JUL - 11
OCT - 11
JAN - 12
APR - 12
JUL - 12
OCT - 12
JAN - 13
APR - 13
JUL - 13
OCT - 13
COST
PRICE
R$
120
100
Mato Grosso
80
60
40
20
0
JAN - 07
APR - 07
JUL - 07
OCT - 07
JAN - 08
APR - 08
JUL - 08
OCT - 08
JAN - 09
APR - 09
JUL - 09
OCT - 09
JAN - 10
APR - 10
JUL - 10
OCT - 10
JAN - 11
APR - 11
JUL - 11
OCT - 11
JAN - 12
APR - 12
JUL - 12
OCT - 12
JAN - 13
APR - 13
JUL - 13
OCT - 13
COST
PRICE
R$
Rondonia ˆ
120
100
80
60
40
20
0
JAN - 07
APR - 07
JUL - 07
OCT - 07
JAN - 08
APR - 08
JUL - 08
OCT - 08
JAN - 09
APR - 09
JUL - 09
OCT - 09
JAN - 10
APR - 10
JUL - 10
OCT - 10
JAN - 11
APR - 11
JUL - 11
OCT - 11
JAN - 12
APR - 12
JUL - 12
OCT - 12
JAN - 13
APR - 13
JUL - 13
OCT - 13
COST
PRICE
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
No price premium for compliance
Ranchers we interviewed most commonly complained that they receive no price premium for
adopting a deforestation-free operation. Anti-deforestation efforts to date have dealt ranchers only
negative incentives. Table 2 lists the suite of laws and initiatives to persuade ranchers to adopt
deforestation-free operations (Nepstad et al., 2013). Six of the seven initiatives increase costs,
restrict entry into markets, or diminish access to credit. Only two provide positive incentives—Low
Carbon Credit (ABC) program, and REDD—but neither has yet performed as intended. ABC,
which offers 5.5% financing, has had little uptake, possibly because it requires ranchers to have a
land title. REDD+ would provide compensation to ranchers who protect the forest, but it has not yet
been implemented at sufficient scale to have significant impact.
TABLE 2.
Laws and initiatives to promote deforestation-free ranching are all stick and no carrot
SOURCE: Adapted from (Nepstad et al., 2013)
LAW/INITIATIVE FOREST METRIC NEGATIVE INCENTIVE POSITIVE INCENTIVE
Forest Code 80% of property with forest cover Fines. No access to credit None
Critical Municipalities Municipality-wide deforestation No access to credit and markets None
Beef Moratorium (voluntary) Cut-off date for forest clearing No access to beef buyers None
REDD+ State-wide, historical deforestation None
Not yet implemented for
ranchers at scale
Consumer Goods Forum
commitment (CGF) Zero net deforestation by 2020 Exclusion from CGF buyers None designed
Rural Land Environmental
License (CAR) Legal compliance (in Para) Cost of application
Time cost to comply
None
Low-Carbon Credit (ABC)
Program Legal compliance No access to low-interest credit
Low interest (5.5%) credit;
but uptake has been low,
possibly because a land title
is required
Ranchers we interviewed feel the situation is not sustainable. Given the high costs to comply with
regulations and the ease with which unlicensed ranchers can sell their cattle, ranchers have perverse
incentives to abandon the rules and revert to deforestation. For those who are committed to
maintaining legitimate operations, little choice remains but to reduce their beef focus and instead
dedicate some or all of their land to more profitable—and possibly less closely regulated—activities.
In sum, beef-focused efforts to combat deforestation to date are creating unintentional impacts on
ranchers’ land use decisions, raising the possibility that future deforestation threats will merely shift
out of the beef industry and into other sectors. Unfortunately, several dynamics external to the beef
industry are already lining up to accelerate this shift.
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3
Deforestation Threats Emerging Outside the Beef Value Chain
As Brazil’s agricultural export-driven economy continues to grow, new deforestation threats are
emerging from outside the beef industry. At least three dynamics are expected to intensify the
pressure on forests in northern Amazon states: land speculation, growth in demand for other
agricultural commodities, and the rapidly expanding role of palm oil.
Land Speculation
Deforestation fueled by land speculators is increasing rapidly in Brazil. As the country’s agricultural
export market grows, and government and industry build new infrastructure for commodities
exports, speculators anticipate future demand for land in the North, including demand from
displaced ranchers currently operating in the South and Center-West regions.
Figure 11 maps the deforestation in Pará from August 2012 to January 2013, illustrating the severity
of land-speculation-driven deforestation. About 80% of deforestation was speculative in nature,
occurring around infrastructure projects such as Transamazonica ˆ and highway BR-163. Only about
20% of deforestation comprised expansion of existing agricultural operations (Brandao ˜ Jr., 2013;
Mansur, 2013). The recent capture of a highly organized deforestation gang reinforces the notion
speculative deforestation has surpassed traditional drivers. Responsible for an estimated 10% of
recent deforestation in Pará, the gang systematically burned public land, divided it into parcels,
and sold it to farmers and ranchers (BBC, 2014).
Because speculators most often use cattle to show that land is productive, government agencies,
NGOs and the international community often attribute land-speculation-driven deforestation to
the beef industry, further tarnishing its reputation even as it works to clean up its supply chain
(Barreto & Silva, 2013).
“As agriculture advances over degraded pasture, ranchers sell their land to
farmers and relocate into new land. ”-Rancher, Mato Grosso
“This is the problem, people can clear land for R$ 400 a hectare, then two
years later sell it for R$ 3,000 a hectare.”-Rancher, Para
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
FIGURE 11.
Deforestation in Pará, August 2012 – January 2013
SOURCE: (Brandão Jr., 2013; Mansur, 2013)
Speculation-Driven
Deforestation
~80%
Commodity-Driven
Deforestation
~20%
Transamazonica ˆ
(BR-230)
~30%
Highway
BR-163
~50%
A combination of public policies and market dynamics fuel speculative deforestation. Table 3
outlines the three contributing areas of public policy: land tenure, the rural income tax, and the tax
on rural properties. As mentioned earlier, the institution of land tenure in Brazil—especially in
Pará, where most speculative deforestation takes place—is deeply flawed. Almost 40% of territory in
Pará has unresolved issues with tenure and titles, and over 70% of all deforestation takes place on
this land (Brito et al., 2013). Land speculators know that years will pass before the government sorts
out a title for the land, and by then it will not be possible to prove who is responsible for any
deforestation on it.
“For cattle ranching to be viable, land needs to be a cheap asset and
that is exactly what ranchers find as they move toward the north.”
- Rancher, Mato Grosso
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Under the rural income tax (IRR), any business on rural land pays 1/5 the normal tax rate. The
government designed the IRR to assist rural entrepreneurs, but the law has become an ideal way to
launder money or evade taxes. Brazilians with excess income can purchase a rural property, put a
few cows on it, report millions in revenue to the government, and pay a fraction of the taxes
(Barreto & Silva, 2013). This only increases demand for land, further fueling speculation.
By design, the tax on rural properties (ITR) is an effective tool to discourage speculation by
incentivizing land intensification and productivity. The ITR assigns higher taxes to landowners with
less productive land, reaching a tax rate of 20% for land deemed unproductive (Barreto & Silva,
2013). Many owners of unproductive land are those using it to launder money or evade the
non-rural tax rate. Unfortunately, the Brazilian federal tax authority does not strictly enforce tax
collection, collecting less than 10% of potential ITR revenues (Barreto & Silva, 2013). This is an
important missed opportunity to discourage people from clearing land to evade or minimize their
income taxes.
TABLE 3.
Policies that facilitate speculative deforestation
SOURCE: (Barreto & Silva, 2013); (Brito et al., 2013)
POLICY INTENT REALITY OUTCOME
Land tenure
Provide a legal framework for
acquisition and ownership of
public lands. Owner must prove
land is productive, and in
return, the state provides a title.
The process is extremely
inefficient. It is common to wait
ten years or more for a title.
Making land look “productive” is
as easy as placing a few cows on
it. So speculators deforest, buy a
few cows, and wait while the
property value grows.
Uncertainty in legal status
contributes to continued
deforestation of new land.
In Pará, 39% of state territory
has unresolved issues with
tenure and titles, and 71% of
all deforestation occurs on
this land. Speculators know
that by the time government
resolves the issue it will be
impossible to prove who
deforested the land.
Rural Income
Tax (IRR)
Give rural entrepreneurs a tax
break to start their business. Any
business on rural land pays 1/5
the normal tax rate.
The tax provides an opportunity to
launder money and/or reduce taxes.
Wealthy Brazilians buy land, put a
few cows on it, report millions in
revenue from the operation, but
bay only 1/5 the normal tax rate.
Increases demand for land,
fueling speculation.
Tax on Rural
Properties (ITR)
Tax land that is underproductive.
Intends to discourage deforestation
by incentivizing land intensification
and productivity. Least productive
land is taxed at a rate of 20%.
Tax is not enforced. Brazil has
roughly 10 million underutilized
hectares. Receta Federal (Brazil’s
federal tax authority) collects less
than 10% of taxes due.
An enormous missed
opportunity to prevent
speculative deforestation.
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
The market dynamics that fuel speculation-driven deforestation begin with the historical
relationship between farmland and ranchland. For most of the twentieth century, ranching in
Brazil took place in the southern savannahs. Motivated by government policies that encouraged
expansion into the Amazon, ranchers slowly moved north in the 1970s. Expansion accelerated
quickly in the 1990s when agricultural exports started to take off, displacing ranchers into the
forests of Mato Grosso (Boucher, 2011b). Today, demand for agricultural land continues to push
ranching north. By 2023, an estimated 3.8 million additional hectares of ranchland are expected to
be displaced out of the Center-west and Northeast regions (FIESP, 2013).
Demand for those 3.8 million additional hectares of ranchland will increase already-skyrocketing
land values. As Figure 12 shows, the average value of farmland and ranchland has increased
considerably in Mato Grosso and Pará, in some cases more than doubling between 2006 and 2010
(FGV, 2013). Several ranchers interviewed in Mato Grosso noted how quickly their land’s value had
increased in recent years, expressing interest in selling it and moving their operations north. As the
value of ranchland in Mato Grosso continues to rise, and as ranchers struggle with increased costs,
ranching may similarly migrate northward, following cheaper land.
7007
7176
5600
4486
4758
FIGURE 12.
Price (R$) of ranchland and farmland
in Mato Grosso and Pará, 2006-2010
1819
2348
2651
3105
3281
SOURCE: (FGV, 2013)
“For me, the future of
ranching isn’t in cattle, but
in the appreciation of the
land value. I bought this
515-hectare ranch in
2001 for 45,000 reais,
and today I can sell it easily
for 2.5 million reais”
-Rancher, Mato Grosso
2006 2007 2008 2009 2010
MATO GROSSO
RANCHLAND FARMLAND
4865
4220
1473 1553
1713
1398 1489
535 596
723
2006 2007 2008 2009 2010
PARÁ
RANCHLAND
FARMLAND
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
Figure 13 illustrates the process by which speculators in the North deforest land in anticipation of
ranchers displaced from ranchland in the South and Center-West regions. Global demand for
grains increases demand for farmland in the southern half of the country. Public and private sector
regulations prohibit deforestation, which limits the quantity of available farmland and rapidly
increases its value. Facing increased costs from pasture management and burdensome regulations,
ranchers sell their land for a large profit and buy less expensive land in the North. Speculators
observe these trends, grab land in the north and deforest it in anticipation of future demand.
FIGURE 13.
Speculators anticipate future demand
from displaced ranchers
1.
Global demand for
grains increases
demand for farmland
in southern Brazil
5.
Observing these
trends, speculators in
Pará and Rondônia
grab land and deforest
it in anticipation of
future demand from
displaced ranchers
2.
Regulation limits
availability of new
farmland, so farmers
pursue degraded
ranchland as
alternative
4.
Facing increased costs
of pasture management
& burdensome regulations,
Mato Grosso rancher sells
his land and pursues
less expensive land in
areas such as Pará
or Rondônia
3.
The value of Mato
Grosso ranchland triples
in under 5 years
This phenomenon is known as indirect land use change (ILUC). Several researchers have
hypothesized that the expansion of industrial agriculture in Brazil is encroaching upon existing
ranchland, displacing cattle ranchers into newly deforested areas (Andrade et al., 2010; Barona et
al., 2010; Lapola et al., 2010). Although these findings of ILUC in Brazil remain controversial,
more recent studies provide supportive empirical evidence (Andrade et al., 2013; Arima et al.,
2011). One such study found that every 10% increase in soy production encroaching on ranchland
results in up to 40% increase in deforestation on the forest frontier (Arima et al., 2011). It is
possible that attempting to prevent deforestation by targeting a sole commodity may actually shift
deforestation to another. More research is needed to fully understand this dynamic.
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
Growth in demand for other commodities
Production of Brazilian agricultural commodities will increase substantially during the next ten
years, creating additional drivers for deforestation. According to the Federation of Industries in the
State of Sao Paulo (FIESP), just four crops shown in Table 4—soy, corn, sugarcane, and palm
oil—will require more than 10.5 million additional hectares of land by 2023 (FIESP, 2013).
Accommodating this 17% increase in farmland in less than ten years while also preventing further
deforestation presents considerable challenges for government and industry.
In the coming decade, Brazil is expected to increase production of corn by 14%, and soy by 47%
(FIEPA, 2013; FIESP, 2013). Large new infrastructure projects will make exports more competitive
and ensure long-term growth. A new federal highway (BR-163) will soon connect farms in Mato
Grosso to a new US$ 2.5 billion port on the Amazon River, establishing a Pacific route to Asia via
the Panama Canal. Together, the projects will increase shipping capacity by 72% and shave two days
off the current south Atlantic route to Asia (FIEPA, 2013; Freitas & Wilson, 2014).
FIGURE 14.
Increased acreage from projected expansion of corn, soy, sugarcane and palm oil, percent increase over 2012-2013
SOURCE: (FIESP, 2013)
LAND REQUIRED IN 2023 (Ha)
CORN
17,700,000
PERCENT INCREASE
11%
REAL INCREASE (Ha)
1,782,734
SOY
34,300,000
24%
6,571,625
SUGARCANE
10,500,000
20%
1,720,736
PALM OIL
140,000
328%
459,000
TOTAL
62,640,000
17%
10,534,094
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
Increased production will expand acreage for corn and soy by 11% and 24%, respectively, requiring
an additional 8.5 million hectares of land for these two commodities alone. As shown in Figure 15,
much of the additional acreage will be located in Amazon states, particularly Mato Grosso and Pará.
States in the northern Amazon—notably Pará—will experience the largest percent growth in corn
production (36%), while the Center-West region—notably Mato Grosso—will see the largest total
growth in corn production. The Center-West region will also see the largest total growth in soy
production (FIESP, 2013).
Sugarcane and oil palm production are projected to grow as well, driven by expanding demand for
ethanol and biodiesel. Brazil is the largest supplier of sugar in the global market, accounting for
half of all exports (FIESP, 2013). About half of Brazil’s sugarcane production is manufactured into
over 20 billion liters of ethanol, most of which is consumed domestically. Since 2009, Brazil has
exported between 1.9 and 4.7 billion liters of ethanol to the United States, responding to demand
from the revised U.S. renewable fuel policy (FIESP, 2013). Continued exports, combined with
rapidly growing automobile sales in Brazil, will double annual ethanol production to about 40
billion liters by 2023 (FIESP, 2013).
To accommodate this growth in production will require an additional 2 million hectares of land.
In 2023, nearly a quarter of production (23.1%) will be in Amazon states. Over the next ten years,
productivity will grow 59.9% in the Center-west region and 71.2% in the North.
“Continued exports, combined with rapidly growing automobile
sales in Brazil, will double annual ethanol production to about 40
billion liters by 2023” (FIESP, 2013).
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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN
FIGURE 15.
Growth in Brazilian corn and soy production, by region
SOURCE: (FIESP, 2013)
NORTH-EAST
CORN
36%
2%
NORTH
SUGARCANE
71.2%
0.7%
SOY
CORN
30%
7%
SUGARCANE
56.4%
9.8%
SOY
161%
12%
CENTER-WEST
CORN
SUGARCANE
SOY
9%
42%
59.9%
22.4%
52%
48%
SOUTH-EAST
CORN
SUGARCANE
SOY
12%
35%
23.0%
61.1%
28%
6%
SOUTH
CORN
SUGARCANE
SOY
17%
33%
12.7%
5.9%
17%
29%
GROWTH (from 2013/2014 - 2023/2024) SHARE in 2023/2024
Rapidly expanding role of palm oil
Palm oil, a relatively new addition to Brazil’s agricultural portfolio, is nonetheless
positioned to grow faster than any other commodity, stimulated largely by federal policies
promoting the use of biodiesel. In 2005, Brazil mandated that all diesel in the country
contain a mix of five percent biodiesel (Brazilian National Congress, 2005). Recent
proposals may increase the blend rate to as much as 10 percent by 2020, providing stronger
incentives for companies to expand palm oil production to meet future demand (Nielsen &
Lima, 2013).
Ideal climatic conditions for palm oil occur 10 degrees above and below the equator, which
includes the entire Amazon region. However, as of 2012, 82% of Brazilian national palm
oil production was concentrated in roughly 120,000 hectares in the single state of Pará.
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The Brazilian government, prioritizing development on degraded lands, focuses most of its
efforts in northeastern Pará, where the Zoneamento Agroecologico do Dende recommended
37 municipalities with large tracts of deforested land (César et al., 2013; Glass, 2013a; Yui
& Yeh, 2013).
Several private and public sector initiatives aim to prevent deforestation in the leading palm
oil firms’ supply chains. To date, these efforts seem promising. Agropalma, the
longest-established palm oil producer in Brazil, has set deforestation standards exceeding
those of the Roundtable for Sustainable Palm Oil (RSPO). The firm is also a founding
member of the new Palm Oil Innovation Group (POIG), a small set of progressive palm oil
companies dedicated to increasing the global demand and supply of sustainable palm oil
(Greenpeace, 2014). The public sector’s own efforts to steer palm oil planting to
already-degraded lands have also been effective, discouraging the expansion of new
production into forested land.
Still, the aggressive domestic growth in demand for palm oil raises concerns that further
forest land could be cleared. The state of Para ´ expects to more than double planting area to
329,000 hectares and increase the biofuels share from 33% in 2012 to 47% by 2015
(Frayssinet, 2013; Glass, 2013a). The state government estimates that by 2022, oil palm
plantations for biofuel will cover 700,000 hectares, placing Brazil third in global palm oil
production (Frayssinet, 2013). Given the devastating record of deforestation in Indonesia
and Malaysia, the world’s two top palm-oil producing countries, it is worth closely
monitoring the development of this industry in the Amazon.
To understand the emerging role of Brazilian palm oil, it is useful to lay out the full set of
economic actors and how they are linked to one another. The value chain, depicted in Figure
17, begins with firms that provide inputs such as fertilizers, pesticides, and seeds. Most seeds
are imported from Colombia, Costa Rica, or Ecuador, but some may be purchased from the
Brazilian Agricultural Research Corporation (EMBRAPA). In many cases, nurseries grow
seedlings and sell them to producers (oil palm farmers). Producers purchase inputs, grow the
oil palms, and after three years, when the trees begin to produce fruit, sell fresh fruit bunches
(FFB) to primary processors. Previously, production in Brazil consisted chiefly of large
industrial farms. More recently, as processors increasingly decide to contract production to
outside parties, small family farms have begun to play a larger role. According to confidential
industry documents, up to 25% of processors’ FFBs come from operations under 100
hectares. One large firm hopes to increase the number of family farms from which it sources
FFBs to 2,000 families by 2015.
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FIGURE 16.
Brazilian palm oil value chain
SOURCE: Industry interviews
INPUTS
PRODUCERS PRIMARY & SECONDARY PROCESSORS RETAIL
FERTILIZERS
PESTICIDES
SEEDS
SEEDLINGS
SMALL FAMILY FARMS
10-100 HA
INDUSTRIAL FARMS
100+ HA
PALM OIL EXTRACTION
RETAIL GOODS
PACKAGED FOODS
COSMETICS
HYGIENE
BIODIESEL
COMMERCIAL FOOD
SERVICE INDUSTRY
RESTAURANTS
INDUSTRIAL KITCHENS
FOOD RETAILERS
GROCERY
BIG BOX
CONVENIENCE
FUEL STATIONS
SUPPORTING INSTITUTIONS—BANKS, INDUSTRY ASSOCIATIONS, UNIVERSITIES
PUBLIC SECTOR—FEDERAL, STATE AND MUNICIPAL GOVERNMENT
INTERNATIONAL AND DOMESTIC NON-GOVERNMENTAL ORGANIZATIONS
Primary processors manufacture the palm oil, which requires a two-step process: milling and refining.
Milling is the process of thrashing, sterilizing, and extracting the oil from the FFB. Refining is the process
of clarifying and removing water content from the milled oil (MDOE, 1999). Primary processors then sell
the refined palm oil to secondary processors. Primary processors are some of the largest in the industry
and are frequently vertically integrated, i.e., their in-house capabilities stretch across several segments of
the value chain. They wield substantial influence over producers, often providing financing and input
materials in exchange for long-term contracts granting exclusive rights to future harvests.
Secondary processors use palm oil as an ingredient in processed or manufactured retail goods, such as
packaged foods, cosmetics, soaps and lotions, or biodiesel fuel. The largest primary processors in Brazil
sell refined oil to secondary processors, but are also capable of some secondary processing. For example,
Agropalma converts some of its refined palm oil into margarine, and ADM, Biopalma, and Petrobras are
all capable of manufacturing biodiesel from refined palm oil (Crain's, 2011; Fischer et al., 2013;
Frayssinet, 2013).
At the end of the value chain, retail firms such as restaurants, grocery stores, and fuel stations then sell
palm oil products to the end consumer. Thanks to palm oil’s versatility as an ingredient in an array of
retail goods, it is now found in half of all items on grocery store shelves around the world (RSPO, 2013).
China, India, Indonesia, and the European Union (EU) are the largest consumers of palm oil (RSPO,
2013). In the EU, the largest consumer is France, where the average citizen consumes an average of two
kilograms of palm oil each year (RSPO, 2013).
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FIGURE 17.
Growth in palm oil production, by major corporations, 2012-2020
SOURCE: (Glass, 2013a)
150,000
500,000
459,000
HECTARES
100,000
50,000
45,000
95,000
42,000
112,000
16,000
36,000
6,000
16,000
5,000
15,000
10,000
4,000
4,000
79,000
3,000
53,000
3,000
11,000
32,000
12,000
2012
2020
HECTARES
400,000
300,000
200,000
100,000
140,000
2012
2020
AGROPALMA
BIOPALMA
YOSSAN
DENPASA
MARBORGES
DENTAUA
PETROBRAS/GALP
ADM
PALMASA
Nine primary processors are already expanding palm oil production in Pará (see Figure 18). The four
largest of these each plan to expand by 50,000 hectares or more. They are Agropalma, ADM, Petrobras,
and Biopalma. Agropalma, Brazil’s dominant processor to date, now plans to add 50,000 hectares, more
than doubling its 45,000-hectare production by 2020. ADM will also add 50,000 hectares, vastly
increasing the size of its own 3,000-hectare operation. Petrobras and Biopalma will undergo the largest
growth, expanding by 75,000 hectares and 70,000 hectares, respectively (Frayssinet, 2013; Glass, 2013a;
Lane, 2012). Although the market currently offers higher prices for food end uses, these firms seem to be
anticipating supplying the biofuel market in the future.
ADM, which already manufactures biodiesel from soy, plans to diversify its biodiesel feedstock with palm
oil. The firm is building a processing facility in Sao Domingos do Capim, expected to be operational in
2016 (Crain's, 2011). Petrobras recently signed a US$ 530 million agreement to produce palm oil in
Brazil and ship it to Portugal, where it will be refined by Galp Energia, making 250,000 tons of biodiesel
for distribution throughout Europe (Frayssinet, 2013). Biopalma also plans to expand biodiesel
production, the result of a recent deal with mining giant Vale. As part of its strategy to produce biodiesel
to fuel its mining equipment, Vale recently acquired 70% of Biopalma—which in turn plans to invest
US$ 500 million in two extraction facilities in Pará. The first facility will open in 2015 with annual
capacity of 120,000 tons per year. The second will open in 2018 with capacity of 450,000 tons per year
(SABI, 2012).
OTHERS
TOTAL
With the Brazilian government ensuring a guaranteed market for its producers via its proposed increases in
biofuel mandates, the country’s palm oil industry is poised to grow at unprecedented rates in the coming
years. The resulting demand for farmland raises concerns about future deforestation. Will the palm oil
expansion become a new deforestation threat, or an opportunity to continue the country’s recent progress?
Much of the answer will lie in several dynamics not just within palm oil, but also within the beef industry.
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4
The Intersection of Beef and Palm Oil
To meet anticipated demand of 10.5 million additional hectares of farmland, the Brazilian
government realizes it must encourage planting on already-degraded lands. Beef ranchers have
millions of hectares of underutilized ranchland that could be devoted to palm oil and other
high-demand commodities. Accordingly, several public and private sector programs now encourage
ranchers to also plant crops—efforts that, if managed well, can help avoid further land clearing.
Still, a positive outcome will not be automatic. To ensure that palm oil is an environmental win for
the Amazon and an economic one for ranchers and farmers, it is necessary to ensure that only
already-degraded land is used. It is also necessary to make certain that small producers capture
economic value, to avoid the pitfalls of mono-cropping, and to step up the role of the public sector.
Planting on degraded ranch land
Although Brazil currently accounts for just 0.5% of global palm oil production, the government
anticipates, and is actively encouraging, substantial growth (UNEP, 2011). In 2010, EMBRAPA
identified 32 million hectares of land suitable for palm oil cultivation, 29 million of which are
located in the Amazon biome (EMBRAPA, 2010). The Brazilian government considers palm oil a
win-win opportunity, frequently citing the crop’s potential returns as green fuel, green jobs, and a
carbon sink ideal for reforesting lost segments of the Amazon (Frayssinet, 2013; SAGRI, 2013;
UNEP, 2011). Of course, the key to realizing these green benefits is preventing further clearing of
forest land. Fortunately, several private and public sector incentive programs are in place, each
prohibiting any expansion of new crops on forested land.
A description of programs that incentivize the integration of palm oil and other crops with
ranchland is found in Table 5. One of the largest public initiatives is the Low Carbon Agriculture
(ABC) program. ABC actively supports the integration of cattle and other agricultural activities,
providing low-interest financing (EMBRAPA, 2011). The program aims to convert 15 million
hectares of degraded ranchland to crops as a means to improve agricultural productivity without
expanding into new areas (Marques, 2013).
To promote the expansion of palm oil, the government has implemented two complementary social
inclusion programs: the Social Fuel Seal (SFS) and the Program for Strengthening Family
Agriculture (Pronaf EcoDendê). The SFS is a certification private biofuel companies must earn in
order to participate in the majority of biodiesel auctions, and it requires a certain minimum
percentage of raw materials to be sourced from small producers (Cesar et al., 2013; Glass, 2013a;
Secretaria da Agricultura Familiar, 2013). Pronaf EcoDendê—a subprogram recently developed
under the broader Pronaf program—provides 2% financing to small family farmers to expand palm
oil production (Glass, 2013b; MDA, 2012). Palm oil has become a priority for Pronaf. In the
2013/2014 budget, Pronaf allocated nearly R$ 125 million for palm oil projects in its EcoDendê
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program, nearly 93% of all Pronaf spending in 2012 (Glass, 2013b). The government has linked
these two programs, requiring that firms wishing to qualify for benefits in the Social Fuel Seal
program collaborate with small family farmers in Pronaf EcoDende.
Private sector initiatives are equally ambitious. Firms that source products for Bunge and Cargill are
already contracting directly with ranchers to grow soy and corn on their ranchland. The companies
supply ranchers with inputs such as seeds and fertilizers in exchange for an agreed-upon
bushel-per-hectare return at the end of the growing season. In interviews with Datu researchers,
ranchers reported in 2013 paying the companies 21 bushels per hectare. In 2014, they will pay 22.8
bushels per hectare. In these agreements, ranchers keep any yield in excess of the agreed-upon
share.
TABLE 4.
Programs that promote the integration of commodity production into ranching
SOURCE: (Glass, 2013a, 2013b; MAPA, 2012; PalmOilHQ, 2011)
ASSISTANCE PROGRAM
CORN
SOY
SUGARCANE
PALM OIL
Low Carbon Agriculture (ABC) program—Provides
financing up to $500,000, 5.5% interest, 5-15 year terms
to help ranchers integrate agriculture into their operations
PUBLIC SECTOR
ASSISTANCE
Pronaf EcoDendê—Provides financing up to R$ 80,000
per family over 14 years to cultivate palm oil
Petrobras Biocombustîvel—Set a goal to contract
2,250 farmers to grow palm oil
PRIVATE SECTOR
ASSISTANCE
Bungee, Cargill—Provide ranchers inputs such as seed
& fertilizer in exchange for an agreed upon bushel/hectare
return on the investment
ADM, Agropalma, Biopalma Vale—Provide a mix of low
interest loans and technical assistance to ranchers
interested in growing palm oil
Similar to public sector initiatives, the largest private sector programs target palm oil. Backed by
government incentives to work with family farmers, Agropalma, Archer Daniels Midland (ADM),
Petrobras, and Biopalma each have initiated programs to engage small producers. In exchange for
exclusive access to future harvest, each company offers producers a different mix of incentives, such
as input materials at-cost, fees for rural licenses such as the CAR, transport of goods, technical
assistance, and low-interest loans. These incentives are very effective. According to a private
industry report, as a result of these programs, more than 80 percent of newly-initiated palm oil
farmers now have access to credit for the first time.
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Several ranchers interviewed for this study expressed interest in growing palm. Beef processors in
Para ´ are aware of this interest and expressed concern that beef production could decline and restrict
supply. A confidential large-processor report found that approximately one in three of its palm oil
suppliers also raise cattle.
Because the expansion of palm oil is only beginning, it is difficult to predict which types of
rancher will be more likely to convert to palm oil in the future. One may speculate—based on the
licensing costs cited earlier for ranchers with fewer than 500 hectares—that smaller operators
facing a disproportionately higher cost to operate may be some of the first to make the transition.
Geography and infrastructure may also be a determining factor. Since FFBs must make it to
processing within 24 hours, adoption will be limited to ranches located sufficiently close to
transportation infrastructure.
Ensuring that small producers capture value
Brazil’s beef industry consists largely of small producers; an estimated 1,800,000 ranchers raise
cattle, with an average of only 110 heads of cattle per farm (Ahola, 2014). Small ranchers lack the
economies of scale enjoyed by larger producers. As the costs of fuel, equipment, labor, and
regulatory compliance increase, small ranchers’ already-thin margins decline even further. It is
no surprise that many small ranchers continue to find a way around current anti-deforestation
measures, since the alternative—pasture management—requires up-front investment at a
considerably higher price than clearing land. In short, if small producers simply cannot afford to
avoid clearing land, that is what they will do, despite the rules. To avoid repeating this dynamic in
palm oil, it is important not just to offer incentives to small producers to enter the palm oil value
chain, but also to ensure that they fully capture the economic value they create.
Compared with beef ranching, palm oil offers greater potential revenues per hectare. On average,
palm oil can yield R$ 6,028 per hectare per year, while beef yields only R$ 697 (IndexMundi,
2014a, 2014b). The important question is whether small producers will capture an adequate
share of this value, or if it will be absorbed largely by the extraction plants and processors seeing
the palm oil into its final stages.
To date, palm oil small producer projects undertaken by the biodiesel industry remain largely
experimental. Initial programs have seen mixed success in their ability to generate income for
rural families (Cesar et al., 2013; Glass, 2013a). Palm oil takes at least two years to become
productive, reaching maximum productivity only in the eighth year of growth (ACET, 2013).
Thus, while revenues are extremely attractive in the height of palm’s productivity—from its
8th-18th year—in its initial stages the cost of production (fertilizer, pesticides, some rental
machinery, labor) can result in a net loss (ACET, 2013). Even small producers with mature trees
achieve low net profits due to their financing obligations for fertilizer and start-up costs (Glass,
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2013a). If small ranchers are to successfully include palm oil in their operations and not fall back
on illegally clearing land for grazing, these economic hurdles will need to be addressed.
Avoiding pitfalls of monocropping
Reliance on a single crop presents several environmental risks, including vulnerability to pests
and disease. Producers also face economic risk when they depend on a single crop in a highly
fluctuating commodity market, with no guarantee that the prices they receive will cover their
rising input costs. An additional risk is a decline in the local agrarian economy, as subsistence
farmers move away from generating their own food in favor of a cash crop that may or may not
produce sufficient returns.
The increasing shift of farmers to palm cultivation is already contributing to a regional economic
effect underway in Para. ´ Sixty percent of food consumed in Para ´ is now grown out-of-state, and
the price of many food items in the state is rising. According to Roberto de Sena Bentes,
economist and technical advisor of the Para ´ regional office of the Departamento Intersindical de
Estatistica e Estudios Socioeconomicos (DIEESE), the recent increase in food prices can be
attributed to the turnover of agricultural land to palm oil (Glass, 2013a).
A large monoculture on a regional scale can also create power imbalances between the buyer and
producer. The beef industry has already moved largely toward a consolidated, top-down power
structure, a pattern that the palm oil industry is repeating. In the long-term contractual
agreements between palm oil small producers and biodiesel companies, the buyer or company
maintains a high degree of influence over the producer (Cesar et al., 2013). Contracts grant the
company exclusive buying rights, largely unfettered access to the palm property, and the ability to
define all management practices (Glass, 2013a). A lack of worker unions or cooperative support
in the northern region for palm production accentuates the power disparity, inhibiting farmers’
self-reliance in producing and marketing palm (Cesar et al., 2013).
An “agro-pastoral” approach combining crops and livestock could help ranchers reduce their
market risk and expand their choice of potential buyers. In a recent five-year study of the related
concept of agro-forestry in Pará, palm oil yields in agro-forestry systems surpassed monocrop
systems under similar conditions, at 7 tons per hectare per year for agro-forestry, versus 5 tons in
a monocrop (EMBRAPA, 2013; Langford, 2014). While cattle were not included in this study,
the economic benefits of a diversified operation are evident. EMBRAPA is currently pushing a
variety of possible systems through their iLPF Strategy 2 , which encourages the integration of
crops, livestock, and forest activities via rotation, intercropping, and succession (EMBRAPA,
2013). Recently, the Inter-American Development Bank (IDB) began funding a pilot project for
integration of a native palm oil variety on ranchlands in the Cerrado region after a feasibility
study determined the integrated system to be socially and economically sustainable (Averdunk et
2
iLPF - Integração Lavoura-Pecuária-Floresta
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al., 2012, 2014). Petrobras currently requires its palm oil producers to avoid intercropping,
although the company, having commissioned a study with EMBRAPA to investigate its benefits, is
considering changing the requirement (Glass, 2013a).
Stepping up the role of the public sector
Brazil’s burgeoning palm oil industry is already facing several consequences of government
inefficiency. Poor road infrastructure results in higher prices and uncertainty in market access,
leading processors to undertake maintenance of roads and bridges themselves in order to transport
their goods (Averdunk et al., 2012). Rapid production expansion is inhibited by a backlog of land
title paperwork. Procedures to obtain environmental licenses remain slow and complicated
(Averdunk et al., 2012).
As demonstrated by Brazil’s experience with beef-related deforestation, vast improvement is needed
in public sector monitoring and enforcement. In beef, negative publicity about deforestation led
the large processors to take on a self-policing role, creating efficient systems to screen suppliers and
commissioning independent audits of their supply chains. Much progress has been made thanks to
these industry efforts, but they unfortunately have come at a cost that disproportionately affects
small ranchers, diminishing their ability to compete.
Care must be taken to avoid recreating this dynamic all over again with palm oil. The palm oil
industry uses the CAR to monitor suppliers against deforestation. As discussed earlier, the CAR is a
federally-mandated license required of all agricultural producers that uses satellite imagery to
monitor land for deforestation. When asked about potential leakage in the CAR system—similar to
how illicit beef is sold through CAR-registered producers—industry representatives attributed the
problem to insufficient regulation and enforcement, something they consider the responsibility of
the government, not the private sector. So ultimately, industry self-policing for deforestation will
be only as effective as the CAR system.
Recent land use data confirm that having ambitious regulations in place achieves little if the laws are
not enforced. A 2013 University of California-Davis study projecting land conversion rates under
three different Brazilian government enforcement scenarios (low, medium, and high) found that in
a low anti-deforestation enforcement scenario, palm oil expansion in Para ´ would lead to 62%
conversion of forested areas (Yui & Yeh, 2013). Effective monitoring and enforcement is crucial.
5
The New Deforestation Reality
Brazil’s challenge of preventing future deforestation is about to become much more complicated.
Given the country’s anticipated rapid growth in palm oil and other commodities—and their
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sudden intersection with the beef industry—it will be increasingly difficult to attribute land
clearing to a single commodity. And, for the industries that must be held accountable, it will be
increasingly hard to verify that their supply chains are deforestation-free.
Emerging complications for enforcement
The integration of ranching with crops for food and biofuel has extensive potential to prevent
further deforestation, even as demand for agricultural land increases by 17%. However, as more
ranchers also become farmers, complications arise. Under the current system, a rancher who
chooses to grow soy and palm oil faces the daunting task of navigating requirements for the
Terms of Adjusted Conduct (TAC), the Roundtable for Responsible Soy (RTRS), and the
Roundtable on Sustainable Palm Oil (RSPO). Because each roundtable uses its own unique
system to audit suppliers, this presents needless delays and compliance costs.
Fortunately, the states of Para ´ and Mato Grosso are moving to improve the existing fragmented
licensing system by relying almost exclusively on the CAR to monitor against deforestation. By
streamlining the process for ranchers and simplifying auditing for processors, the CAR
markedly reduces licensing costs and allows operators to diversify and experiment with other
crops without excessive bureaucratic hurdles. To promote rancher adoption of the CAR, in May
2011, Para ´ initiated an incentives program, Green Municipalities (MV), to provide
CAR-registered property owners low-interest financing, and to grant ranches in
federally-embargoed municipalities access to markets. As of April 2013, more than 70,000
rural properties had registered, more than any other state in Brazil (PMV, 2013).
Para ´ and Mato Grosso are demonstrating success in using the CAR system to address beef-related
deforestation. However, an important regulatory challenge must be considered. As ranchers
increasingly undertake production for more than one value chain, and as roundtable efforts, such as the
RTRS, replace their unique systems to audit suppliers with the CAR system, opportunities for
regulatory “leakage” will only multiply.
Consider the example from the beef value chain, discussed earlier, depicted again here in
Figure 20. Within any single value chain, unlicensed producers can insert their non-compliant
product into the legitimate supply chain via licensed producers. An unlicensed rancher, for
instance, may have the opportunity to channel deforestation-linked beef through a licensed
rancher who, facing ever-increasing production costs, will pass along illicit beef for a fee. This
leakage is believed to at least partially explain why deforestation continues despite great strides
in regulation and enforcement. It occurs only vertically between unlicensed and licensed
producers of the same product—in this case, beef. ´
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FIGURE 18.
Present opportunities for illicit commodities to enter legitimate supply chains
NON-LICENSED
RANCHER
LICENSED
RANCHER
JBS,
Marfig,
Minerva
NON-LICENSED
SOY FARMER
LICENSED
SOY FARMER
Cargill, Bunge
NON-LICENSED
PALM OIL FARMER
LICENSED PALM
OIL FARMER
Vale Biopalma,
ADM, Agropalma
Figure 18 shows how, under a framework with all commodities regulated using the CAR system,
leakage could occur horizontally, giving unlicensed producers many times more opportunities to
channel their products into legitimate, regulated supply chains. Thus, while past unlicensed palm
oil producers could only channel their product through willing licensed palm oil growers, they now
can channel it through a willing CAR licensed rancher who also happens to grow palm oil. Since
some of the largest processors do not collect FFBs directly from the farm, but rather at collection
centers, the opportunity to channel illicit FFBs into the legitimate supply chain is even easier than it
is for beef. Future frameworks will need to address these increased opportunities for leakage.
“Financing for palm oil is more widely available, the profitability is more predictable
than beef, and the cattle industry is just too complex now with all the pressure
on ranchers.”- Rancher, Para´
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FIGURE 19.
Future opportunities for illicit commodities to enter legitimate supply chains
NON-LICENSED
RANCHER
DEFORESTING
LAND
CAR LICENSED
RANCHER WITH
SOME SOY AND
PALM OIL
JBS,
Marfig,
Minerva
NON-LICENSED
SOY FARMER
DEFORESTING
LAND
CAR LICENSED SOY
FARMER WITH
SOME PALM OIL
AND CATTLE
Cargill, Bunge
NON-LICENSED
PALM OIL FARMER
DEFORESTING LAND
CAR LICENSED
PALM OIL
FARMER WITH
SOME SOY
& CATTLE
Vale Biopalma,
ADM, Agropalma
Increasing awareness by retail industry and consumers
The beef, soy, and palm oil industries have each worked hard in recent years to prevent
deforestation in their respective value chains and show governments, buyers, and the international
community that their operations are deforestation-free. As commodity operations merge,
attributing deforestation to a specific commodity becomes more difficult. Said another way, it
becomes easier to falsely blame one industry for deforestation committed by another. An example
is shown in Figure 19. If a licensed palm oil operation, also raising cattle, deforests adjacent land to
expand palm oil production, this deforestation could be attributed to beef. The same scenario
could occur in the opposite direction, attributing beef-related deforestation to palm oil. Producers
and buyers throughout each product’s value chain have reason to be concerned about this
reputational risk.
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FIGURE 20.
Attributing deforestation will soon be challenged: Example of beef and palm oil
PRODUCER:
PRIMARILY PALM OIL
WITH SOME BEEF
PRODUCER:
PRIMARILY BEEF
WITH SOME PALM OIL
Deforests land to expand
palm oil production, but it is
attributed to beef
Deforests land to expand beef
production, but it is attributed
to palm oil
HYPOTHETICAL
BUYER:
VALE BIOPALMA
HYPOTHETICAL
BUYER:
JBS
Derivatives of beef, soy, and palm oil are used in millions of end products. Large retail firms that
source these commodities—and consumers of final products—increasingly want to be sure they are
not contributing to deforestation in the Amazon. Yet the links are not always obvious. To illustrate,
a sample list of U.S. corporations that source beef products from Brazil is included in Appendix A.
Consumers of products such as canned corned beef from Goya, or leather shoes from Birkenstock,
can easily make the connection to ranching in Brazil. But other connections are not as widely
recognized. For example, the public may not be aware that JP Morgan Chase trades in Brazilian
leather, thus potentially linking it to Amazon deforestation. New Ford car owners may not consider
the origins of their leather seats, and pet owners may assume Hartz dog treats come from a
sustainable source. If future regulatory efforts continue to address deforestation commodity by
commodity, the links to end products may become only more complex and difficult to isolate.
6
A Jurisdictional Approach
Commodity-by-commodity efforts such as the GTPS and RTRS have worked successfully with
powerful firms to prevent deforestation in the beef and soy supply chains, thus helping to achieve
impressive reductions in land clearing. However, future commodity-by-commodity efforts are not
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certain, as demonstrated by the recent decision to end the Brazilian Soy Moratorium in December,
2014 (Stewart, 2014). Roundtables also face challenges in globalized markets; for example, the
RSPO, influential in western markets, has less impact in the highest palm-oil-consuming countries
(China, India, and Indonesia), where environmental concerns are of lower priority. As observed
with GTPS and Brazilian beef, regulations exclusive to a single commodity can drive up costs,
distribute them unevenly across the chain, and create perverse incentives for producers. Future
efforts will require moving beyond a single supply chain focus. Continued success will require
complementing roundtable efforts with innovative measures that work across multiple commodities.
Zero net deforestation
Many organizations working to prevent deforestation are promoting the concept of “zero net
deforestation.” Unlike zero deforestation, zero net deforestation allows land to be cleared in some
areas, as long as other areas are sufficiently reforested to maintain net carbon density (WWF, 2014). A
number of municipalities and states in Brazil are striving to achieve zero net deforestation by 2020
(PMV, 2013). This creates an unprecedented opportunity to simplify enforcement and traceability. By
certifying a given jurisdiction, and all commodities produced in it, as “deforestation-free,” authorities
would no longer have to track thousands of producers, instead focusing on a single geography.
New satellite technology and data management help make the jurisdictional approach possible by
eliminating uncertainty about a geographic area’s deforestation record. Since 2002, the Brazilian
National Space Research Institute (INPE) has made its satellite imagery available to the public (INPE,
2013). More recently, Google provided a public platform for new high-resolution maps, monitoring
rates of deforestation at a spatial resolution of 30 meters (GFW, 2014; Science, 2013). Because this
technology is available to governments, corporations, NGOs, and operators, it is more possible than
ever to monitor performance at the state or province level, preparing the way for jurisdictional
certifications.
Effects on producers, retail buyers, and consumers
For ranchers and farmers, meeting the requirements of a deforestation-free jurisdiction could
potentially be less costly and time-consuming than obtaining commodity-specific certification. Costs
associated with government bureaucracy and third-party requirements would likely decrease. In
addition, the stage would be set for a United Nations Reducing Emissions from Deforestation and
Forest Degradation (REDD+) program, giving producers economic incentives. A common complaint
among ranchers is that they receive no price premium for their deforestation-free operations. A
jurisdiction-based payment for ecosystem services (PES) program could provide ranchers an indirect
premium for preserving the forest on their land. A PES system can also deliver additional benefits,
such as capital, technical training, or inputs.
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Beef, soy, and palm oil processors would save on the substantial administrative costs to monitor their
supply chains. Processors staff entire departments to manage detailed files on each of their suppliers,
ensuring that each one is up to date with the many required licenses. To publicly verify their
deforestation status, processors such as JBS regularly hire firms to conduct independent audits of their
supply chain. These practices are costly. A jurisdictional certification reduces these costs considerably,
since the processor or retailer need only verify that the supplier operates in the designated
jurisdiction.
Jurisdictional certifications also level the playing field across all products and producers. As discussed
earlier, the smallest ranching operations face a per-hectare cost of compliance nearly ten times that of
the largest operations. Similarly, third-party certifications are frequently too costly for small
producers, putting them at a disadvantage. A jurisdictional approach helps address these challenges
faced by small producers trying to compete with larger players.
A further advantage over the commodity focus is the elimination of most opportunities for vertical
and horizontal leakage. If every producer within a given jurisdiction is licensed and certified, it
removes the incentive for this type of leakage. Of course, if market demand increases for products
in certified jurisdictions, leakage may well come from other, non-certified jurisdictions. The best
way to prevent this is to improve the GTA system, the traceability mechanism for cattle.
Incorporating the use of electronic identification (EID) systems—microchips that use radio
frequencies to monitor the location and movement of cattle—would be much more effective than
the current system. EIDs are currently used in Australia, Canada, and Denmark, where they reduce
labor costs associated with cattle management (CowTime, 2003; Livestock Research, 2010).
From the perspective of conscientious retail buyers, jurisdictional certification would build far
greater confidence that the suppliers they select do not contribute to deforestation. Several large
companies in the Consumer Goods Forum, such as Kraft, Nestle, Proctor & Gamble, Unilever and
Walmart, have committed to establishing zero net deforestation supply chains by 2020, raising the
possibility that they could support efforts to identify and certify entire jurisdictions that have
achieved this status (PRNewswire, 2010). Consumers, in turn, would benefit from increased
transparency.
Challenges
Implementing a jurisdictional system with a PES component such as REDD+ is challenging. It
requires well-established, reliable systems to monitor deforestation and realistic reference points
upon which to base future progress. Extensive planning and negotiation are required to ensure an
effective and equitable distribution of benefits. Also essential is coordination across multiple
agencies at all levels of government, with effective and transparent institutions capable of enforcing
the law (CIFOR, 2012).
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With its sophisticated satellite technology to monitor deforestation, and its established reference
points upon which it has already made considerable progress, Brazil has already overcome some of
the initial challenges to implementing a deforestation prevention program based on
jurisdictional certification. It has also put in place some of the world’s most comprehensive
regulations—regulations that, unfortunately, it often fails to enforce. Institutional accountability
and public sector enforcement need drastic improvement. Like any regulatory effort, a
jurisdictional certification will only be truly effective if the public sector enforces the rules and
collects fines from violators.
Perhaps equally daunting is the poor state of land tenure in Brazil. While not prohibitive to a
jurisdictional certification, unresolved tenure can impede the implementation of a PES component.
A successful PES program depends on clearly defined land tenure rights to ensure that regulatory
enforcement and incentive-based components work effectively. If more than one occupant claims
ownership of land, it is impossible to enforce regulations against environmental offenses, since each
occupant can blame the other for the infraction.
To receive payment for ecosystem services for protecting the land, owners need to be able to prevent
third parties from deforesting their land without consent (Duchelle et al., 2013). A possible
opportunity to address unresolved land tenure may lie in cooperation between the government and
processors. Because processors have established a system to verify that their suppliers have proper
licenses—thus defining land/operator relationship over time—they may offer a start by providing
reliable documentation.
A jurisdictional certification based on net zero deforestation would address many shortcomings of
current commodity-based approaches. It has potential to trim administrative costs across the value
chain, reduce leakage, and increase retailer and consumer confidence in the veracity of
deforestation-free products. Realizing these benefits will require the public sector to make
considerable improvements, particularly in enforcing regulations and resolving land tenure. Indeed,
these public sector issues will need to be resolved before any approach, whether focused on
commodities or on geographies, can reach its full potential.
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7
CONCLUSION
This study has examined beef-related deforestation in the Brazilian Amazon. Responding to public
pressure, the Brazilian beef industry has reduced deforestation considerably in a short time. By
implementing systems to monitor their suppliers, processors have incentivized nearly all major ranchers
to license and register their properties. For the first time ever, almost 90% of cattle come from
legitimate, licensed operations.
Our research identified important areas of needed public sector improvement to reduce industry
cheating and ensure that ranchers make long-term commitments to deforestation-free operations. Also
needed are regulatory streamlining, reductions in the costs to comply, and resolution of land tenure
issues to ease access to credit for improved pasture management.
While Brazil’s beef industry is now in large part deforestation-free, this transition has come at ranchers’
expense. Escalating requirements by processors and government have dramatically increased ranching
costs without expanding revenues, calling into question ranchers’ ability to make further progress in
avoiding deforestation. Just as when a balloon is squeezed, ranchers could respond by simply shifting to
areas of less pressure, diversifying into other commodities that may not be as closely regulated.
Changes in ranchers’ land use decisions, along with other rapidly emerging dynamics in the beef
industry, are pushing future land-clearing threats out of the beef value chain. An important focus for
future anti-deforestation efforts is the intersection between beef and palm oil. The net effect of palm oil
expansion could turn out positive or negative for forests, depending partly on how much economic
opportunity it creates for small producers; if they do not have economically viable alternatives, they will
only end up illegally clearing new land.
As more ranchers turn to producing oil palm or other crops, it will become increasingly difficult to
attribute deforestation to a specific commodity, making commodity-by-commodity enforcement
methods less effective. An alternative that merits further study is to complement future efforts to build
deforestation-free supply chains with enforcement and certification mechanisms focused not by
commodity, but by jurisdiction.
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Appendix A. Corporations that source beef products from Brazil
FIRM NAME
AUTOS
Acura
Audi
BMW
Buick
Chevrolet
Chrysler
Dodge
Ford
Honda
Hyundai
Jeep
Kia
Land Rover
Lexus
Lincoln
Mazda
Mercedes
Mitsubishi
Nissan
Porsche
Renault
Toyota
Volkswagon
Volvo
END PRODUCT
Leather upholstery for cars
BANKS
JP Morgan Chase
PNC Bank
Standard Bank and Trust
Leather
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FIRM NAME
FOOTWEAR
Allen Edmonds Shoe Corporation
Belvedere, Inc.
Burten Distribution
DSW
Genesco (Brands include: Journeys, Schuh)
Happy Feet Inc (Birkenstock)
Kepner Scott Shoe Company (Children's Shoe Brand's: Amilio,
Carpenter, Sandals by Carpenter and Self Starters)
L.L. Bean
Loeffler Randall
Matisse Footwear
Mosinger Company, LLC (Brand is Mark & Lemp)
Nordstrom, Inc.
Off Broadway Shoes
Opportunity Shoes
Pinnacle Brand Group
Rainbow Sandals, Inc
Reef Sandals
San Marina Shoes
Southern Leather, co; Sells to brands such as Birkenstock
The Jay Group (Retail in Adidas, Nike, JCPenny, Reebok, Payless,
Steve Madden, Naturalizer, Stride Rite, Nine West
Timberland
END PRODUCT
Footwear
Footwear
Shoe parts, Footwear
Footwear
Footwear
Footwear
Footwear
Footwear
Footwear
Footwear
Footwear
Footwear
Footwear
Footwear
Footwear
Footwear
Footwear
Footwear
Shoe repair products
Footwear
Footwear
FOOD
Bushy Creek corned beef
Bushy Creek shredded beef
Bifi Snacks
Jack Links Beef Jerky
Peperami Snacks
Goya canned corned beef
Sampco Inc
Link Snacks, Inc
Goya Foods, Inc.
FURNITURE
American Leather, Inc
Anthem Leather, Inc
Carroll Leather
Upholstery
Furniture
Upholstey
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FIRM NAME
FURNITURE
Hancock and Moore, Inc
Klaussner Furniture, Inc
LA-Z-BOY
Leather Creations, Inc.
McKinley Leather
Stickley Fine Upholstery
Taylor King Furniture, LLC
END PRODUCT
Furniture
Upholstery
Upholstery
Upholstery
Upholstery
Upholstery
Upholstery
PET FOOD
Hartz Naturals
Legacy Pet, LLC
Pet Center, Inc
Red Barn Pet Products
The Natural Dog Company
Dog chews
Dog chews
Pet Food
Pet Food
Pet Food
Source: (ImportGenius, 2014)
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