Brazilian-Beef-Final_Optimized1

kitri1

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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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN

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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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN

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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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN

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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DEFORESTATION AND THE BRAZILIAN BEEF VALUE CHAIN

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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