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Will trade goals restrict Bolsonaro’s plans to loosen environmental protections?

The president-elect has promised to merge the environment and agriculture ministries, and remove Brazil from the Paris climate accord, but will these actions really be beneficial for the farming sector that has supported him?

Brazil’s new president Jair Bolsonaro has been lauded by agribusiness and lambasted by environmentalists, but what impact is he likely to have on the country’s farming sector and lucrative agri-food exports?

After winning the first round of Brazil’s presidential elections in early October, Bolsonaro turned his attention to securing the rural vote ahead of the run-off with rival Fernando Haddad, promising farmers “legal certainty” and curbing the “excessive” policing of the sector by the environment agency, Ibama, and the national parks service ICMBio.

He already had the backing of Brazil’s congressional farm lobby, the Parliamentary Agricultural Front (FPA), which represents the country’s influential agribusiness sector in both houses, and many of his closest advisors have worked in or have close ties to the agriculture sector.

His comments on opening up protected indigenous territories in the Amazon to farmers and loggers, and threatening to follow the US lead in pulling his country out of the Paris climate accord, have alarmed environmentalists and buoyed agribusiness in equal measure.

Ministries to merge?

Bolsonaro vowed to merge the environment and agriculture ministries, partly to combat government ‘bloat’ (he has promised to halve the number of government ministries) but also to lessen bureaucracy and red tape for farmers.

Many have taken the move to mean that, essentially, the new government is signalling that it will favour ‘production’ over ‘preservation’.

The president’s soon-to-be chief of staff, Onyx Lorenzoni, seemingly confirmed plans for the new ministry earlier this week as details of the new administration began to emerge, prompting immediate criticism from current and former officials.

Environment minister Edson Duarte expressed concern for Brazil’s role in protecting its “natural wealth” – the country has the world’s largest tropical forest and 12% of the planet’s fresh water - against what he described as “criminal and predatory exploitation”.

But he also claimed the farming sector could suffer retaliation from importing countries if the country is seen to relegate environmental issues to the background.  

This was a view echoed by former environment minister Marina Silva, who tweeted: “This disastrous decision will bring serious damage to Brazil and will pass to consumers abroad the idea that all Brazilian agribusiness survives thanks to the destruction of forests.”

She added that such a move would be a “non-tariff barrier” to trade.

Essa decisão desastrosa trará graves prejuízos ao Brasil e passará aos consumidores no exterior a ideia de que todo o agronegócio brasileiro sobrevive graças a destruição das florestas, atraindo a sanha das barreiras não tarifárias em prejuízo de todos.

Current agriculture minister Blairo Maggi, who will almost certainly be replaced by the new administration with someone with ties to agribusiness, was also critical of the decision.

He told reporters on a trip to the UAE on Wednesday (October 31) that he expects the proposed merger to result in losses for the Brazilian agri-food sector, particularly in terms of exports to Europe where environmental preservation is held in high regard.

In a subsequent statement, the agriculture ministry said that over the past two and a half years, Maggi "has travelled the world publicizing the sustainability of Brazilian agribusiness and gaining preference for Brazil's products because of producers' costs of maintaining environmental reserves on their properties.”

For his part, Bolsonaro has not confirmed that the merger will take place amid rumblings that not all agriculture stakeholders are in agreement over the idea.

“We had an idea to combine the ministries but it seems both will remain separate, with one person focussing on environmental protection,” he said in TV interviews yesterday (November 1). “We intend to protect the environment without creating roadblocks to progress.”

He cited the time it takes for certain infrastructure projects to be approved by the environment ministry as needing to be shortened considerably, claiming some applications are taking up to 10 years. He has previously mentioned stalled mega-dam projects in the Amazon as examples.

Trade policy

Whatever happens with the agriculture ministry going forward, it will have a job on its hands immediately to restore the image of Brazilian food products in overseas markets.

The 2017 ‘Carne Fraca’ food safety scandal rocked Brazil’s major exporting companies with the US and EU delisting plants.

Hundreds of Brazilian poultry consignments have been rejected at EU borders since May last year, largely due to salmonella concerns, and while cases have fallen dramatically in recent months the country still has a battle to regain full access to the EU market. 

A recent audit undertaken by the European Commission concluded that Brazilian meat plants “still have work to do”, while as recently as June, JBS, the world’s largest meat processor, was involved in a fresh corruption scandal just days after signing up to an anti-corruption pact. 

Securing increased access to the EU market for agri-food exporters will almost certainly remain a key goal of the new Brazilian government. Sales in the past 12 months to the EU from Brazil were valued at €11.9 billion, according to European Commission figures published earlier this month, despite the issues. 

However, talks between the EU and Mercosur, the bloc of Latin American countries consisting of Brazil, Argentina, Uruguay and Paraguay, were already at a standstill before the election with agricultural quotas among the main stumbling blocks to progress.

Fierce opposition from EU farming groups and the previously mentioned concerns about the loosening of environmental controls will likely see the European Commission adopting a “wait and see” approach on progressing the deal.

But another concern will be whether the Mercosur group will even survive intact under the Bolsonaro regime.

The new President has said the bloc is “overvalued”, while Paulo Guedes, the soon to be finance minister of a new ‘supercharged’ department consisting of finance, planning, industry, trade and services, said this week that neither Mercosur nor traditional ally Argentina are considered to be priorities for the new regime.

Indeed, it was announced on Monday (October 29) that Chile will be Bolsonaro’s first international destination, breaking with a long foreign policy tradition that saw Argentina visited first no matter what the political leaning of the Brazilian government.

Trump and Putin

It is for good reason that Bolsonaro has been described as the ‘Trump of the Tropics’ and the two leaders share a similar world view on a number of issues.

The US will probably be the second foreign trip for Bolsonaro and he is likely to receive a warm reception.

In the wake of his victory, President Trump tweeted: “Had a very good conversation with the newly elected President of Brazil, Jair Bolsonaro, who won his race by a substantial margin. We agreed that Brazil and the United States will work closely together on Trade, Military and everything else!”

Had a very good conversation with the newly elected President of Brazil, Jair Bolsonaro, who won his race by a substantial margin. We agreed that Brazil and the United States will work closely together on Trade, Military and everything else! Excellent call, wished him congrats!

Brazil has already benefitted in agricultural export terms from the Trump presidency, being the main beneficiary of the US-China trade war that has seen import duties placed on American agri-food products entering China – particularly in the case of soybeans.

However, Brazil and China remain at odds on a number of other agricultural issues including recently launching a World Trade Organization dispute against the Asian country’s sugar import policy, and, along with other countries in the so-called BRICS group (Russia, India, China and South Africa), its continued shutout of meat and other food products due to either antidumping or food safety concerns.    

On that front, Bolsonaro can perhaps claim one early victory with Russia's state veterinary service giving approval for nine Brazilian companies to resume shipments of pork and beef to the country after an 11-month shut out.

Although it will only offer a small lift in trade, analysts such as IEG Vu’s Max Green have suggested it sends the message that Russian president Vladimir Putin is ready to work with Bolsonaro, but does not want to give away too much this early in the relationship. 

Sugar and ethanol

So what are the likely effects from the Bolsonaro election on two of Brazil’s key agribusiness sectors – sugar and ethanol?

In the short term, the effect of the Brazilian elections has strengthened the real against the US dollar, making all Brazilian exports more expensive. This has had a knock-on effect in key markets such as sugar, where it has been supportive to prices in the international market.

But in the medium term, Bolsonaro’s choices around environmental policies, in particular the country’s participation in the Paris climate accord, will have an influence on biofuel, and therefore sugar, production in the country. 

Similar to the agriculture-environment merger, the new president is wavering over his Paris accord promise, saying that Brazil would stay in as long as there are no restrictions on his government’s plans to open up the ‘AAA’ corridor – the vast area of land stretching from the Andes, through the Amazon to the Atlantic.

At present, government policy is to expand biofuel output, under the RenovaBio program. Bolsonaro came out after the election promising to be a “partner” to the ethanol industry and make Brazil a world leader in the field.

But doubts are emerging over this direction, with proposals to reduce the tax burden on ethanol and gasoline on the cards, particularly in relation to the tax difference between the two products. Paulo Guedes is the likely person to look to for signals on this front, which could then have a direct influence over sugar production in the coming years.

At present, the industry has been heavily reliant on RenovaBio as a lifeline in times of low prices for both ethanol and sugar. If the sector gets guarantees over government stimulus, the industry will certainly expand its production capacity, according to analysts at IEG FNP in São Paolo.

“If the policies are favorable to ethanol, sugar production will be ramped up, increasing the efficiency of mills to produce sugar attached to ethanol production,” IEG FNP said in a note this week.

Brazilian commodity prices on IEG Vu

With the potential for so much change in Brazil’s agriculture sectors under the new president, it is more important than ever to keep up to date with the latest developments in the farming powerhouse.

With this in mind, Agribusiness Intelligence is pleased to announce that it will soon be increasing its coverage of Brazilian agri-food markets, including the addition of more than 500 price lines to the IEG Vu Price Graphing Tool.

The new lines include prices for the following commodities, broken down by the main producing regions: beef, cattle, poultry, eggs, pigs, pork, live birds, liquid milk, soybeans, sorghum, wheat, maize (corn), soymeal, soy oil and wheat meal.

If you are not already a subscriber to IEG Vu and would like to experience the full range of services, you can contact the customer support team to register your interest or simply go to any article on the IEG Vu website and select the ‘Free Trial’ option. 

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