South America Calling

Brazil, Tomatoes and Food Inflation

The whole of Brazil is talking about tomatoes.

The price of the food staple has more than doubled over the last 12 months and now costs more in a Sao Paulo supermarket than in New York.*

The hike has caused great consternation, not only because the tomato is an ingredient with no real substitutes but also because it is emblematic of a recent surge in food inflation.

Other food staples have also shot up; prices for the ubiquitous rice and black beans have risen 20% in the last 12 months, leading some to question how this can happen in one of world's major agricultural powers in a year when record grain production is expected.

There is a simple supply and demand answer to this question: production of these staples won't rise this year in the way soy has and stocks of beans, rice and wheat are limited. But it brings into spotlight the vastly differing conditions under which commodities for export and domestic food consumption are produced.

Billions of dollars have been pumped into Brazil's agribusiness sector over the last decade, but those funds have been almost exclusively put into export crops such as soybeans, sugarcane and (increasingly) corn.

The production of food staples has largely been left to family farms.

Investment in rice and black bean seed technology, for example, has been a fraction of that in soy and corn, while the smaller farms that plant these staples have more limited access to government credit than their larger soybean-producing cousins as they can't offer the necessary guarantees.

Add in high export grain commodity prices and rice and beans simply can't compete for acres with soy and corn.

As a result, Brazilian rice planted area has fallen 41% since 1990 and imports now account for 7% of consumption, while black bean area has dropped 38% and 6% of Brazilian demand is met by imports.

These foods are important as most Brazilians eat rice and beans at least once a day, not tomatoes.

According to Folha de S. Paulo, a local daily, concerns about a growing reliance on imports and instability of food stocks have reached President Dilma Rousseff.

The government realizes that it needs to do more to guarantee sustainable minimum prices for these staples and build official stocks.

It also has to try to do more to promote production of these foodstuffs in the large commercial farms of the center-west, spreading the base from the small producers of the south.

But in the short term, food prices will continue to pressure inflation, which currently sits at a disconcertingly high of 6.3% per annum, likely forcing the government to raise interest rates later in the year despite less-than-spectacular GDP growth forecasts for 2013 -- market consensus is around 3%.

* In the Pao de Acucar supermarket in Sao Paulo a kilo of tomatoes costs R$10.58 ($5.29), more than the $4.89 quoted for New York City on the Expatistan website.



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