Another blow to the image of Brazilian beef

Author

Gustavo Ribeiro
June 04, 2019 • Reading Time: 6 minutes

Another blow to the image of Brazilian beef

Brazil’s Agriculture Ministry has suspended beef exports to China after detecting a case of mad cow disease, or bovine spongiform encephalopathy (BSE), in Mato Grosso. The suspension is temporary and follows procedure foreseen in a 2015 sanitary accord between Brazil and China. The Brazilian government said the animal was 17 years old, had already been slaughtered, and products obtained from it were taken from the human food chain to “no risk to humans.”

While considered atypical and not enough to change Brazil’s status as an area of “insignificant” risk for the disease, the case is a new blow to the image of Brazilian beef. In recent years, police operations unveiled corruption schemes that tampered with sanitary controls, and Brazil’s ability to match quantity (it is the world’s largest beef exporter) with quality has been called into question by competitors.

Working in favor of Brazilian exporters are China’s own sanitary issues. The country experiences a swine fever outbreak that could reduce its pork production by 30%. And Chinese households are expected to replace pork with beef. In 2017, China imported USD 939m in beef from Brazil—an amount that rose to USD 1.5bn last year, and that has already reached USD 443m between January and April.

A win at the eleventh hour

The government got an important win in the Senate last night. In the final hours before the bill expired, the upper house approved new rules for social security benefits (by a 55-12 margin)—establishing stricter criteria for eligibility and creating more mechanisms to prevent fraud. Expected savings from the measure are of BRL 10bn in 10 years. The vote gave the Economy Ministry hope to build a consensus around the pension reform in the Senate.

A new important test is scheduled for tomorrow, however, when the Senate votes on the possibility of raising the government’s debt ceiling—preventing a shutdown or the violation of fiscal responsibility laws (an impeachable offense). In exchange, the government agreed to tweak the pension reform, giving a larger transition period for rural producers to adapt to the new rules.

Pension reform

In the House, disputes over the pension reform remain fiery. Centrist parties want to exclude state and municipal servants from the bill—which would essentially force state houses to either pass their own reforms or their states would financially collapse. In the minds of many members of Congress, state politicians—especially those on the left—are playing a double game: they defend the reform in Brasília, but criticize it among their electorate. Eyeing the 2020 municipal elections, congressmen don’t want to bear the burden of the unpopular reform alone.

The bill’s rapporteur has suggested a way to split the baby. He would create a rule automatically including states in financial calamity and those with a higher rate of elderly citizens—which would encompass 10 states, Rio and São Paulo among them.

Brazilians recovering faith in democracy (sort of)

The newest edition of the Americas Barometer—an opinion poll conducted every 2 years by Vanderbilt University in partnership with Fundação Getulio Vargas—detected that 58% of Brazilians are not satisfied with the functioning of democracy. While the scenario might seem bleak, that rate reached 78% in 2017. Those who believe that democracy is the best system rose from 52% to 60%.

However, one-third of people believe that, in a scenario of rampant corruption, a coup d’état is justifiable. And while that perception is more frequent among conservatives (43%), left-wing Brazilians also enjoy it (31%). And 38% of people believe the president could shut down the Supreme Court if necessary.

Sanitation bill expires, limiting investments

While the government managed to pass the decree altering social security rules, it failed to get Congress to pass the bill setting a new regulatory framework for the sanitation sector. The bill would centralize regulation under the federal authority, instead of the current system in which every municipality has its own set of rules. Its most important—and controversial—point, however, changes how administrations hire sanitation companies.

Today, municipalities don’t need to hold public bidding processes, which helps them favor state-owned companies—which are less capable of investments. The bill would allow private firms to fight for markets with public entities, which would in theory foster much-needed investments. Only 6% of municipalities are currently supplied by private firms.

After the sanitation bill expired, Senator Tasso Jereissati presented a bill containing essentially the same text of the decree—to which the upper house agreed to vote on as a high-priority measure. Some parties are conditioning their support to a rule giving state-owned companies 48 months to continue their operations, only after which contracts could be reviewed.

Also noteworthy

Growth. For the 14th straight week, markets have reduced their GDP forecasts for 2019—from 2.5% in March, to 1.13% now. Despite growing pessimism, Central Bank President Roberto Campos Neto is not convinced that a cut in Brazil’s benchmark interest rate is in order. He said lower interest rates could push inflation up, which would be even more detrimental to the economy. Mr. Campos Neto considers the Brazilian economy’s over-reliance on the state as the main reason for the slow recovery.

M&A. As we reported last week, Atvos, an Odebrecht subsidiary which produces sugar and ethanol, will go under court-supervised reorganization. That led Dutch group LyondellBasell to suspend talks to purchase Braskem, Odebrecht’s petrochemical firm, due to the uncertainty surrounding the group’s financial situation. In 2016, the group gave all of its shares in Braskem as collateral to five banks. Now, Odebrecht has debts amounting to BRL 80bn—not counting Braskem, which is independent of the parent company.

Retail. The board at online retailer Netshoes recommended shareholders accept the last bid by Magazine Luiza (USD 3/share), even if another retailer, Centauro, has presented a better offer (USD 3.50/share). That’s because a deal with Centauro would take an extra 2 to 4 months to be concluded, and the board is not certain that Netshoes, buried in debt and with no working capital, would have enough liquidity to wait that long.

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