Sustainability of Brazilian agriculture - what's the direction?

A lack of funding, excessive regulatory oversight, a high tax environment, and mounting bottlenecks are slowly eroding the competitiveness of a few key sectors. Examples? sugar cane chain for a start, or the long tail of meat processors (those who have not received capital injections from BNDES, the development bank), many of which have been exiting the market (Mondelli is the latest victim, but imperiled Doux is not far behind). The milk and dairy sector continues to suffer from major weaknesses, with milk prices falling further and powdered milk imports rising. JBS is now offloading Vigor, its dairy business, saying the floatation will enable the company to grow efficiently, but with milk collection declining, production costs rising and the country ever more dependent on imported powdered milk the industry will struggle in the medium term to raise profitability. LBR, also part owned by BNDES (and PE funds) has struggled to integrate the pieces and maintain profitability. These are only examples of under-performing sectors, but the paper & cellulose sector's progress and outlook shows that all is not bleak.

On the farmland investment question, it appears that changing legislation has pushed some of the leading ag funds to look for opportunities out of the country, while the EU sovereign debt crisis has impacted funding in Brazil. All of this suggest that agricultural production may not increase at the same rate in the near future as it has recently, in spite of progress at raising productivity across the chain. Overall, rising productivity (which includes rising fertiliser imports), strong demand in spite of funding shortage point to continued growth, but Brazil's reliance on a commodity exports model means the exposure to exhange rates will remain another key weakness affecting valuations, aside from an increasing focus on one client (China).

On the issue of environmental sustainability, a year of un-ending discussions on "codigo Forestal" have given environmental criminals free rein to deforest in those remote states that are less monitored. If the codigo is indeed passed as law in March 2012, how will implementaiton be better than the last law? This is an aspect that is not clear.