PULLING BACK THE VEIL OF IGNORANCE: THE SOCIAL AND ENVIRONMENTAL EFFECTS OF THE US-CHINA TRADE WAR ON BRAZILIAN SOY PRODUCTION BERNADETTE GOSTELOW, MAXIMILIAN LIM

1. China’s increasing demand of Brazilian soy

Soy meal is used as a high-protein ingredient in animal feed for livestock and as an ingredient to be further processed into food for human consumption, such as tofu and soy milk, or is extracted as oil (Purcell et al., 1). As of 2018, China is the world’s largest importer of soy, both in weight (23%) and value of imports (18%) (Chatham House). Hence, China’s decision to impose a 25% retaliatory tariff on US soy in July 2018 (Schoen) had a profound impact on the source composition of Chinese imports. While the value of the US global export of soy remained the same as the value of US soy exports decreased from close to $13.2 billion in 2017 to $5.2 billion in 2018, the total value of US export of soy decreased minimally from $27.8 billion in 2017 to $25.6 billion in 2018, the percentage of US export of soy to China decreased from 47.5% to 20.5% (Chatham House). 1.1 Effects on land use and carbon emissions

Concomitantly, China has increasingly plugged this supply gap by importing soy from Brazil. The value of Brazilian soy exports to China increased by 35.6% from 2017 to 2018, and the weight of exports increased by 28.5% in the same period (Chatham House). Furthermore, the continued drop in Brazilian soy price from $555 per tonne in 2014 to $419 per tonne in 2018 suggests that this percentage will increase soon (Chatham House). As a caveat,the Chinese government’s decision in 2019 to waive the 30% tariff on some American exporters may shift the composition of Chinese import of soy in the near future. Nevertheless, in actuality, Brazil’s supply of soy to China increased from 47.0% in 2014 to 77.6% in 2018. Concurrently, according to the Food and Agriculture Organization (FAO) database FAOSTAT, 86,760,520ha of land was dedicated to soy cultivation in Brazil in 2014. In 2018 this number increased to 97,464,936ha, representing a 12.3% increase (FAOSTAT) .

Referring to Figure 1 (all figures are in the Annex), given short term trends, Brazil will likely increase its total land use for soy cultivation by 61.5 million hectares by 2020. Assuming that soy has a yield rate of 3.25 metric tonnes per hectare and an additional 15.7 million tonnes of soy demanded from China, Chinese soy demand would account for the 4.83 million hectare increase or approximately 45.1% of the predicted increase in amazon land usage. Referring to Figure 2, given long term trends, Brazil will likely increase its total land use for soy cultivation by 7.5 million hectares by 2020. Assuming that soy has a yield rate of 3.25 metric tons per hectare and an additional 6.06 million tonnes of soy demanded from China, Chinese soy demand would account for the 1.86 million hectares increase or approximately, 17.4% of the predicted increase in amazon land usage.

Assuming that 1 hectare of Amazonian rainforest captures 6.4 tonnes of carbon dioxide annually (sfmcanada, 1). The actual 10.7 million hectare clearing of rainforest between 2014 to 2018, partially made to cater to Chinese demand, has indirectly caused a release of 68.48 million tonnes of carbon dioxide into the atmosphere annually. If predictions are accurate, future Chinese demand from 2018 to 2020 would indirectly release a further 11.90 to 30.91 million tonnes of carbon dioxide annually.

The pivot in Chinese demand towards Brazilian soy is particularly damaging, considering that at 3.25 metric tonnes per hectare (Alves), it has a relatively lower yield rate than American soy, with the US yield rate of 3.75 metric tonnes per hectare (Reuters). This rate suggests that to satisfy a similar 100 metric tonne increase in demand Brazilian production would require 4 more hectares of land than the US. Given trends, the additional 15.7 million tonnes and 6.06 million tonnes increased in Chinese demand could be met with 640,000 fewer hectares of land (13.2% fewer) and 250,000 fewer hectares, respectively (13.4% fewer). Brazilian soy farmers furthermore use the most amount of fertilizer per hectare at 169kg/ha compared to the US (62kg/ha), Russia (26kg/ha), and Argentina (16kg/ha). This data suggests that Brazilian soy cultivation is relatively environmentally inefficient (FAOSTAT). 1.2 Long-term economic costs to Brazil

The ‘ecosystem value’ of a hectare of forest (Constanza, 258), i.e. its effect on climate stabilisation via the carbon sequestration effect and contribution to the rainfall cycle,., was valued at $1784/ha/year in 1997. Accounting for inflation, this valuation increases to $2091.44 in 2019. Considering short-term trends, the ‘ecosystem value’ loss due to the increased Chinese demand for Brazilian soy from 2017 to the present valued (in 2019 only) at $10.1 billion and considering long-term trends, at $3.9 billion. These costs are distributed globally because climate stabilization is a global public good rather than a national good for Brazil. It is worth highlighting that these costs are annual, suggesting that with increased carbon emissions, the global cost will increase at a compound and exponential rate.

Furthermore, the increased carbon emissions resulting from the loss of the carbon sink can be measured by the Social Cost of Carbon (SCC) (EPA) that quantifies the economic cost of non-market effects such as its effect on human health and the environment. Unlike the ecosystem value, the SCC measure is seen as national value, measuring domestic costs precisely. However, it must be

caveated that because both the ecosystem value and the SCC quantify the economic cost of the loss of carbon sequestration, the two measures should not be combined as that would ‘double count’ the economic cost. The current SCC is valued at $42 per metric tonne (EPA). Following short-term trends, this amounts to $202.86 million and long-term trends, $78.12 million. This amount would be $26.88 million (13.3% less) and $10.6 million (13.6% less) less if US soy production met increased Chinese demand for soy. Hence the Chinese tariff on US soy has directly contributed to the inefficient increase in deforestation globally and a deadweight cost that ranges from $10.6 to 26.88 million.

The deforestation associated with soy production has direct economic costs in the form of loss of traditional incomes. For example, before the rise of soy production in the 1990s, the Amazon biome was the center of nut production and sustainable timber production. These are valued at $40/hectare for nuts and $200/hectare for sustainable timber (Mongabay, Ecosystem Services). According to the USDA, in 2014, approximately 36.8% of soy production occurs in the Amazon biome (USDA, crop explorer).

According to short-term trends, 1.78 million hectares of the Amazon and 0.68 million hectares according to long-term trends were deforested due to the increase in Chinese demand for soy. Assuming that both nut and sustainable timber production co-existed throughout the Amazon, this represents an economic cost of $427.3 million and $163.2 million respectively. Instead of these traditional activities, nut farmers and loggers will either be displaced or become salaried workers for big agribusinesses. This shifts the value and profits of economic activity away from the people to corporations.

As a qualification, these projections are likely to be underestimations given that it does not account for illegal and unaccounted for deforestation. In the 1990s, it is estimated that 80% of the deforestation in the Amazon to have been illegal (WWF) . Although the Brazilian Institute of the Environment and Natural Renewable Resource has taken measures in the past 30 years to stamp out illegal practices, illegal deforestation still poses a huge threat to the Amazon as the practice increased by up to 60% in 2018. Furthermore, despite an economic turndown leading to a fall in electricity consumption, Brazil’s carbon emissions rose by 9% in 2016, plausibly driven by spikes in illegal deforestation (Carbon Brief). The problem of illegal deforestation in Brazil will likely increase as soy becomes more profitable as a result of the US-China trade war.

2. Case Study: Disruption of Cerrado and Amazonian ecosystems in Mato Grosso

In Figures 3&4, across Brazil, soy is concentrated in the western and southwestern states of Mato Grosso, Goias, Mato Grosso do Sul, Paraná and Rio Grande do Sul. Scientifically speaking, the acidity of the soil in these states is unsuited for soy. However, as a result of artificial government intervention in the 1990s (Santana et al, ix), the production of soy in the southwestern states has dramatically increased, as Mato Grosso alone accounts for approximately 33% of Brazil’s soy production in 2019 (USDA, soybeans). On top of the short-term trend of increased Chinese demand, long-term trends of government intervention, including the Uniform National Price Support strategy that protected the industry from pricing competition from imports and a national pricing strategy that uniformly and artificially set prices to shore up production in these states until February 1995 (Schnepf, 37) have contributed to this concentration. Hence, an increase in Chinese demand for Brazilian soy will be concentrated in these regions. 2.1 Monopolised and undertaxed: how a few agribusinesses control soy production in Mato Grosso

Seven agricultural firms, Bunge, Cargill, ADM, COFCO, Louis Dreyfus, and Amaggi, dominate soy production in Brazil, capturing 57% of the total market share (Trase). Amaggi Group dominates production in Mato Grosso, having solidified its position in agribusiness through vertical integration in the production, processing, and the export of soy and sub-products such as oil and meal (Mongabay, Blairo Maggi). While the domination of the market is not necessarily harmful to Brazil’s public interest, coupled with massive government subsidies soy is effectively overvalued

due to market distortions. In 2019, the government released a new subsidy plan: for every 120 hectares of soy insured by farms, the government will fully subsidise 20 hectares (Vieira).

Assuming that soy has a yield rate of 3.25 metric tonnes per hectare and that the price of Brazilian soy is $419 per tonne, in 2019 soy revenue would amount to approximately $66.0 billion according to long term trends and $100.0 billion according to short term trends. However, because a sixth of the production is subsidised, the government has effectively paid up to$16.7 billion to these agribusiness giants.

Furthermore, most of the big agricultural firms have offshore accounts that are possible tax havens. For example, according to the ICIJ, Amaggi Group’s beneficial ownership is linked to Appleby Trust Ltd and Reid Services Ltd in the Cayman Islands. Blasio Maggi, the owner of Amaggi Group and former governor of the state of Mato Grosso, was publicly questioned about his ownership of these companies in the 2017 Brazilian Paradise Papers (Hermesauto). Similarly, Louis Dreyfus is also allegedly linked to Appleby (ICIJ). Whilst there are legitimate business reasons for having offshore accounts, the trend suggests that there is a strong possibility that these firms have been evading Brazilian corporate taxes.

Given that agribusiness has become an important bastion of both the Brazilian economy and its politics, the corruption in soy and agribusiness in general is particularly rampant and concerning. The bancada ruralista controls over half of Brazil’s congress, allowing pro-agribusiness policies like subsidies and the privatisation of infrastructure projects to be passed easily (Branford).

Therefore, these socioeconomic and distributional inequalities were further cemented and exacerbated through the unequal distribution and implementation of technologies developed by the Brazilian Agricultural Research Corporation (EMBRAPA)—a public agricultural research agency linked to the Ministry of Agriculture and Food Supply. This inequality highlights the systemic public-private partnership between Brazilian government agencies and big Brazilian agricultural producers. This growing public-private partnership between the Brazilian government and agricultural producers is unsurprising, especially given the importance of agriculture in the Brazilian economy, which has concentrated the political power of wealthy landowners. 2.2 Effects of greenhouse gas emissions on air pollution and the integrity of food chains

Agricultural cultivation in the Amazon biome has been linked to higher nitrous oxides (NOX) atmospheric emissions. NOX has a dramatically larger per-unit impact on global warming and climate destabilisation than carbon dioxide (Nelson). Whilst the EPA estimates that the SCC is valued at approximately $39 per metric tonne in 2019, the social cost of nitrous oxides (SCNO) is valued at approximately $14,000 per metric tonne in 2019, approximately 350 times more (EPA). For example, referring to Figure 5 in the Amazon biome, though the rainforest has been documented to emit a baseline of NOX (1.9 kg/ha/year), the replacement of the rainforest with pasture has increased the NOX emissions by more than 3 fold.

Because of the acidity of the soil in the Cerrado and Amazonian biomes, a significantly higher amount of fertiliser is required for soy cultivation. However, referring to Figure 6, due to advances in inoculation and rhizobia that allow soy to fix nitrogen directly from the atmosphere, soy seeds require relatively little nitrogen based fertiliser but significantly higher amounts of phosphorus and potassium.

In soy fields, while atmospheric emissions of NOX is high, the nutrient runoff of nitrogen, phosphorus, and potassium into water bodies has been theorised to be low as the soil fixes and stores phosphates and nitrates. Nevertheless, with projects such as BR-163 (explained below) that facilitate the proposed expansion of soyfields to the floodplain near Santarém, there is a high risk that marine life becomes contaminated. Particularly during the low tide period, floodplains commonly shrink and dry up, concentrating fish in a single area. When this happens, fertilisers from soy fields will also concentrate on the dried-up plain with the fish.

Infrastructure that supports soy production is likely to accelerate given robust Chinese demand for soy and the Chinese investment in Brazilian infrastructure (Watts). The building of more waterway and dams would be an ecological disaster as dams obstruct water flow, blocking the flow of nutrients and sediments downstream, potentially having devastating effects for aquatic life. This blocked flow will also increase the concentration of methyl mercury in the reservoirs that would be ingested by fishes. The process of bioaccumulation could pose a health hazard to Brazilians who rely on seafood from these rivers as their primary food source. 2.3 Acceleration of infrastructure-driven deforestation in the Amazon

The construction BR-163 started in the 1970s as part of the government’s development plan. Initially, BR-163 was conceived to be a 1,770km-long highway that connects Satarém to Cuiabá in Mato Grosso (WWF). In

response to pressure from big agricultural conglomerates to build better infrastructure in Mato Grosso to transport goods the government has been leveraging private partnerships to plug the infrastructure gap.

As early as 2013, the Brazilian government has auctioned off the continuation of the project and management of parts of the highway to private companies. The Brazilian construction giant, Odebrecht, won the government concession at R$0.026km (USD). Nevertheless, international commenters have doubted the legitimacy of the bidding process, pointing to Odebrecht’s highly politically entrenched status as it has bankrolled multiple politicians’ campaigns (Estradas). Odebrecht has since been formally indicted for corruption and the contract has since been annulled due to its failure to meet contractual KPIs. Instead, the government employed the army to complete the BR-163 (Gallas).

Chinese demand for Brazilian soy will drive an acceleration of deforestation for the construction of soy fields and related infrastructure. Big agribusiness firms and the Brazilian government have long wanted to build a trans-Brazilian railway that will provide an alternative route for soy to the Panama Canal, which is viewed to be US-controlled.

However, neither the government nor businesses have been willing or able to fund such a project. China’s increased import dependence on Brazil has made a trans-Brazilian railway (Mongabay, Amazon Rail Network) a plausible project for China’s broader Belt and Road strategy. China has already bought a Brazilian port at São Luís do Maranhão and is in negotiations with the Brazilian government to build new rail lines such as FICO in Brazil’s centrewest that will cut through Mato Grosso (Mongabay, Amazon Rail Network). China’s aggressive expansion accelerates the deforestation of the Amazon. 2.4 Acceleration of the destruction of the Cerrado biome

Whilst the destruction of the Amazon has received much international attention, little attention has been paid to Cerrado lands. Referring to Figure 7, in 2016, it was estimated that more than 3.5 times more Cerrado land was cleared than Amazon land by big agribusinesses like Bunge and Cargill. They purportedly view Cerrado lands as a less controversial biome to clear than the Amazon. Though almost half of the Cerrado has already been converted to agriculture, only 7.5% lies in protected areas. Much belong to private landowners who may clear 65% to 80% of each property. In contrast, 50% of the Brazilian Amazon lies within protected areas (Ermgassen et al., 3).

There are legitimate concerns about bio-conservation that this paper does not have the scope to explore. Beyond such concerns, local geraizeiros populations have farmed the Cerrado land since the 19th century and are being displaced and exploited. The issue is beyond economics as violent private security contractors have allegedly been employed by agribusinesses to terrorise locals into allowing agribusinesses to acquire their land.

Geraizeiros continue to be harassed by private security contractors despite the fact the Brazilian state courts have affirmed the rights of 62 geraizeiros families to 42,000 hectares of Cerrado land (Mongabay, Green Land Grabbing). In 2019, arguably partly due to high Chinese soy demand, private security contractors have continued to harass geraizeiros and several were shot for attempting to graze their cattle on Cerrado land (Mongabay, Cerrado farmer shot). This harassment stems from the fact that whilst geraizeiros have been affirmed of their right to their land, the Cerrado land is not considered a protected area. This reflects a deeper trend of the marginalisation of traditional communities.

Whilst private companies and some government officials have justified these policies by stating that modern agriculture would offer a path out of poverty for rural populations, rural populations are often exploited. Particularly because soy is a capital-intensive enterprise, the profits from soy farming rarely get distributed to workers. In 2005, Fazenda Australia, which operates soy farms, was found guilty of illegal hiring of workers via gato (labour intermediary) of workers.

Workers were housed in appalling conditions— housing made of zinc sheets, plastic canvases, and cardboards—with no access to water, electricity and basic sanitation (Reimberg). As mentioned earlier, the deforestation of Brazilian land at the cost of traditional livelihoods is not only a cultural issue but also an economic one as the promised value and progress for modern agriculture rarely reaches workers. Without social protections, exploitation will continue as external demand for soy continues..

3. Brazilian government’s exacerbation of structural inefficiencies in soy production

Agriculture gained significance in Brazilian politics from 1986 to 2007, with production increasing by 77% during the period. This boost was driven by improvements in productivity, as growth in an average farm total factor productivity (TFP) increased 2.55% per year between 1985 and 2006 (Rada et al., iii). Commodity research centres operated by the state-led EMBRAPA45 were the primary drivers of this TFP increase (Rada et al.,

iv). However, decomposing these figures, the productivity growth of crop farms (2.9%/annum) during the period was much lower and lags behind the productivity growth of livestock farms (7.1%/annum) (Rada et al., 18). This widening productivity gap was primarily caused by the different levels of influence EMBRAPA research had on farms with varying levels of efficiency, where EMBRAPA research influenced the most efficient farms.

Moreover, while crop farm productivity has improved across the board, improvements in productivity were not equally distributed. There has been a growing productivity gap between farms that were more efficient in 1985 and those that were producing at average efficiency levels during the same period. Farms that were producing at average efficiency levels in 1985 had technical efficiency levels fall from 93% in 1985 to 84% in 1995 to 64% in 2006 (Rada et al., 19) .

Similarly, despite moderate levels of technical inefficiency, strong allocative inefficiency has exacerbated this divergence in TFP. Particularly, the over-utilisation of land and labour and insufficient educational infrastructure in rural areas exacerbated allocative inefficiency. Similarly, poor climate, soil conditions, and irrigation use exacerbated productive inefficiency (Vicente, 208).

Mato Grosso has had one of the highest levels of technical efficiency, which highlights how farmers in the state managed to quickly modernise and use technically efficient production methods (Vicente, 212). However, this conceals deeper historical and institutional factors that reveal how large agribusinesses have traditionally dominated the region. Further decomposition of input utilisation underscores the over-utilisation of land, fuel, fertilisers, herbicides, and seeds in Mato Grosso (Vicente, 214)—in tandem with our earlier analysis of soy cultivation in Mato Grosso. 3.1 Structural inefficiencies inhibit technological adoption

A growing gap in operating scale aggravates these divergences in efficiency levels. Big agribusinesses utilise more than 75% of Brazilian agricultural land, making up 62% of the country’s agricultural output and contributing to 23.5% of the Brazilian GDP in 2017 (Gross). This is significantly greater than the operating scale of smallholder farmers, who despite making up 84% of the country’s number of farms—a staggering 4.4 million farms in comparison to big agribusiness’ 800,000 farms—occupy less than 25% of the country’s agricultural land (Gross). The rate of technological adoption in Brazil is 3 times slower than that of the United States despite a flattening of agricultural yield curves in agricultural production (Lowry et al.). The United States Department of Agriculture (USDA) has suggested that over-farming and overuse of agricultural inputs such as herbicides and fertilisers that inadvertently drive climate change and degrade soil are the key culprits.

Poor soil-conservation practices, such as mono-cropping and inefficient herbicide, lead to low resilience agricultural systems vulnerable to disease and worsen the problem (USDA). Despite slowing growth in crop yields, inertia remains among Brazilian farmers, slowing their adoption of agri-tech. Technological adoption seems to also follow this same bifurcation, where big agribusinesses can afford to and profit from adopting technology; whereas smallholders lack economic incentives since they neither have sufficient knowledge nor reached production stages where technological adoption will significantly improve TFP.

This bifurcation in access to resources between large agribusinesses that run larger higher productivity farms and smallholders running smaller rural farms has led to different barriers towards technological adoption. The former do not adopt the technology due to utility maximisation. Specifically, large agribusinesses are incentivised to clear the forest and repurpose pasture for crops to increase growing scale, instead of improving efficiency on existing plantation land because of the lack of enforceable constraints and the relative cost of technology. The latter sees itself inhibited from adopting technology due to the innovation-diffusion paradigm.

For smallholders, insufficient primary and secondary school infrastructure under-equips Brazilians with the knowledge required to both identify climate change as a problem that affects production yields and to undertake corollary strategies to mitigate the effects of climate change and improve crop yields (Rada et al.). This innovation-diffusion problem does not only hold for the adoption of novel technologies and strategies such as switching away from tillage, but also prevents the implementation of stepwise changes in farming methods. Even switching herbicides or fertilisers would require farmers to spend time and resources to track, report, and comply with environmental regulations, many of whom do not have the required knowledge to do so.

Beyond the lack of educational infrastructure in many Brazilian federal units confounded by significant income inequality across Brazil, there is a unique structural format where many of inefficient smallholder farmers are led by older farmers. In Brazil, the average farmer’s age is 47 (da Silva). Studies in Burkina Faso (Sidibé) and

South Africa (Baiyegunhi) highlight how older farmers are less likely to adopt irrigation and water harvesting practices. This suggests that younger farmers are more positively correlated to adopting new technologies.

Studies show that structural elements inherent to the smaller scale of smallholder farming may exacerbate their lower propensity to adopt new technologies, ceteris paribus, in the absence of government intervention. Particularly, farm size has a significant negative correlation with soil conservation practices (Israel) due to the cost of implementing soil conservation practices increasing with farm size. Similarly, land ownership is negatively correlated with the implementation of irrigation and water harvesting technologies (Israel), which is alarming when considering that most farmers in Brazil own their land.

The primarily food-related crop configuration of smallholders dampens technological adoption, especially when compared to the non-food cash crops produced by large producers. Beyond the lower market value of these food-related crops, production by smallholders for commercial intentions has a significant negative correlation with the lowered probability of technological adoption in soil and water conservation practices (Israel). This is primarily because smallholders seek to make an immediate profit before focusing on household consumption and increasing long-term yield. 3.2 Exacerbation of inequities between big agribusinesses and smallholder farmers

Brazil emerged as one of the world’s global agricultural producers by the 21st century. Agriculture has remained a robust segment of Brazil’s economy, accounting for 46% of Brazil’s exports in 2016. Agriculture was even one of the few sectors to continue reporting growth during the 2017 Brazilian recession (Agriculture Abroad). Yet, there are significant inequalities in efficiency levels and productivity between smallholder farms and farms operated by large agribusinesses. As a caveat, both smallholder and large agribusiness efficiency levels in Brazil are still markedly lower than farmers in other countries, like the United States (Filho et al). In the following sections, notions of efficiency and productivity refer to a relative comparison between the agricultural efficiency levels between smallholders and large agribusinesses within Brazil.

It is important to note that discrepancies in efficiency are also grounded in structural reasons arising from different agricultural configurations. Smallholder farmers tend to grow food-related crops due to easy access to inputs and markets to sell crops. Smallholders form the backbone of Brazil’s food source, producing 70% of Brazil’s consumed food (Gross). On the other hand, large agribusinesses tend to focus on cash crops such as soy because they command access to export markets abroad. This bifurcation in agricultural configuration also leads to a divergence in agricultural productivity, which tends to be calculated as a function of output value divided by input value. Clearly, cash crops are more profitable than food-related crops such as nuts and cassava.

However, these disparities cannot be solely explained by productive efficiency factors such as farm size,cost savings from economies of scale, and agricultural configurations. This distributional inequality is caused by public-private practices that have entrenched the position of large agribusinesses in Brazil. This entrenchment has caused varying levels of technology implementation and access to markets. Today, the top 1.5% of agricultural landowners in Brazil own 53% of all agricultural land (Gross). Furthermore, 84% of Brazil’s farms only contribute 38% of the gross value of Brazil’s agricultural production (Food and Agriculture Organisation of the United Nations). These deep divergences will accelerate with the US-China Trade War, as big agribusinesses are the ones that predominantly benefit from increased Chinese demand and the associated profits. With more profits, agribusiness giants have yet more capital to plough back to purchase technologies. 3.3 Existing Brazilian governmental policy serves the interests of large inefficient agribusinesses, entrenching their economic and political positions

We have argued that the growing discrepancy between smallholder farms and large agribusinesses are largely the result of so-called governmental policy between agribusiness giants and the government. This needs to be addressed should Brazil aim to limit environmental degradation caused by land-use changes, deforestation, and unsustainable agriculture. Soy cultivation is highly capital-intensive, requiring expensive fertilisers, high yield seeds, herbicides, and equipment for land clearing (Global Forest Atlas). Furthermore, soy is almost wholly sold in exclusive export markets and soy sales require farmers to have access to secondary processors that extract meal and oil (Brown-Lima et al.). As such, smallholders do not have the means to afford these high fixed costs, nor do they have the scale to sell their products in export markets.

However, although soy production by big agribusinesses is more efficient vis-a-vis the nuts that smallholders produce, soy production in Brazil is inefficient

in comparison to other countries like the US, as explored above. Nevertheless, because soy production is the ‘gold standard’ of efficiency within Brazil, big agribusinesses have little incentive to use more efficient practices to increase their yield. Yield growth is hence focused on acquiring new land through which to plant more seeds. Instead, these businesses merely price and displace smallholders out of their land. The US-China trade war would further exacerbate this issue as increased Chinese demand incentivises agribusinesses to expand their soy fields whilst not increasing their efficiency. 3.4 Insufficient government aid to smallholders

In settings with relatively equal socioeconomic distributions, the roles of rural credit and transportation infrastructure have been significant in improving agricultural productivity (Israel). Yet, studies on rural agriculture in Brazil have shown that inequities between smallholders and large agribusinesses are so stark that educational investment is the most appropriate and impactful mechanism in closing the productivity gap. Particularly primary school infrastructural investments have historically worked best to close agricultural productivity gaps in Brazil (Rada et al.). However, the Brazilian government seems focused on policies that disproportionately benefit large agribusinesses, possibly due to the domination of the rural caucus in politics. These policies such as the Policy of Guaranteed Minimum Prices (PGPM), technological adoption assistance provided by EMBRAPA, and the infrastructural development of the BR-163 do not specifically aim to improve the productivity of smallholders. 3.5 Lack of sustainable lending and green finance

Current government-led agricultural risk management tools are not as useful for smallholders as they are crafted for big agribusinesses (Assunção et al.). Current price-risk mitigation policies insulate against price volatility caused by climate export shocks, which large agribusinesses are more exposed to than smallholders. Moreover, existing risk mitigation policies do not provide incentives nor sufficient predictability to smallholders for them to plan for or to adopt the technology (Assunção et al.). Instead, current policies result in low income for poor farmers and restricts their ability to raise credit (Assunção et al.).

Brazilian price risk mitigation in the form of the Policy of Guaranteed Minimum Prices (PGPM) have not been wide-ranging and not cost-effective enough, with a deficit of BRL$1.4B (USD$0.27B) in 2013 (Assunção et al.). Smallholders do not benefit from this policy because minimum prices protect against price risk created by unstable export markets and oversupply shocks. Smallholders are instead more vulnerable to weather risks caused by drought and seasonal weather patterns (Braun), which would be better insulated by insurance policies.

Globally, agricultural buyout policies have decreased in scale, yet this trend has not been observed in Brazil (Assunção et al.). Credit supply has been a strategy through which to promote sustainable agriculture practices, seen through the Low Carbon Agriculture Programme (Assunção et al.). Yet, credit access predicated on switching to more sustainable and environmentally-friendly agriculture practices is still not fully-developed for large agricultural producers, who form the largest contributors to deforestation and emissions in Brazil (Assunção et al.). Smallholders are not incentivised to take risks or adopt technology without sufficient risk mitigation strategies (Assunção et al.). Taken together, this means that increased soy demand caused by the US-China trade war will not create growth opportunities for smallholders, but will instead entrench the positions of big agribusinesses and widen the inequities between the two groups. 3.6 Brazil’s superficial environmental targets obfuscates the lack of robust progress

Both the Brazilian government and large agribusinesses have been complicit in using zero deforestation commitment (ZDR) and climate pledges as covers to continue degrading the environment. For example, according to Figure 8, both Amaggi and Louis Dreyfus have made pledges to set up soy infrastructure in 2009 and have largely fulfilled their pledges. Their joint-venture, ALZ Grãos, has invested in soy storage, wholesale facilities and a port terminal in at-risk areas, increasing deforestation risk in 2017 by 5-fold and 10- fold in comparison to Amaggi and Louis Dreyfus respectively (Zu Ermgassen et al).

Furthermore, the Brazilian government’s 2015 COP21 pledge was a political manoeuvre meant to obfuscate Brazil’s environmental commitments. In 2015, the pledge was set at a 37% cut by 2025 with 2005 as the base year (Timperley). However, Brazil not only committed to an absolute carbon emission reduction but also, analysing 2012 emissions data, it is clear that Brazil was already close to fulfilling its pledge in 2012 (Timperley). This low bar gives Brazil leeway to increase emissions and still meet its 2025 target, a commitment that Climate Action Tracker has called out as “insufficient”(Timperley). It is hence unsurprising that IEA has projected that Brazil’s emissions will increase through 2040, and

indeed Brazil’s GHG emissions increased 9% in 2016 as reported by Carbon Brief and the Observatório do Clima as a result of increased deforestation (Timperley).

Moreover, the continued role of EMBRAPA and the Ministry of Agriculture (MAPA) in leading agricultural research through the Agricultural Risk and Vulnerability Monitoring and Simulation System and the Centre for Climatic intelligence for agriculture continues to benefit large agribusinesses at the expense of smallholders. These centres seek to augment already existing regulatory, planning, and implementation methods that have traditionally worked in the interests of large agribusinesses, and have only increased the scale of pollution and deforestation (Timperley).

With the increased Chinese demand for Brazilian soy, these superficial safeguards will continue to act as a cover for unsustainable and inequitable soy practices. Without robust institutional reform in both the political and economic spheres to make participative and representational institutions more inclusive, any new programmes and reforms proposed by the Brazilian government will only be disingenuous re-creations of structures that seek to further entrench the positions of the agricultural elite.

4 Recommendations 4.1 Environmental social credit rating system

We acknowledge that given entrenched political interests in Brazil, it would be unrealistic to expect the Brazilian government to cut all soy subsidies. Instead, it would be more realistic to peg soy subsidies, including the minimum price buyout and ⅙ production subsidy, to environmental protection KPIs. In particular, we propose a points system that would help track negative and positive practices. For example, negative points would be levied per hectare on farms that acquire additional land without first improving their technology, such as high yield seeds. Additionally, high demerits alongside fines will be levied for illegal deforestation or harassment of people from protected areas. In contrast, positive points will be accorded to farmers who employ sustainable practices such as no-till farming, the use of nitrification inhibitors, and the planting of cattails. Because smallholders do not have the political capital to risk the current fines imposed if caught illegally falling trees and are unlikely to fall trees at the scale that large agribusinesses do, we argue that this model is equitable as negative points generally target large agribusinesses. 4.2 Special Taskforce

To administer this environmental social credit rating system; as well as to investigate and determine penalties for environmental violations, we propose the creation of a Special Taskforce.

As mentioned, the Brazilian government and companies have devised superficial policies that target deforestation risk and equity issues. Further, the regulatory and investigative bodies that do exist have monitoring and enforcement issues. For example, the Amazon Council that was established in 2019 is headed by Vice President Mourão who is a supporter of Amazon mining (Mongabay Environmental News). The Council was also created in conjunction with President Bolsonaro’s decision to cut 25% of Brazil’s environmental enforcement agency’s (IBAMA) budget (Mongabay Environmental News). As such, these policies are largely disingenuous reactions to pressure from investors who are worried about environmental issues. We argue that given the entrenchment of agribusiness political interests, the existence of this task force, sanctioned from the very political establishment that is the source of the problem, does more harm than good as it gives the illusion that progress is being made.

We recommend that actors that have a stake in Brazilian soy and in the Brazilian government as a whole, like importers of Brazilian soy and investors in Brazilian infrastructure, should use their leverage to pressure the Brazilian government to set up an independent taskforce. This task force would initially be headed and monitored by intergovernmental experts who would subsequently train up a group of local experts from Brazilian universities and the civil service. As illegal deforestation and harassment of local landowners continue to pose huge risks to Brazil, the presence of an independent taskforce would be crucial in the reporting of and penalising of violations. 4.3 Strict land-use zoning with high fines for defection

To ameliorate the effect of soy’s high NOX emissions, we recommend the implementation of specific crop zoning that would mix soy production with other low-NOX emitting crops (explained below). Furthermore, we recommend the planting of several trees in soy fields that soak up fertiliser, to mitigate problems of nutrient runoff. In addition to the aforementioned negative points for land acquisition, we suggest that the stamp duty for private and public land acquisition should be increased. Because private land acquisition is predominantly executed by smallholders whilst public land acquisition is predominantly executed by agribusinesses who fall more trees to expand production, private land acquisition stamp duties should be increased less

than public land acquisition stamp duties for equitable reasons. 4.4 Educational infrastructure

As mentioned before a key source of inefficiency in smallholder farms is due to lack of education. As such, revenues from the stamp duties, fines, and cut in machinery subsidies should be put towards crafting education programmes for smallholders. These programmes would have a curriculum on no-till agriculture, the importance of planting cattails and trees in fields, etc. This curriculum would be largely deployed by consultants engaged from intergovernmental agencies and local universities. The dissemination of this curriculum will be done via cooperatives. When possible, consultants who devise this curriculum should live in the cooperatives to properly observe practices and offer bespoke advice. 4.5 Cooperatives

Vulnerable indigenous people in the Cerrado and Amazon regions are predominantly under threat from private security contractors hired by large agribusinesses. As such, we argue that a solution would involve incentivising large agribusinesses to protect indigenous populations through tax deductions. Therefore, when agreed, cooperatives should be set up where agribusinesses would be incentivised to not infringe on traditional lands in exchange for tax-deductible benefits. If indigenous populations choose to grow soy, big agribusinesses will be given the option to purchase the soy produced at an equitable rate for export. 4.6 Promotion of a unique crop configuration and rotation system

To promote permaculture, a specific configuration of crops consisting of both subsistence crops (corn, nuts, bananas, cassava) can be mixed with cash crops. This could be promoted as the unique standardised Brazilian crop configuration, that would have the most ideal economic and environmental impact given the average size of cultivable farmland. To return nutrients to the soil, this crop configuration would come as a set of three crop cycles such that the sets can be rotated after harvesting. This crop rotation system would ensure that a good succession of grain crops are followed by grass crops and then cultivated crops. In effect these considerations will form specific configurations specific to what crops grow well in different Brazilian regions. The exact configuration should be decided by agricultural experts in Brazil rather than political leaders, so that the choice of crops cannot be politically charged with certain agribusiness interests. This configuration, while not enforceable, should be promoted by government agencies and consultants especially those involved in the taskforce and cooperative. 4.7 Policies related to agricultural credit and risk mitigation

Private capital markets are the best candidate for the implementation of agricultural price mitigation strategies (Assunção et al.). Yet, Brazilian risk mitigation strategies have not ventured into market-based instruments such as insurance and sell options. Soybean remains the only crop in Brazil still not covered by specific crop insurance (Vieira).

Brazil can work with the International Bank For Reconstruction and Development (IBRD) and FAO to develop more comprehensive risk mitigation schemes in the form of index-based, region-specific, and crop revenue-related insurance policies. Lastly, government interventions have been subsidy-heavy in Brazilian agriculture, which have dampened incentives towards efficiency and technological adoption. Brazil can curtail this by attaching requirements of technological adoption to qualify for government aid or pairing policies together, such as through subsidising certain seeds whilst requiring farmers to purchase more environmentally friendly fertilisers. 4.8 Green finance

Sustainability conditions should be encouraged through foreign investment in Brazil. Brazil received $109m between 2013 and 2016 from multilateral climate funds both privately managed and run by multilateral platforms such as the IBRD (Timperley). This is still quite a low number compared to total FDI inflows, and while Brazil can better promote its more sustainable projects, more should be done to induce local investment projects to move towards more environmentally sustainable production strategies as they source for foreign investment. Tax breaks and waivers on foreign investment could be extended to projects that commit to sustainable environmental standards, to environment reporting to the government, and to ensuring that these standards are met during the length of the project. Export licenses and special preferential investment licenses can also be granted to companies, depending on their history of committing to sustainable projects. 4.9 Public-private partnerships, with attention to BR-163

As seen from the example of BR-163, the Brazilian government needs to ensure transparency and equal opportunity during the tender and auctioning processes of government contracts. Particular attention should be paid not just to the price points of the submitted tenders,

but also to the performance history of companies and if they can ensure the provision of agreed deliverables.

Whilst we agree with the current policy that passes on the cost of building BR-163 to farmers, via tolls. We argue that tolls should not charge a simple flat rate dependent on distance (Estradas), but rather a fee based on ability to pay. Hence, we recommend different toll rates based on the maximum tonnage of vehicles using the expressway, where large vehicles carrying large quantities of cash crops to the ports meant for the export market should be charged more than smaller vehicles operated by smallholder farmers travelling to local markets.

With particular attention to operating BR-163, we advise against the government’s plans to yet again privatise the expressway (BNamericas), but instead propose a contractual limited-time auction of the management of the road under a usufruct system. This would be similar to the Singaporean government’s auctioning of critical bus and subway lines (Land Transport Guru). Under such a system, the operator of the road needs to guarantee minimum services and performance standards as dictated by the Brazilian government whilst paying the auctioned yearly sum to the government, in exchange for revenues obtained from the tolls. These services and standards can take the form of a number of road maintenance work done per year, a cap on the number of accidents, or the number of trees felled per year, amongst others. 4.10 Others

The Brazilian government should make it unacceptable for large agribusinesses to use prophylactic sprays across whole fields, given the contaminating effect it has on the soil. Instead, targeted agrochemical applications should be encouraged based on individual plant health. Improvements in technology have made it increasingly viable to deploy remote-sensing techniques that automatically detect and recognise pest and disease damage on fields in real-time. This is especially crucial with larger field sizes, and these technologies can be deployed such that detection can occur before symptoms are first visible to farmers. This makes large-scale prophylactic sprays redundant and relatively less cost-efficient. More relevant to farmers, these technologies can also predict crop yields and losses at critical junctures in the farming cycle with these technologies. This strategy helps with early detection, mitigation, and crop estimation that is crucial for farmers’ interests. The Brazilian government should hence encourage the adoption of said remote-sensing technologies amongst big agribusinesses who can afford to do so.

Machinery subsidies have been shown to promote tilling practices. Tillage is a traditional practice that has been shown to have poor effects on soil health and to consume more man-hours (Mafongoya et al), and has limited agricultural benefits. Cutting machinery subsidies, in tandem with encouraging partial and no-till practices will make it more unsuitable for farmers to practice tillage.

Annex

Figure 1: Long-term trends

Figure 2: Short-term trends

Figure 3: Maps showing regional soy production hotspots in Brazil (United States Department of Agriculture)

Figure 4: Maps showing regional soy production hotspots in Brazil (Martinelli et al.)

Figure 5: NOX emissions in Brazil per region (Davidson et al)

Figure 6: Fertiliser usage by biome in Brazil (Garrett et al.)

Figure 7: Trends in deforestation in the Amazon and Cerrado biomes (zu Ermgassen et al)

Figure 8: ZDC effects on Amaggi, Louis Dreyfus and ALZ Grãos (Zu Ermgassen et al.)

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