Spoiled Beans Highlight Brazil’s Inflation Challenge

One bad harvest of beans in Brazil is causing massive headaches for new President Dilma Rousseff and showing just how difficult it is for policy-makers worldwide to combat a recent jump in food inflation.

The retail price of beans – a staple that many Brazilians consume in virtually every meal – went up more than 52 per cent in 2010, more than any other single rubric in the country’s main IPCA consumer price index.

The rise reflects a general increase in global commodities prices as booming emerging market countries consume more protein and other foods – a trend that has placed inflation targets in jeopardy from China to Brazil and the rest of Latin America.

A 5.91 per cent jump was seen in the IPCA price index in 2010. The leading culprit was food, which accounts for nearly a quarter of the IPCA’s weighting. Spikes in beans and several other Brazilian staples such as beef – up by nearly a third in 2010 – pushed food prices up 10.4 per cent.

Yet a closer look at the rise in bean prices points more to the vagaries of weather and ill-fated attempts to balance demand and supply than broader economic factors, and may be beyond the reach of policy-makers’ inflation-fighting weapons.

“I’ve never seen a rise like this,” said Benedito Peres, a grocer who has been selling beans and other goods at his store on the edge of the capital Brasilia for more than 35 years.

The volatility in beans is relatively separate from the global rise in commodities because almost all beans consumed here are produced locally, with the exception of a few exotic varieties brought in from Argentina and even China.

There are three bean harvests during the year in Brazil, and last year’s total output ended up being fairly normal at about 3.32 million tonnes, government crop agency Conab said.

Yet a dip in prices early in the year set off a chain reaction. Farmers planted less for the ensuing harvest, and then an outbreak of bad weather – droughts in some spots, floods in many others – caused a supply crisis.

LOSING CONTROL

Meanwhile, as prices rose, some farmers began to hoard supplies in speculation they would go up even further, according to Michele Corbeti, a bean market analyst at the Safras and Mercado consultancy.

The government attempted to intervene by offering regulatory stocks from warehouses, but that had little impact because beans lose their quality within weeks of harvest.

By the time of the third and final bean harvest, production had mostly recovered, but prices failed to immediately react.

The consequences of the rise in beans and other foods spread quickly throughout Brazil’s economy. The IPCA helps determine everything from annual wage increases to the price of tens of billions of dollars of inflation-linked bonds, and it is used by the central bank as a guide to set interest rates.

The dilemma for central bank policy-makers is that a hike in interest rates would have little effect on the factors listed above, while it also runs the risk of squelching a consumer credit boom during Rousseff’s first months in office.

Finance Minister Guido Mantega is among those who insist that non-food inflation is under control in Brazil – a statement many analysts have interpreted as a plea for the central bank to be restrained in its tightening cycle.

Mantega even suggested late last year that Brazil should consider basing its inflation targets on core inflation, which would leave out food prices entirely.

With beans, at least, the problem may end up fixing itself. Brazil’s secretary for production and agroenergy, Manoel Bertone, says the five per cent rise expected in bean production in 2011 should be enough to stabilize prices this year.

He added the only long-term solution to volatility is likely an increase in farming output to keep pace with demand.

“You have increasing income not only in Brazil but also other places in the world. What we need is to make sure that higher prices lead to investments,” he said.

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