Bountiful returns: agriculture minister Blairo Maggi finds himself in charge of a sector whose performance, much driven by exports to China, has helped push inflation down to historical lows © Reuters
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In Três Lagoas in Mato Grosso do Sul state, the site of the world’s largest single-line pulp mill — owned by Brazilian company Fibria Celulose — forestry manager Tomás Balistiero shows off the prowess of those who cut down trees to feed the plant.

A chart shows the record output for a single operator during a nine-hour night shift: 1,702 eucalyptus trees felled, a rate of 19 seconds per tree.

Another operator demonstrates how it is done, by way of a PlayStation-like console in the cockpit of one of the monster harvesters. The machine grasps a eucalyptus tree in its jaws, saws it off at the base and peels its bark and limbs as smoothly as a banana. In seconds, it slices the tree into 6.5m lengths, piling them like matchsticks. “Here there are very few people and a lot of land,” says Mr Balistiero. “Productivity is very high.”

Fibria, the largest eucalyptus pulp company in the world, is about to become even bigger after a planned merger with Suzano, the country’s number two producer. Its operations provide an example of how Brazil has survived its worst recession in history over the past few years.

Brazil’s GDP grew 1 per cent last year, a nascent recovery from the previous two years when it shrank by a combined 7 per cent. By contrast, agriculture, which includes forestry, grains and animal husbandry activities such as ranching, grew 13 per cent in 2017.

A bountiful harvest helped push inflation down to historical lows. Brazil’s official IPCA inflation index registered a 2.7 per cent rise in prices in the year to March, its lowest level since 1999.

Agriculture’s performance, much of it driven by exports to China, and the decline in inflation have been accompanied by record low benchmark interest rates of 6.5 per cent.

Economic growth rates are forecast at 2.75 per cent this year and 3 per cent next year, according to a central bank survey.

The recovery could be yet more spectacular should the candidate who wins the presidential elections in October quickly implement economic reforms. Most important is a much-needed overhaul of the state pension system, which is considered to be unsustainable, with many public servants in particular retiring in their mid-50s.

“The window of opportunity is here,” says Marco Abrahão, head of private banking at investment house Credit Suisse Hedging-Griffo, which manages R$115bn in assets.

“If someone enters now with a reform agenda, that would be the first time this has happened in Brazil at a moment when we also have low interest rates and inflation.”

The problem, say analysts, is that while the market sees the need for fiscal reform, no clear leader likely to enforce it has yet emerged in the electoral race.

Most candidates from the centre-left to the far-right, for example, seem willing to implement pension reform but the uncertainty lies in how quickly and effectively they might want to do so. The current president, Michel Temer, has been unable to persuade congress to pass the constitutional amendment needed for pension reform, in spite of having been head of the lower house three times.

“There is uncertainty, especially with fiscal policy, over what will be the approach adopted by the new government,” says Mario Mesquita, chief economist at Itaú Unibanco. The uncertainty “is delaying people’s decisions”, he adds, on whether their spending will be geared towards “private consumption or investment”.

Some of the uncertainty is already reflected in economic performance. Industrial production in the first quarter of 2018 was minus 0.1 per cent, compared with market expectations for positive growth of 0.6 per cent.

Alberto Ramos, a Goldman Sachs economist, has said that while he still expects low interest rates and external demand to drive up industrial production this year, other factors could come into play, such as a recent slide in the currency of Argentina, one of Brazil’s most important trading partners.

In a recent report, Mr Ramos noted that Brazilian industry “could face headwinds” if Argentina’s financial turbulence undercuts growth in the key auto market for Brazilian exports.

Brazil could also face problems from the fallout in emerging markets from rising US interest rates, say analysts, with yields on US treasuries increasing as Brazilian benchmark rates are hitting record lows — encouraging a currency sell-off. Brazil’s real has already depreciated to its lowest levels since 2016.

Significantly, the central bank announced it would increase its sale of dollar swaps — bets against the dollar that have the effect of supporting the real — saying these were necessary to smooth out foreign exchange market movements. Some economists argue, however, that the fallout for Brazil from the US interest rate cycle should be bearable.

“Brazil has very favourable external fundamentals, such as a low current account deficit, modest external debt and high foreign exchange reserves,” states a note from Santander, the Spanish bank.

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