Monday, April 24, 2006

What I've been doing with my time....

Deforestation and the Market for Amazon Soybeans

The Legal Amazon of Brazil encompasses an astounding 500 million hectares (Fearnside, 2001(a)). The deforestation of this area poses global threats to the hydrology, climate, and biogeochemical cycles of the Earth (Skole, Chomentowski, Salas & Nobre, 1994) as well as global economic markets. Currently deforestation of the Brazilian Amazon is proceeding at an alarming rate, potentially the highest rate of any nation (Skole, et al., 1994). Already an estimated 58.7 million hectares have been deforested, with that area increasing by 1.5 to 2.5 million hectares annually (Skole, et al., 1994; Kaimowitz, Mertens, Wunder & Pacheco, 2005).
The primary cause of deforestation in the Brazilian Amazon is the expansion of agriculture (Skole, et al., 1994). Soybean farming is the fastest growing segment of Brazil’s agricultural production, accounting for 4.9 million hectares of cleared land already (Kaimowitz, et al., 2005). Arguably the most potentially damaging of Brazilian crops, soybeans are to blame for an expansive transportation infrastructure boom in Brazil (Fearnside, 2001(b)). The paving of roads is anticipated to facilitate a 25-40% increase in deforestation in the Amazon. This increased deforestation will release enough carbon emissions to negate half of the emission reductions called for by the Kyoto Protocol (Carvalho, Moutinho, Nepstad, Mattos & Santilli, 2004). Yet the new infrastructure serves to keep the costs of production faced by individual farmers low as they transport their crops to global markets and convenient access to transportation infrastructure can make a $15 per ton difference in the price a farmer receives for his crop (Barnett, 2006).
In 2006, Brazil is set to become the world’s largest producer of soybeans surpassing U.S. production for the first time ever (USDA, 2006). What is driving this rapid expansion of soybean production in Brazil and the consequent deforestation in the Brazilian Amazon? Oddly, for the answer to that question, we have to look to European cows.

Cattlemen as Profit-maximizers
Profit is the difference between how much money you make and how much you spend, and cattlemen are in business to maximize it. As profit-maximizers, cattlemen seek to ensure that their marginal cost is equal to their marginal benefit for each unit of production. In the cattle business, this means a focus on the “unit cost of producing a hundredweight of calf” or UCOP (Hughes, 2004).
While one might argue that the market for beef is imperfectly competitive, with prices influenced by a small number of firms, the market for cattle is perfectly competitive, filled with numerous small producers providing the same product to numerous buyers with no control over the market’s prices. Thus, the key to profit maximization in the cattle industry is keeping your unit cost of producing a hundredweight calf as low as possible, typically by use of a cheap protein feed source.
In the United Kingdom, where agricultural land is at a premium due to natural scarcity, the inexpensive protein source of choice until the early 1990’s was the rendered carcasses of farm animals imported largely from India (, 2006). This practice came to a grinding halt in the early 1990’s when the practice was linked to the outbreak of bovine spongiform encephalopathy (BSE) or “mad cow disease,” in the United Kingdom.
It has been speculated that the feeding of diseased animal proteins to cattle, ruminants and vegetarians by nature, allowed for the creation of a new prion disease capable of infecting humans as variant Creutzfeldt-Jakob disease, or vCJD, a lethal and degenerative neurological disease. The number of documented cases of variant Creutfeldt-Jakob disease has risen to 158 worldwide, with 148 of them in the U.K. alone (, 2006).
There is new research to suggest that the disease in fact came from diseased human remains fed to cattle, a disturbing possibility made potentially likely given certain cultural practices in India, the primary source of rendered protein to the United Kingdom (CBC News, 2005).
In the United States where abundant farm-land helps keep the cost of soybeans low, cattle producers have long relied on soybean hulls as a frugal source of protein feed for their cows (, 2006). No longer able to use rendered animal proteins, European cattle producers too turned to soybean hulls to feed their cattle. Previously soybeans had not been used as cattle feed in the United Kingdom in particular because the scarcity of land and the value of its alternative uses, made the opportunity costs of producing feed for cattle too high to be a profitable undertaking (, 2006).
Now the question European cattle producers faced was where could they acquire soybeans at a low enough cost to keep their unit cost of producing a hundredweight of calf competitive with that of the United States? For this they would have to find a source for soybean production with ample land and sparse development, making the alternative uses for the land few, and keeping the opportunity cost of growing soybeans low. Brazil, a developing South American nation with significant land holdings in the Amazon, fit the bill perfectly.

Soybeans are 50% protein, making them an excellent choice for protein-rich livestock fodder. This coupled with the halt of the rendered animal feeding systems common to Europe, a drought in the United States, and the demise of the Peruvian anchovy fishery has caused a great demand for soybeans. The global shortage of animal fodder has forced the price of soybeans up, making their farming even more attractive to Brazilian farmers (Donald, 2004). Government subsidies that create an artificial price floor have also helped to increase the dispersal of soybean farms across Brazil (Donald, 2004).

The Tragedy of Brazilian Soybeans
Soybeans are 50% protein, making them an excellent choice for protein-rich livestock fodder. This coupled with the halt of the rendered animal feeding systems common to Europe, a drought in the United States, and the demise of the Peruvian anchovy fishery has caused a great demand for soybeans. The global shortage of animal fodder has forced the price of soybeans up, making their farming even more attractive to Brazilian farmers (Donald, 2004). In addition, government subsidies that create an artificial price floor have helped to increase the dispersal of soybean farming operations across Brazil’s Amazonian holdings (Donald, 2004).

When Garrett Hardin wrote about his fictional commons in 1968, he might as well have been writing about Brazil’s Amazonian land holdings. While there exists a complex system of private and public ownership of land in the Amazon, government inefficiency and the sheer scale of the undertaking results in an open-access system (Alston, Libecap & Mueller, 2000). Here, as in Hardin’s common, land is free, environmental costs are externalized, and no producer has any incentive to decrease their own consumption of the common. The result is a race to the bottom for as Hardin (1968) tells us, “Freedom in a commons brings ruin to all.”

Solutions to the Tragedy
In his paper entitled, “Soybean cultivation as a threat to the environment of Brazil,” Philip Fearnside (2001(b)) makes several suggestions for the future of soybeans in Brazil; “(1) protected areas need to be created in advance of soybean frontiers, (2) elimination of the many subsidies that speed soybean expansion beyond what would occur otherwise from market forces is to be encouraged, (3) studies to access the costs of social and environmental impacts associated with soybean expansion are urgently required, and (4) the environmental-impact regulatory system requires strengthening, including mechanisms for commitments not to implant specific infrastructure projects that are judged to have excessive impacts.”
Protection of land ahead of soybean frontiers is an approach very much in line with the traditional solution to the tragedy of the commons. By restricting access to the land, you prevent the race to the bottom that naturally ensues in an open-access system. However, this approach will likely be difficult to implement given the convoluted Brazilian land-ownership laws and the expanse of land that would have to be monitored for the changes to be successful.
The second suggestion of terminating agricultural subsidies that prop up the price of soybeans and encourages production beyond market demand has merit. By discontinuing the artificial price floor, the government would cause the price of soybeans to fall back to the market equilibrium. This shift would result in many farmers leaving the market, as many would find their marginal cost of producing soybeans now higher than their marginal benefit. The termination would also result in the improved efficiency of the market, as the dead weight loss imposed by the government subsidies would no longer exist.
Studying the costs of social and environmental impacts of soybean production in the end would allow for the negative externalities of such production to be quantified and appropriate measures to be taken for businesses to internalize those externalities such as with a tax on production. In the short run, these studies will not make any impact on the manner in which the externalities of soybean production are dealt with. These externalities include “displacement of former land occupiers, chemical pollution, soil erosion and exhaustion, extreme income concentration, social disparity, and the diversion of government subsidies that could otherwise be directed to education and health,” to name a few (Donald, 2004).
Finally, strengthening the environmental impact regulatory system would give government the power to deny infrastructure that encourages the spread of soybean production by lowering transportation costs and thus increasing the profits of soybean farmers.

The relationship between deforestation and the market for Brazilian soybeans is a complex and global one. The solution to the problem is far from simple, but Fearnside’s recommendations are the beginning of an answer. Whether they will be enough to stop the unbridled spread of soybean production and the deforestation that lays in its wake is yet to be seen. What is certain is without intervention, farmers will continue to enter the soybean market and deforest the Amazon until supply finally catches up with demand and prices reach equilibrium, but by then it may be too late to reverse the damage done. Action needs to be taken soon to curtail the destruction to Brazil’s Amazon region and prevent further environmental degradation.


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Skole, D. L., W. H. Chomentowski, W. A. Salas, & A. D. Nobre. (1994). Physical and Human Dimensions of Deforestation in Amazonia. BioScience. 44(5), 314-322.
USDA. (2006, Feb.). Brazil replaces the U.S. as the top soybean exporter in 2005/06. Oilseeds: World Markets and Trade, Retrieved April, 2006, from