Concentration of market power may be harmful to São Paulo's agribusiness sector

Lack of transparency in the setting of prices paid to agricultural producers can have negative effects on investment in sugarcane and orange growing and processing industries.

By Elton Alisson  |  Agência FAPESP – Concentration of market power in São Paulo State’s agribusiness may be harmful to the sector. The two main agricultural activities in the state – production of sugarcane and oranges – have been disproportionately affected by this phenomenon, according to a study of agribusiness in São Paulo under the aegis of the project “FAPESP’s contribution to the development of agriculture in São Paulo State, Brazil”, supported by FAPESP and with Paulo Cidade de Araújo (1932–2016) as principal investigator.

“Like the rest of the economy in Brazil and the world, agribusiness has undergone a process of market power concentration in recent decades, resulting from mergers and acquisitions motivated by the advantages of large-scale operation,” said Geraldo Sant’Ana de Camargo Barros, a professor at the University of São Paulo’s Luiz de Queiroz College of Agriculture (ESALQ-USP) and coordinator of the study.

Barros told Agência FAPESP that the study found increases in both oligopsony and oligopoly in different segments of São Paulo State’s agribusiness sector. 

These new market configurations have subjected rural producers to unclear business practices, such as price formation, which is determined by suppliers of inputs, the processing industry and service providers.

“Many smaller farmers have given up because of this process,” Barros said. “They suffer from technological disadvantages compared with large and medium producers. In addition, they tend to pay more for inputs and receive less for the produce they sell.”

He went on to say that the process has also led to significant concentration in the state’s agricultural sector, with more large-scale rural establishments that use state-of-the-art technology and have the upper hand in negotiations on inputs, produce and credit via preferential channels, to the detriment of medium and small producers.

Another study, also part of the larger project, corroborates this finding by showing that the number of rural establishments in São Paulo State fell 30% from 327,000 to 228,000 between the 1970 and 2006 agricultural censuses. During the same period, their average area rose from 62.5 hectares to 74.5 hectares, indicating the concentration of land ownership.

These changes were accompanied by a decrease in employment in the state’s agricultural sector. The rural population in the state fell from 4.8 million in 1960 to 1.7 million in 2010, when it corresponded to 4.1% of São Paulo’s total population and 5.6% of Brazil’s rural population.

“Small producers have historically sought to mitigate the adverse effects of lack of competition by organizing to improve the terms of trade through joint action,” Barros said.

“Traditional forms of organization used by small producers, such as co-ops, are designed to combine forces in negotiating with the processing and service industries. More recently, these have evolved into partnerships between segments of rural production and industry.”

An example of such partnerships, he added, is CONSECANA, the São Paulo State Council of Sugarcane, Sugar & Ethanol Producers. The mission of this nonprofit trade association is to improve relations among sugarcane growers and the processing industry and to establish a level playing field for trade among the different segments in terms of technical parameters for raw material pricing based on sugar and ethanol prices collected by a mutually agreed upon institution, specifically ESALQ-USP’s Center for Advanced Studies in Applied Economics.

“A similar initiative has been pursued in the citrus sector with the aim of developing balanced relations, adequate remuneration, and permanent incentives to raise product quality and customer satisfaction,” Barros said.

Need to review fuel pricing policy

According to the researchers’ data, São Paulo State is Brazil’s leading producer of sugarcane and oranges, with 58% and 76.2% of the respective national totals. However, the state’s sugarcane output has fluctuated sharply in recent years, and a larger proportion has gone into the production of sugar than into ethanol production.

Between 2008 and 2013, for example, sugar production rose 40% more than ethanol production from sugarcane, and the ratio of sugar to ethanol prices rose 40% in 2011 and 20% in 2013.

Sugar prices are largely determined in the global marketplace, whereas ethanol prices are indirectly controlled by the Brazilian government’s fuel pricing policy. “A review of the fuel pricing policy could change these proportions in the production of sugar and ethanol from sugarcane,” Barros said. 

Price formation is fairly transparent in the case of sugarcane, thanks to effective action by CONSECANA, he went on, whereas in the case of oranges, much remains to be done to increase efficiency and achieve a more balanced price formation system.

The market for oranges is not transparent, involving contracts between multinational juice processing corporations and independent growers, with privately negotiated and therefore differentiated prices.

International prices of orange juice fluctuate like those of any global commodity, so agricultural and industrial profit rates also tend to vary over time. “A joint body representing growers and crushers, similar to the sugarcane organization, could help surmount this problem,” Barros said.

Agência FAPESP has previously published three stories on the study led by Paulo Cidade: “Investment in human capital and research increases productivity in agriculture”; “Agronegócio paulista apresenta padrão de crescimento balanceado” (in Portuguese); and “Agricultural output in São Paulo State grew more than 90% in last two decades”.