The development of the modern Brazilian forest sector began in the 1960s as a result of a federal policy that incentivized reforestation efforts that would sustain the forest products industry and reduce pressure on native, old-growth forests. The fiscal incentive lasted from 1966 to 1987, and was principally responsible for the formation of the large base of planted forests in Brazil. These plantations played a critical role in the expansion of Brazil’s solid wood products industry. With the development of new processing technologies and increased global demand, new large-scale manufacturing facilities were installed throughout Brazil that allowed the country to become a major producer of panels and cellulose.
In the 1990's, a second cycle of forest industry development began. This cycle was marked by significant private investment in the forest sector that included new manufacturing capacity, as well as the expansion of the total planted forest area. This capital injected into the Brazilian forest sector benefitted national (Klabin, Duratex, Eucatex, Suzano, Rigesa and Pisa) and international (Champion, Tafisa and later Arauco) corporations.
At the turn of the millennium, a third cycle of development—and a structural change in the industry—impacted the Brazilian forest sector: forest-based enterprises began to divest of timberland ownership and depart from the vertical integration model, and new investors in planted forests, primarily Timber Investment Management Organization (TIMO), entered the market to fill the ownership void. This change in timberland ownership had a significant impact on the development of the forest sector, as it infused billions of investment dollars into the forest value chain and generated jobs, new development and increased production. Today, TIMOs manage about 10% of the planted forests in Brazil.
While the growth of Brazil’s forest sector over the last 30 years has been positive, no policy incentive specifically aimed at new development has been in place since the late 1980s. The continued growth and evolution of the forest sector since that time has been the result of the entrepreneurial vision of private domestic and international investors. In some cases, the government has impeded growth within the sector. For example, a renewed interpretation in 2010 of a law that was enacted in 1971 resulted in restrictions being imposed on timberland ownership by foreign companies. Forest2Market do Brasil estimates that Brazil missed out on roughly 20 billion reais ($5.5 billion) in investment due to these restrictions.
A New Way Forward
On January 1, 2019 a new president and congress will take office in Brazil. With this change, the hope is that the new administration will create an environment that is conducive to the development of the forest sector. At the very least, the hope is that the administration will not hinder new development as others have in the past.
What can the Brazilian forest sector expect from the new administration? In the opinion of Marcelo Schmid, director of Forest2Market do Brasil, the "National Plan for the Development of Planted Forests" that was released in September by the Ministry of Agriculture, Livestock and Supply (MAP), details the general direction of the new administration. There are three guidelines included in the Plan that would provide significant benefit to the forest sector:
1) Definition of clear, national legislation for licensing forest activities
Brazil does not have consistent laws that apply to environmental regulation, which harms a number of agricultural sectors and the forestry sector in particular. Resolution No. 237/1997 of the National Environmental Council (CONAMA) considers "forestry" to be a potentially polluting activity, along with activities such as the manufacture of chemical products and other activities where the environmental risk much greater. The resolution imposes an obligation to develop an Environmental Impact Assessment (EIA) on such activities for proper licensing.
Since the responsibility for the licensing of forestry projects is managed at the state level (according to Complementary Law 140/2011), each Brazilian state has a different understanding of proper forest plantation licensing. This has resulted in a situation where the process in some states is very simple and the EIA is not required (as in Mato Grosso do Sul), to states where the process is overly complex and requires the presentation of a full-spectrum analysis and study (as in Rio Grande do Sul).
Excluding forestry as a potentially polluting activity would end the requirement to present an EIA in any state, which would increase the potential to attract new investment in the forest sector across the country rather than just those states where regulation is less stringent. Further, maintaining distinct rules for each state is ineffective; if Brazilian environmental licensing generates legal uncertainty for the entire economy, the uncertainty disproportionately impacts the forestry sector.
2) Regulation of timberland ownership by foreigners
The law that regulates the acquisition of land by companies with foreign capital is Law 5,709 of 1971. What was happening in Brazil at the time this law was enacted? This was the period of the Medici Government, which marked the peak of a particularly oppressive era and an increase in the size and reach of the state. The government increased its influence in the economy with the creation of approximately 300 state-owned enterprises during the decade. Law 5,709 has received differing interpretations since its publication in 1971, but since 1994 the Federal Attorney General (AGU), an advisory body of the Federative Republic of Brazil, considered the Law to be “unconstitutional.”
However, in a new opinion in 2010, the AGU reversed its previous interpretations and affirmed the constitutionality and validity of the law by imposing restrictions on the acquisition of rural properties by foreign companies. In its 2010 decision, the AGU affirmed that the reversal would help to strengthen national security and combat the acquisition of property used for money laundering and biopiracy. While these are worthy objectives, the reversal also had the unintended consequence of creating a high level of uncertainty, which deterred foreign investment worth billions of dollars in Brazil’s forest sector.
The approval of a new law that regulates the acquisition of land by foreign companies (with or without limits, as long as it is applied consistently) is of tremendous importance for the development of the forest sector. This change will generate added security for foreign investment that will guarantee a return on the sale of wood and the value of bare land. Such a change will free up existing investment already present in Brazil, and allow for the flow of new international investment that will impact the entire forest value chain.
3) Policy incentives for small producers
Unlike the agricultural sector, the maturation period of forest assets is quite long. In the case of large timberland owners such as cellulose and panel producers, or large TIMO groups, the maturation period is built in to the investment strategy. However, for small and medium-sized land owners, the length of the investment period before harvest oftentimes make timberland management an impracticable option.
Due to the lack of advantageous policy or incentives, small and medium-sized producers eventually convert their forests to other uses, as Forest2Market do Brasil has observed in the central region of Paraná, where there is a shortage in the pine supply. This development is worrisome for consumers of wood raw materials in the region.
The National Plan for the Development of Planted Forests presented by MAPA outlines several options that will aid in the creation of new policies to assist small timberland owners, including the creation of the Forest Credit Certificate and the improvement of existing policies (such as the ABC Program and PRONAMP). The implementation of such policies is a very important strategic step to ensure the expansion of planted forest area in a decentralized way, increasing its potential contribution to socioeconomic and environmental development.
While the entire forest industry in Brazil is optimistic about the sector’s future as the new administration takes office, a final observation is necessary:
Brazil’s forest sector has been quite resilient during the economic crises that have affected the national and international economies over the last ten years. Obviously, certain segments—especially those focused on the domestic market—were more affected during the domestic recession, but the sector's overall performance versus other sectors shows that it was one of the least affected. Moreover, the forest sector has experienced positive growth over the last several years even without the assistance of government incentives or a more competitive domestic business environment.
Again, we are optimistic that a change in national leadership will bring renewed interest and growth to the forest sector. If this does not happen, however, we must remember that Brazil’s forest industry has been strong enough to survive for many years with little or no federal assistance. It will certainly be able to endure four more years, if necessary, by maintaining a focus on the continued development of Brazil’s forest economy.