Deal makingWarren Buffett’sHeinz ventureillustrates agrowing trendPage 2

Inside »

AgricultureBumper crops fallvictim toinadequateinfrastructurePage 2

Foreign policyA softer diplomatictone beginsto bear fruitin WashingtonPage 3

DefenceEmbraer’s contractto supply theUS air forceaugurs wellPage 3

EducationInstitutions arepoised to capitaliseon an expandingmiddle classPage 3

FT SPECIAL REPORT

Brazil & the USThursday May 16 2013 www.ft.com/reports | twitter.com/ftreports

When the Brazilian diplo-mat Roberto Azevêdoclinched the biggest jobin global trade last week– as director-general of

the World Trade Organisation – hereceived a relatively warm responsefrom Washington.

The US could not have beenexpected to do anything other thanvote for Mr Azevêdo’s rival, HerminioBlanco, the former trade minister ofMexico.

But Washington’s decision to “jointhe consensus” when Mr Azevêdo wasselected by the WTO and back theBrazilian candidate showed bothrespect for the man and for the emerg-ing power he represents.

The growing sense of bonhomiebetween the two countries makessense. For the US, Brazil is looking

more than ever like a friendly face inan increasingly multipolar world, onethat is tilting slowly towards eastAsia. For Brazil, the US, with its tech-nology, quality higher education andcapital markets, is an ever moreimportant partner in the effort tobecome more internationally competi-tive and escape the middle incometrap in which it has languished fordecades.

Perhaps for this reason, BarackObama, the US president, is expectedlater this year to roll out the red car-pet and offer Dilma Rousseff, his Bra-zilian counterpart, the first state visitfor a leader of her country since 1995.

“It’s an important time between theUS and Brazil,” says Eric Farnsworth,vice-president of the Council of Amer-icas and Americas Society.

“Everything I see indicates that

Washington views Brazil’s rise as afavourable development.”

Brazilian and US relations dateback to 1824 when Washingtonbecame the first state to recognise theindependence of the Latin Americanpower to the south. Brazil was alsothe only South American country tosend troops to fight on the allied sidein the second world war.

Although the relationship has usu-ally been cordial, it has been charac-

terised by periods of indifference. Liketwo good enough neighbours, rela-tions remain reasonably good as longas the conversation does not stray toomuch towards politics, a subject onwhich Brazil, with its social demo-cratic leanings, mostly sits to the leftof Washington.

In spite of this, Brazilian presidentsin recent decades have got on wellwith their US counterparts. FernandoHenrique Cardoso, president duringthe 1990s and early 2000s, was veryclose to US president Bill Clinton.Former Brazilian president, LuizInácio Lula da Silva, though once atrade union firebrand, got onfamously with his US counterpart,George W. Bush.

Ms Rousseff and Mr Obama are notseen to have the same rapport andboth have been more preoccupied

with domestic politics. But relationsbetween them are warming.

On the policy side, things have notalways been smooth. Mr Lula da Silvaprompted US suspicion in 2010 whenhe tried to intervene alongside Turkeyin the dispute over Iran’s nuclear pro-gramme. Mr Lula da Silva and MsRousseff’s ruling Workers party hasbeen a traditional friend of regimesconsidered unpalatable by the US,such as Cuba and Venezuela underthe recently deceased Hugo Chávez.

Brazil’s independent stance, notonly on these countries but in seekingto establish alternative power blocs,has grated on Washington. Ms Rouss-eff’s first overseas trip, for instance,was to Beijing rather than to itswestern trading partners. “There is a

Continued on Page 2

Politics putto one sidein sign ofcloser tiesAgrowing sense of friendship between thetwo countriesmakes sense in an increasinglymultipolar world, writes Joe Leahy Cordial: relations are warming between Brazil’s president Dilma Rousseff and US president Barack Obama Getty

The US, with itstechnology, education andcapital markets, is an evermore important partner

2 ★ FINANCIAL TIMES THURSDAY MAY 16 2013

Brazil & the US

Joe LeahyBrazil Bureau Chief

John Paul RathboneLatin America Editor

Vivianne RodriguesUS Capital Markets Reporter

Amy StillmanSenior Researcher,Brazil Confidential

Samantha PearsonBrazil Correspondent

Gregory MeyerMarkets Reporter

Stephanie GrayCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For commercial opportunitiesplease contact John Moncureat john.moncure@ft.com orAlejandra Mejia atalejandria.mejia@ft.com

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Contributors »

certain frustration in Wash-ington,” says Mr Farns-worth. “Brazil seems to beas interested in developinga relationship with Chinaas they are with the US. Idon’t think most peoplewould suggest the Chineseand US models are compati-ble.”

Throughout it all, tradein goods has continued togrow. It increased from aslittle as $28bn in 2002 tonearly $77bn last year, witha $11.6bn surplus in favourof the US, according to theUS Census Bureau.

Brazil is the kind of trad-ing partner the US needs,and it supports about300,000 jobs in its northerlyneighbour. It also buys thetypes of products the USwants to sell more of – air-craft parts, machinery andplastics. US services exportsto Brazil have alsoincreased, more than tri-pling between 2002 and 2011to nearly $20bn.

For Brazil, the US, withits transparent businesspractices and focus on inno-vation and intellectualproperty, is the kind oftrading partner it prefers.After an initial honeymoonwith Beijing in the first dec-ade of this century, whenChina became its biggesttrading partner, Brazil isgrowing frustrated withaspects of the business rela-tionship.

An old developing worldally, China is importingBrazil’s iron ore and soya-beans but in return swampsthe Latin American countrywith cheap imports. “Weare a rare example of acountry that holds a sizea-ble trade surplus withChina – $11bn in 2011 – butit’s not the quality of tradethat we would like to seesometimes,” says AntônioPatriota, foreign minister.

Mindful that US universi-ties are one means ofimproving its competitive-ness, Brazil is sending alarge number of studentsunder its R$3bn ($1.5bn) sci-ence without borders schol-arship programme to col-leges in the US.

Brazilian companies,meanwhile, are tapping thestrengthened capital mar-kets of the US for privatesector investment.

Defence co-operation isimproving, with the USmaintaining an order for agroup of Brazilian lightattack aircraft, the country’sfirst such contract with theUS military. Embraer, theBrazilian builder of the air-craft, has signed a co-opera-tion agreement with Boeing

Continued from Page 1to develop a jet-engined mili-tary transport aircraft. Thishas strengthened aspira-tions in Washington that theUS might eventually win acontract to supply the Bra-zilian air force with fighters.

The growing relationshipis leading to hopes thatthorny technical issues mayone day be worked out.These include visa-freeaccess for Brazilians to theUS and a tax treaty thatwould simplify businessdealings between the two.

The two countries whichare competitors on globalsoya, orange juice and othercommodities markets, areoccasionally at odds ontrade.

The US sometimesaccuses Brazil of protection-ism while Brazil hasattacked US agriculturalsubsidies. Brazil is con-cerned that it is being leftout of US efforts to build aweb of bilateral agreements,such as with the EU, whichit fears will undermine theglobal trading system.

US officials counter thatBrazil is too wedded tothe slow-moving SouthAmerican trading bloc, Mer-cosur.

In the long run, the USseems willing to embracethe rise of a Brazil that pur-sues an independent foreignpolicy and insists onfriendly relations with mostcountries in the world, nomatter how distastefulWashington might findsome of them. Brazil seemshappy to expand its influ-ence with a sense of respon-sibility to all.

“Brazil sees itself as acountry that has a role inthe global space, as an actorthat will contribute andbenefit from more integra-tion with the internationalsystem,” says Paulo Sotero,director of the Brazil Insti-tute at the Woodrow WilsonInternational Center forScholars.

In a 2011 report, thethink-tank Council on For-eign Relations went further:“Brazil is on the short listof countries that will mostshape the 21st century.US and Brazilian foreignpolicy must adjust accord-ingly.”

Politics has beenput to one side

The day he announced his$28bn deal to buy Heinz, theUS food group, WarrenBuffett, known as the “Sageof Omaha”, waxed lyricalon US television networkCNBC about his partner inthe transaction, a Braziliangroup led by investor JorgePaulo Lemann.

Describing how his Berk-shire Hathaway group willact as the financial investorin the takeover and MrLemann’s 3G will take careof operations, Mr Buffett

said: “It’s my kind of dealand it’s my kind of part-ner.”

He could just as easilyhave been summing up thegrowing business relation-ship between Brazil and theUS as companies fromthe two increasingly focuson cross-border deal mak-ing.

Over the past decade, asBrazil’s economy hasbecome more open to globaltrade, its companies haveactively sought US capital,whether in the form of over-seas bond offerings, shareissues or by courting pri-vate equity money.

US investors and bankshave been targeting Brazil,whose economy, particu-larly on the consumer side,has remained buoyantthroughout most of the glo-bal slowdown.

“We’ve been on a multi-year plan to build out ourBrazil business,” said GaryCohn, Goldman Sachs’ chiefoperating officer, during arecent visit to the invest-ment bank’s new São Paulooffice.

“We’ve doubled the capi-tal that we have in thebusiness. Seeing more andmore opportunity, we nowhave more than $400m ofcapital in the business.”

Last year was the secondbiggest on record for cross-border mergers and acquisi-tions between Brazil andthe US, surpassed only bythe boom in 2007, accordingto figures from Dealogic,the data company.

Brazilian and US compa-nies announced deals worth$12.1bn, compared with$4.9bn a year earlier. In2007, deals had reached

$12.3bn. In debt markets,Brazilian companies in 2012broke all previous records,raising $43.3bn on issuancesmarketed in the US, com-pared with $30.5bn a yearearlier.

The soft spot was equitycapital markets, with Bra-zilian companies raisingonly $292m in 2012 in theUS. But this market hasbeen hot in the past, withUS-listed equity capitalmarket deals by Brazilianissuers raising $30.1bn in2010.

Among the leading merg-ers or acquisitions wereUnitedHealth’s $5.1bntakeover of Amil Partici-pações, the Brazilianpharmaceutical company,last year, steel producerGerdau’s acquisition ofChaparral Steel in the USfor $4.4bn in 2007, and

meatpacker JBS’s purchaseof US rival Pilgrim’s Pridefor $2.6bn in 2009.

On the debt side, issuancehas been dominated byPetrobras, the oil major,which sold $7bn of bondslast year and $6bn a yearearlier. Other big corporateissuers include state-con-trolled Banco do Brasil with$2bn sold earlier this year.

In equity, the biggest US-listed transactions werePetrobras’ $70.1bn follow-onoffering in 2010, a $12.2bn

follow on by Vale, the ironore miner, in 2008 andthe initial public offering in2009 of Banco SantanderBrasil, the local unit of theSpanish bank.

Private equity funds havecontinued to come to Brazil.In one of the highest-profilemoves, global privateequity specialist KohlbergKravis Roberts namedJorge Fergie, a senior McK-insey consultant, as its SãoPaulo chief in January.

Private equity funds,including Carlyle Groupin the US, raised a recordof $10.3bn for Latin Amer-ica in 2011, with most ofthis earmarked for Brazil.

In another trend thatis expected to lead toincreased cross-borderflows, Brazilian pensionfunds are consideringinvesting as much as 10 per

cent of their money over-seas. “The tendency is usu-ally to first go to the macropicture rather than singlenames,” says André Laportat Goldman Sachs in SãoPaulo, of the pension funds’likely targets.

Most were still decidingwhat investment strategythey would pursue but theywere expected initiallyto buy funds targeting indi-ces such as the S&P 500.

While the pace of outwardinvestment by the Brazilianpension funds is likely tobe steady rather thanexplosive, it is indicative ofthe forces driving deepen-ing ties between USand Brazilian dealmakers.

While Brazilian business-men operate in a differentworld from their US peers,given the country’s largerstate presence and less effi-

cient legal, tax and bureau-cratic frameworks,they tend still to havea strong personal rapportwith their American coun-terparts.

As Mr Buffett said ofthe Heinz arrangement, hehad been in contact withMr Lemann since the pairserved on the Gillette boardtogether more than 10years ago.

Mr Lemann brought thedeal to him in December,suggesting that 3G wouldtake care of the operationalside as the Brazilian and hisinvestor team had at ABInBev, the global brewerthey helped to create. MrBuffett could not have beenhappier.

“Any partnership whereI don’t have to do the workis my kind of partnership,”he joked on CNBC.

Lucrative business transactions help cash flow in both directions

The US sometimesaccuses Brazil ofprotectionism whileBrazil has attackedUS agriculturalsubsidies

Last year was thesecond biggestfor cross-bordermergers andacquisitions

Brazil’s domestic bondmarkets have strengthenedconsiderably in the pastdecade.

The country’s rapidgrowth has brought a newwave of companies, lendersand investors into local cap-ital markets as its financingneeds have risen sharply.

Yet, compared with otherdeveloping regions, in par-ticular east Asia, it contin-ues to lag.

The local bond market,relative to gross domesticproduct, is small and someof the most developed seg-ments remain those of gov-ernment bonds, interestrate futures and currencyderivatives, a legacy of Bra-zil’s reliance on heavy gov-ernment borrowing in orderto fund large deficits.

“There has been a greatimprovement in Brazil debtcapital markets in recentyears, with more products,larger volumes and newplayers,” says Michael

Cummings, head of LatinAmerican debt capital mar-kets at Credit Suisse.

“But, given the size of itseconomy and the sophisti-cation of its financial sys-tem, it remains in need offurther development.”

Sales of fixed incomesecurities in the first quar-ter reached R$15bn ($7.5bn),according to Anbima, thecountry’s capital marketsassociation. This was 41 percent down on the sameperiod of 2012, much thanksto a slowdown in the econ-omy.

Debentures and commer-cial paper account for morethan 80 per cent of sales,with primary offerings andmortgage debt securitiesaccounting for only 10 and 2per cent, respectively.

In addition, many corpo-rate debt securities are notregularly traded forextended periods. Thisabsence of price quotes insecondary markets preventsmany institutional inves-tors from holding suchsecurities, which furtherreduces an importantsource of liquidity.

As a result, when manyBrazilian companies wantto raise big money, theystill have to go the US debtmarkets.

In 2012, Brazil tooksecond place among foreignissuers of corporate debt inthe US. Most of the salescame from investment-grade companies, with largegroups such as oil producerPetrobras, state-ownedbank Banco do Brasil andVale, the mining company,pushing the country’s mar-ket share to more than 10per cent of overseas dollar-debt issuance, according tofigures from Dealogic, thedata company.

Brazilian companies areattracted to the US marketbecause of its record low

borrowing rates and by itshuge pool of long-terminvestment funds.

While interest rates inBrazil have declined in thepast decade, the centralbank last month had toincrease the benchmarkSelic interest rate by 25basis points to 7.5 per centin a response to a surge ininflation. That, in turn,limits the development of amarket for large bonds witha maturity date of morethan five to seven years.

Lower borrowing costsare not the only reasonmany Brazilian companies

rely on foreign debt sales.Offerings in internationalmarkets attract a muchlarger pool of investors tothe companies’ debt.

“When Brazilian compa-nies take into account thelevel of local rates and com-pare that with the rates inthe US, plus the opportu-nity to sell longer-term debtto a larger pool of investors,for many of them, thebetter option is to come tothe US markets,” says Rob-erto D’Avola, managingdirector and head of LatinAmerica debt capital mar-kets at JP Morgan Chase.

While liquidity in localdebt markets has been ris-ing steadily, the US is still abetter option for the mix-ture of long-term and largeissuances, such as Petro-bras’ $7bn bond last year.

“Even for large compa-nies, it could be challengingto replicate in Brazil such alarge offering, whichincluded longer-datedtranches,” says Joao DeBiase, global head of DCMand syndication manager atBanco Itaú BBA. “Many ofthe large local funds, arestill not very active in suchmarkets and don’t tradition-ally buy such type of securi-ties.”

Still, Mr De Biase notes

that the outlook for thecountry’s debt capital mar-kets remains bright. Thelarge pipeline of infrastruc-ture projects, anticipatedexpenditures in preparationfor the 2014 World Cup andthe 2016 Olympics, and aboom in residential andcommercial real estate, willboost both private and gov-ernment debt-issuance incoming years.

Efforts by the Braziliangovernment to boost localdebt markets have hadmixed results. The govern-ment has been providingtax incentives to local andforeign investors buyingreal estate funds, for exam-ple, to encourage financingoptions in the housing andconstruction industries.

The government alsokeeps a tight control ofmoney flows in and out ofthe country. Its nationaldevelopment bank, BNDES,remains the nation’s largestdirect lender to corpora-tions.

“It could be hard for com-mercial and investmentbanks to match the level offinancing and the ratesoffered by a governmentbank such as BNDES,” saysMr Cummings. “But eventhat is changing in Brazil,and for the better.”

Record low borrowing rates lure corporations northCapital markets

The US is a betteroption for companiesseeking debt, saysVivianne Rodrigues

Football funds: World Cup projects will boost debt issuance

There is a rising spectre to thesouth of the US’s grain belt.In the past two years Brazilhas reaped the benefits ofagricultural innovations and

year-round sunshine to producerecord soyabean and corn yields,putting it squarely in the rear-viewmirror of grain exporters in the US.Brazil’s soyabean production this year– at about 83.5m tonnes – is set toscrape ahead of US production of82.1m tonnes, according to forecastsby the US Department of Agriculture.That could see Brazil overtake the USas the world’s biggest soyabeanexporter.

“Brazilian farmers are pretty wellprepared to realise this potential,”says Daniel Glatt, a grain producer inthe northern Brazilian state ofTocantins. “If world demand for agri-culture continues at its current pace,Brazilian farmers will continue to pro-duce more.”

One advantage is that Brazil’s tropi-cal climate allows farmers to plant asecond corn crop during the year,known as safrinha (little crop), whichis usually harvested in June and July.The corn is planted on the same soilwhere soyabeans, cotton or beanswere harvested in the precedingmonths. The rotation technique wasdeveloped by Embrapa, Brazil’s pio-neering national agricultural research

corporation, which has also spreadthe practice of so-called “no-till” farm-ing, where stalks are left to rot, form-ing a mat to soak up more nutrients.Another Embrapa technique devel-oped to improve growing conditions isthe application of limestone to thehighly acidic soils of the Cerrado,Brazil’s savannah region. That hashelped the once-barren area becomethe main source of grain output overthe past 15 years.

Indeed, although the Brazilian gov-ernment offers little help in the wayof subsidies to its farmers, generouspublic financing for Embrapa over its40-year lifespan has paid high divi-dends. Its innovative farming methodshave not only increased productivity,but also potential acreage by enablingfarmers to plant in previously infer-tile areas or degraded pastures.

In Mato Grosso, the largest grain-producing state, an estimated 9m hec-tares could be used for crop produc-tion. By contrast, US farmers areusing all available acreage. “The US isrunning into finite space limits,”notes Michael McDougall, senior vice-president at commodities traderNewedge. “Brazil definitely has thepotential to be much bigger.”

Another factor is that biotechnologydeveloped for the temperate US mid-west is being adapted to suit the trop-ics, with genetically modified (GM)

seeds being created to resist pests anddiseases specific to Brazilian farmingareas. The approval process of newGM traits is speedier, taking on aver-age 24 months in Brazil comparedwith about 40 months in the US,according to Ray Gaesser, vice-president of the American SoybeanAssociation.

Even so, Brazil’s potential to sup-plant the US in agricultural might isbeing undermined by a fundamentalweakness. Last month, at its peak, theline-up of trucks carrying grain tounload at the Santos port in SãoPaulo stretched for more than 21miles. Journey times from the city ofSorriso in northern Mato Grosso tothe port more than doubled duringthe peak season for soyabeans inMarch. Freight costs have ballooned.

The country’s inadequate infra-structure has been unable to absorbthe bumper crop yields, fuelling ship-ping delays and rising transport costs.Problems bringing the produce to porthave already led Sunrise Group, theChinese grain trader, to withdraw a$1.1bn order for 2m tonnes of soya-beans. Other buyers could follow suit.

Furthermore, higher transport coststhreaten the competitiveness of Bra-zilian agricultural exports.

According to the Soy Transport-ation Coalition, the Iowa-basedassociation, the cost of transporting

soyabeans from northern Mato Grossoto Shanghai was $160.22 a tonne in thefourth quarter of last year.

The same journey cost $94.08 and$88.50 a tonne from Davenport in Iowaand Sioux Falls in South Dakota,respectively.

Multinational grain traders thatswallowed higher transport costs inthe first part of the year are nowlowering the amount they are willingto pay for Brazilian corn. That hasdelayed sales for this year’s corn har-vest since farmers are waiting for bet-ter prices.

According to the Mato Grosso Insti-tute of Agricultural Economics(Imea), just 22.3 per cent of corn pro-duction in Mato Grosso was sold byApril, down from 50 per cent the sametime last year.

The US’s integrated freight trans-port system of rail, road and bargeseems in far better stead to handlewhat is shaping up to be a betterharvest than last year, when US cornproduction was hit by the worstdrought in half a century.

“The infrastructure we have in theUS has made us very competitive,”says Mr Gaesser. “Brazil is expandingits infrastructure but it will nothappen overnight.”

That might just allow the US tomaintain its lead on corn exports – forthis year at least.

Bumper cropsfall victim toinadequateinfrastructure

AgriculturePotential to supplantUS outputis being undermined, writesAmyStillman

Bean counting:trucks loading upwith soyabeansfor export Getty

‘The US isrunninginto spacelimits. Brazilhas thepotential tobe muchbigger’

Deal making

Warren Buffettventure illustrates agrowing trend,writes Joe Leahy

FINANCIAL TIMES THURSDAY MAY 16 2013 ★ 3

Brazil & the US

It is not what many wouldexpect to find buried deepin the peaceful and verdantcountryside of São Paulostate in southeastern Brazil.A 5km-long tarmac runwayjuts out alongside fields ofsugar cane, leading toEmbraer’s vast complex ofblue and white warehouses.

Inside, rows of attack air-craft, many painted withsinister shark faces, arewaiting for a few finaltouches before being flownto assist countries such asAngola on border patroland counter-narcotics mis-sions.

Embraer’s assembly plantin Gavião Peixoto, wherethe group manufacturesseveral jets and completesthe production of its SuperTucano light attack air-craft, has long been at theforefront of Brazil’s manu-facturing industry.

However, as Embraersigns more contracts to sup-ply air forces around theworld, the manufacturinghub has also become a focalpoint for the country’s for-eign relations.

The turning point camein March this year whenthe US air force finally gaveEmbraer the go-ahead tosupply 20 of its SuperTucano aircraft for counter-insurgency missions inAfghanistan. Embraer andits US partner SierraNevada were awarded acontract worth about $428m– the Brazilian company’sfirst with the US air force.

The deal was not onlytaken as a “seal of quality”from the world’s biggestdefence spender, but also asign of better relations withthe US after a long andpolitically charged biddingprocess.

Embraer was firstawarded the contract inJanuary 2012, then valuedat about $355m. However, amonth later, the US airforce suddenly cancelledthe deal, saying it was notsatisfied with the documen-tation.

US authorities had beenfacing immense pressurefrom the losing bidder,Hawker Beechcraft, whichfiled for bankruptcy threemonths later. The con-tract’s cancellation, whichcame just before a visit byBrazil’s president DilmaRousseff to Washington,was seen as a big politicalblow.

Many in Brazil suspectedthe decision had been politi-cally motivated, given thatthe bitter fight over thecontract had gradually esca-lated into a public row overwhich programme wouldgenerate more jobs in theUS. Embraer and SierraNevada responded by suingthe US defence departmentin a federal court, and, inFebruary, they were onceagain awarded the contract.

After a last-minute sus-pension of the contract fol-lowing another challengefrom Beechcraft, as the USaircraft maker was namedafter emerging from bank-ruptcy, the US air force

finally authorised Embraerin March to go ahead withproduction.

The deal is relativelysmall for the US, which,despite its shrivellingdefence budget, stillaccounts for more than 40per cent of estimated globalmilitary expenditure.

For Embraer, it repre-sents a vital foothold in theUS market and one thatcould lead to further busi-ness in the US and else-where. “Even if the US airforce doesn’t exerciseoptions for additionalplanes and service beyondthe current award, the con-tract for the A-29 SuperTucano aircraft could beworth much more than theinitial stated amount, par-ticularly in light of service-related business,” wroteMoody’s in a recent note.“Having the US departmentof defence attached to a siz-able order should boost thecompany’s success rate onfuture contract bids withother international custom-ers,” the rating agencyadded.

The contract comes asEmbraer is also developingthe KC-390 military trans-port jet in co-operation withBoeing, a partnership thatcould provide furtherinroads to the US defencemarket.

“Embraer’s defence andsecurity business is about16 per cent of total companysales but we expect it torapidly become a moreimportant component ofconsolidated revenue overthe next couple of years,”said Moody’s.

After the happy endingfor Embraer in the US, the

time may soon come for theBrazilians to return thefavour. Ms Rousseff haspromised to make a deci-sion this year on a long-awaited deal to overhaulBrazil’s air force that isestimated to be worth atleast $4bn, almost 10 timesthe size of the US air forcedeal. Boeing is biddingagainst France’s DassaultAviation and Sweden’s Saabfor the contract, underwhich the winner will pro-vide more than 36 fighterjets.

Brazilian officials haveindicated that Boeing isnow in a better position toclinch the contract.

Last month, Boeing alsoannounced plans to build aresearch centre in São Josédos Campos in São Paulo –where Embraer is based –in what appeared to be yetanother attempt to woo theBrazilian government.

Brazil has been puttingoff the decision for yearsnow and budget constraintsmay prompt Ms Rousseff todelay the decision yet againuntil after next year’s presi-dential elections.

A victory for Boeing inBrazil would certainly helpfurther cement US-Brazilrelations but, faced with aneconomic slowdown athome, Ms Rousseff maydecide to keep the US wait-ing.

Embraer dealseals cordialrelationshipDefence

Brazil may be aboutto return the favourwith its own aircraftpurchase, writesSamantha Pearson

The company isalso developingthe KC-390military transportjet with Boeing

Despite having the world’sbiggest ethanol industry,the US imported 9.6m bar-rels of the biofuel from Bra-zil last year.

Brazil, the ethanol pio-neer, imported 2m barrelsfrom the US.

The circular trade showshow government policy stillguides much of the ethanolmarket, despite stridestowards commercialisation.

The US and Brazil, thegiants of the market,together produce 87 percent of the world’s output,according to analysts FOLicht. The US product islargely distilled from corn,while Brazil makes ethanolfrom its sugar cane crop.For the engine of a car, thetwo vintages arevirtually identical. Yet in

the eyes of the law they arequite distinct.

This helps explain whythe US and Brazil are ship-ping one another ethanol atgreat expense rather thansimply using it at home.

Washington is weaningits domestic ethanol indus-try off subsidies. In 2011 atax credit for ethanolblenders expired, as did acorresponding import tariff.

Nonetheless, the industrystill has the support of agovernment mandaterequiring domestic ethanolconsumption to grow eachyear. The mandate is indi-rectly helping to driveimports from Brazil.

The mandate, known asthe renewable fuel stand-ard, is split between vol-umes for traditional corn-based ethanol and“advanced biofuels” whoseproduction releases lessgreenhouse gas impactsthan ploughing fields forgrain.

Corn ethanol has the big-gest share, but theadvanced biofuel require-ment is growing more rap-idly.

US production of

advanced biofuels has notmatched government expec-tations.

To meet the mandate, fuelcompanies are allowed toimport sugar cane ethanol,mainly from Brazil. The USEnvironmental ProtectionAgency estimates about15.9m barrels of sugar etha-nol imports will be neededthis year.

“As the mandate grows,ethanol imports rise accord-ingly,” say economists atthe University of Missouri’sfood and agricultural policyresearch institute.

Another US policyencouraging Brazil toexport ethanol is set by Cal-ifornia. The state, knownfor standard-setting vehicu-lar pollution controls, wel-comes the use of sugar caneethanol to satisfy its lowcarbon fuel standard pro-gramme.

In the reverse direction,US ethanol exports to Brazilare well below a peak of9.4m barrels reached in 2011when the South Americancountry suffered poor sugarharvests.

The Brazilian ethanolindustry has also been hurt

by domestic governmentpolicies that have kept pet-rol prices artificially low tofight inflation.

This year, Brasilia raisedthe required ethanol blend-ing rate to 25 per cent from20 per cent of motor fuel ina bid to help the domesticbiofuel industry. Butimports from the US areexpected to continue none-theless.

The US corn-based etha-nol industry has morecapacity than needed for adomestic fuel market wheredemand is weak and most

fuel companies refuse toblend more than 10 per centethanol with petrol.

Brazilian imports arrivingunder the advanced biofuelsmandate further add to sup-plies. So a portion of therelatively cheap, unwantedcorn ethanol barrels flowsback to Brazil.

The Energy InformationAdministration, in a notelast year, called it a “com-plex environment” whereblenders and ethanol pro-ducers “not only have toproduce enough corn etha-nol to meet the overallrenewable fuels mandate,but . . . must also import sig-nificant volumes of sugarcane ethanol to meet theadvanced biofuel mandate,all in the face of demandconstraints”.

The US and Brazilian eth-anol industries are squaringoff as regulators considerhow to apportion this year’sUS ethanol mandate.

The Renewable FuelsAssociation, the main UScorn-based ethanol lobby,argues that the EPA shouldlower the advanced biofuelsmandate to insure againstunreliable supplies from

Brazil. Furthermore, tightcorn stocks and slowingoutput suggest the US maynot be able to export asmuch ethanol as in yearspast, the association says.The circular trade betweenthe companies is “economi-cally absurd”, the RFAadded.

Unica, the Brazilian sugarcane industry group, con-tends that the US shoulduphold its advanced biofueltargets, which would sup-port ethanol imports fromBrazil.

“The fact that there istwo-way trade in ethanolbetween the US and Brazildemonstrates both the com-plexity and success of gov-ernment intervention intofuel markets,” Unica wroteto the EPA in April.

There is nonetheless anirony in the fact that biofu-els promoted to reducegreenhouse gases are beingferried between the US andBrazil in ships belchingpetroleum exhaust.

As the EPA comments:“This two-way trade of eth-anol engenders additionaltransport-related emis-sions.”

Logic of circular biofuel trade comes into question

One sign of how Brazilianforeign policy has changedsubtly under Dilma Rouss-eff – and become lessaggravating to the US – can

be seen in the Brazilian president’sresponse to the death of Hugo Chávez.

Ms Rousseff declared three days ofmourning following the death onMarch 5 of Venezuela’s president andled a minute’s silence live on nationaltelevision.

“We recognise a great leader, anirreparable loss and above all a friendof Brazil,” she said of the socialistleader, adding carefully that “onmany occasions, the Brazilian govern-ment did not agree” with his policies.

Since assuming office in 2011, MsRousseff, a technocratic manager, hastaken a more restrained approach toforeign policy than her predecessorLuiz Inácio Lula da Silva, the charis-matic former trade unionist who oftenpublicly embraced Mr Chávez.

While Mr Lula da Silva liked totravel the world and make front pagenews, Ms Rousseff has focused moreon domestic affairs, especially theeconomy. She has avoided the kind ofhigh-profile foreign policy bust-upsthat rubbed western capitals up thewrong way.

Although it would be wrong to callthe US and Brazil antagonists or evenadversaries, as Peter Hakim, presidentemeritus of the Washington-basedthink-tank InterAmerican Dialogue,says, their most notable disagreementcame in 2010, when Brazil mediateda Turkey-Iran uranium swap asan alternative to additional sanctionsagainst Tehran for its nuclear

programme. Washington subsequentlyall but accused Brazil of being a politi-cal ingénue, even though the schemehad been initially encouraged by theWhite House.

Those days seem to have passed asMs Rousseff, a former guerrilla andhuman rights activist, has distancedherself from Iran.

“Quietly, the mutual unease thatoften characterised relations duringthe last months of Lula has dissi-pated,” says Matias Spektor, a Brazilforeign policy specialist at KingsCollege, London.

“The reasons are partly personal –Dilma is less interested in and suitedto foreign affairs. And partly struc-tural – Lula gave such a push to Bra-zilian foreign relations, which hadbeen neglected before, that anythingDilma does is bound to be less.”

That lower profile does not meanMs Rousseff has switched tack. A per-manent seat on the UN SecurityCouncil remains a long-term goal;Iran remains an important trade part-ner, as does Venezuela. Brazil contin-ues to promote regional agreements,such as Unasur, the Latin Americanintegrationist treaty that excludes theUS.

The US has never publicly objectedto Unasur and has largely deferred tothe grouping, even welcoming attimes Brazil’s role in addressingthorny regional problems.

One example of the country’s heftcame in neighbouring Paraguay lastyear. When Paraguay’s former presi-dent was legally – if suddenly –removed from office, Brazil joined sev-eral nations in expelling Paraguay

from Mercosul, the South Americantrade group. “It was an exercise indamage limitation,” says Mr Spektor.

Brazil’s tone has begun to pay divi-dends in Washington. The US airforce has bought 20 light attack SuperTucano aircraft, built by Embraer,and the talk is of greater naval co-op-eration in the South Atlantic.

Another sign came in April, whenReuters reported Ms Rousseff hadbeen invited on a state visit to Wash-ington, the first for a Brazilian leaderin almost 20 years.

Although Ms Rousseff visited Wash-ington in April 2012, and met MrObama briefly, a state visit includesformalities such as a black-tie dinnerand a military ceremony on arrival.Although not officially confirmed, thestate visit may take place in October.

It would be wrong to say this marksa honeymoon period. The mutual mis-perceptions in their “non-relation-ship” remain large.

Brazil, seeking a greater interna-tional role. sometimes views the USas a hegemon that wants to keepit down, while the US sometimes

views Brazil as an upstart. What amooted state visit might deliver,therefore, is open to question.

One outcome might be “a state din-ner from Obama, which would liftBrazil into a small elite at very littlecost to the US. That might be one wayto satisfy Brazil without any policychange,” says Mr Hakim.

A more ambitious possibility, headds, is that Ms Rousseff, worriedabout the Brazilian economy’s fadingcompetitiveness and the stalledMercosul trade pact, wants to boostUS trade ties.

Mr Spektor believes there are goodchances of meaningful change. MsRousseff is preparing for a re-electionattempt while Mr Obama is on his lastterm and US businesses itch to getinto Brazil’s booming market.

Such conditions “could lead to USconcessions, something that advancesBrazil’s drive for a Security Councilseat”, Mr Spektor says.

Mr Hakim is less sure. “My ownview is closer to some pieces of paperto sign but it hard to see any realgame changers.”

Change of tonestarts to paydividends inWashington

Foreign policyRousseff has avoided conf lictsof a previous era, writes John Paul Rathbone

Independent:Dilma Rousseff ata summit of SouthAmerican-ArabCountries Getty

Cane crop: market skewed

Along the six-lane highwaythat runs through Rio’svast southwestern districtof Barra da Tijuca, it is easyto spot the influence ofLatin America’s wealthynorthern neighbour.

US restaurant chainssuch as Outback Steak-house and shopping centresincluding a New York City-themed mall surround theaptly named Avenida das

Américas motorway. Theartery, located in the new-est area of the city, is anindication of the affinitybetween two nations thathave similarly large, con-sumer-orientated popula-tions.

Capitalising on this, USeducation institutions thatface declining growth athome are increasingly look-ing to Brazil.

Not only are more Brazil-ians studying in the US, butalso US for-profit educationcompanies such as DeVry,Whitney International andLaureate International haveacquired assets in Braziland are seeking to expand.US private equity funds arealso eyeing educationopportunities.

Such groups aim to take

advantage of the expansionof Brazil’s middle class,which has led to a surge indemand for higher educa-tion.

Kroton, Brazil’s biggestlisted education group, sawa fivefold increase in netprofit last year, whileAnhanguera, its closestrival, more than tripled its2012 net profit over the pre-vious year.

Last month, the two com-panies agreed to merge, cre-ating the world’s largestfor-profit education groupby market capitalisation.

Growth in higher educa-tion is partly driven bythe fact it is starting froma low base. In 2009, just aquarter of Braziliansaged 18-24 were enrolled inpost-secondary education,

compared with 86 per centin the US and 69 per cent inneighbouring Argentina.The government has aggres-sively sought to boost enrol-ment and plans to investR$24bn ($11.9bn) in educa-tion by 2014. One example isthe Science without Bordersscholarship programme.

The R$3bn scheme plansto send more than 100,000Brazilians to top universi-ties abroad. Scholarshipstudents will study subjectareas in which there is ashortage of skilled labour,such as engineering andtechnology.

Fies, a government-funded student loan planlaunched in 1999 has beenextended to include voca-tional courses and studentswith poor credit ratings. A

bill in Congress could seeFies applied to distancelearning courses.

While Fies has reachedjust a handful of studentsso far, investors expect theprogramme to provide animportant boost for the pri-vate education market.

“Fies is likely to drivegrowth in the sector for thenext five to 10 years,” saysone international privateequity fund manager witheducation investments inBrazil. The manager sayssuch expectations are push-ing up the value of listededucation companies andcould lead several privateoperators such as Ser Edu-cacional, Anima Educaçãoand Grupo Multi Educaçãothat have “scale and goodgrowth prospects” to soon

launch initial public offer-ings. Cruzeiro do Sul, theSão Paulo-based university,will also list in the next 18months, says PatrickLedoux, a partner at Actis,the UK private equity firm,that has a minority stake inthe university.

The hand of US privateequity funds and asset man-agers lie behind many ofsuch growth stories. Krotonis 10.2 per cent owned by

Advent International and5.48 per cent of Anhanguerabelongs to BlackRock.

Capital Group hasinvested in Ibmec, theRio-based business school,helping it develop a nichein the for-profit educationsector by targeting wealthyBrazilians who have tradi-tionally opted to studyabroad.

Two new Ibmec campuseswill be modelled on Stan-ford University and theMassachusetts Institute ofTechnology.

Cartesian, another US pri-vate equity group, owns aminority stake in Ser Edu-cacional, which has focusedon Brazil’s under-developedbut fast-growing north andnortheast regions. JanyoDiniz, Ser’s chief executive,

says the company expectsto have 25 per cent morestudents in 2013.

Arizona-based ApolloGroup has had similarambitions. In 2008, it offeredR$230m to buy UniversityPaulista (Unip) in order toexpand its distance learningsystem in Brazil. The bidwas rejected by Unip’sfounder João Carlos DiGenio because it was con-sidered too low. However,Mr Di Genio says talks withApollo have continued asthe Brazilian group hasexpanded its distance learn-ing programme.

Meanwhile, Pearson,owner of the FT, paid $500mfor the learning systemsdivision of Brazilian com-pany Sistema EducacionalBrasileiro in 2010.

Institutions poised to capitalise on an expanding middle class

A $1.5bn schemecould send morethan 100,000Brazilians to topuniversities abroad

Ethanol

Sales of commodityintended to reducegreenhouse gaseshave opposite effect,writes Greg Meyer

Education

Amy Stillmanreports on risingdemand for skillssuch as engineeringand technology

4 ★ FINANCIAL TIMES THURSDAY MAY 16 2013