Why Beer Can Shortage Means Meirelles Will Boost Brazilian Rate

June 08, 2010, 12:43 AM EDT

By Carla Simoes and Iuri Dantas

June 8 (Bloomberg) -- Brazil is running out of beer cans and farmers are leaving crops in the field as surging demand and Chinese-like growth leads to shortages in Latin America's biggest economy.

Cia de Bebidas das Americas, the region's largest brewer, had to import beer cans for the first time in its 125-year history after local supplies were exhausted. Acucar Guarani SA, the country's third-biggest sugar producer by market value, left 10 percent of its crop sitting in the fields an extra 40 days because of a shortage of tires for its harvesters, even after the commodity hit a 29-year high in February.

"We had some machines standing by just waiting for tires," said Jaime Stupiello, agricultural director for Acucar Guarani, in a June 1 phone interview from Sao Paulo. "We tried to buy directly from China, but they didn't have tires for delivery either."

The shortages are one result of economic growth forecast to quicken to 6.6 percent this year, the fastest pace in two decades. That expansion, in excess of the economy's potential of 4.5 percent, is forcing central bank President Henrique Meirelles to raise interest rates to control inflation above the government's target since January, said Elson Teles, chief economist at Maxima Asset Management SA in Rio de Janeiro.

‘Chinese Pace'

"National demand is growing at a Chinese pace," said Teles in a telephone interview. "That's why the central bank will keep raising the Selic and the Finance Ministry is trying to reduce pressure on the bank by cutting spending."

Brazil's gross domestic product may have expanded 8.5 percent on an annual basis in the first quarter, according to the median estimate in a Bloomberg survey of 41 analysts. Brazil reports first quarter GDP at 8 a.m. New York time. China's GDP climbed 11.9 percent in the first quarter, the most in almost three years.

Inflation quickened to a 12-month high of 5.26 percent last month and may reach 5.64 percent this year, according to a central bank survey of about 100 economists published June 7. The government targets inflation of 4.5 percent.

Brazilian policy makers became the first in Latin America to raise borrowing costs when they increased the benchmark interest rate to 9.5 percent in April from a record low of 8.75 percent. The bank will raise the rate another 0.75 percentage point June 9, according to 40 of 44 analysts surveyed by Bloomberg. Two analysts forecast a full percentage point increase while two see the bank raising by half a point.

‘Tightening Mood'

Brazil's economy is "overheating" and policy makers are in a "tightening mood," Meirelles, 64, said in a June 4 interview with Bloomberg Television in Busan, South Korea. The government is cutting spending by 10 billion reais ($5.3 billion) to cool the economy before the interest rate increases take hold, Finance Minister Guido Mantega said May 13.

Across the nation, companies are struggling to keep up with demand that's been rising as unemployment hovers near a record low 6.8 percent, salaries rise and the 30 million Brazilians who have left poverty since President Luiz Inacio Lula da Silva took office in 2003 increase spending. Retail sales rose 15.7 percent in March from a year earlier, the highest on record.
Ambev, the maker of Antarctica and Brahma beers, has so far resisted passing on to consumers higher costs for freight and a tightening job market because of competitive pressures, said Nelson Jamel, the company's financial director.

The company began importing cans after first quarter profit rose 3.9 percent to 1.65 billion reais, more than the 1.48 billion reais forecast in a Bloomberg survey. The company plans to double its annual investments to 2 billion reais to expand production, Jamel said.

Good Problems

"To keep growing we have to confront some good problems now," Jamel, 38, said in a June 2 phone interview. "There are some cost pressures that come with meeting this demand."
Delivery of heavy trucks is being delayed by up to 60 days, said Ricardo Pamplona, president of Gotemburgo Veiculos Ltda, a Volvo retailer with nine stores in northeastern Brazil, traditionally Brazil's poorest region. Sales are up 40 percent so far this year and the company expects to sell 1,200 trucks by the end of December, 66 percent more than in 2009, he said, thanks to demand from civil construction, retail and agricultural users.

The truck shortage is pushing up the costs of shipping goods from the industrial heartland in Brazil's southeast to other parts of the country, Sussumu Honda, head of the national supermarkets association, said in an interview.

In response to the shortages, Brazil reduced import tariffs on 16 products, including sardines, palm oil, beer cans and beer labels, over the past year, according to Trade Ministry figures.
Roubini Speech

Even with a financial crisis in Europe that will depress exports, the outlook for Brazil's economy is "very positive," Nouriel Roubini, the New York University professor who predicted the global financial crisis, said in a May 31 speech in Sao Paulo.

Roubini, 52, recommended that Brazilian policy makers take steps to limit the appreciation of the real, including the "judicious" use of capital controls. The currency has gained 4.4 percent against the dollar over the past 12 months.

Stronger Real

To be sure, the stronger real has made exports more expensive in dollar terms, and the economy could be hit by a fall in commodity prices, which are likely to decline over the next 6 months to 12 months because of a possible double-dip recession in Europe and a U.S. slowdown, Roubini said.

Exports account for 10 percent of Brazil's GDP compared with about 33 percent for Chile and 17 percent for Argentina, meaning that any slowdown in Europe is unlikely to significantly impact growth, Bank of America said in a May 28 report.

"What makes Brazil unique is the strength of domestic demand," said Neil Shearing, an emerging markets economist at Capital Economics Ltd., in a phone interview from London. "If this isn't a V-shaped recovery, I don't know what is."