Record Brazil heat pressures crops, energy prices, government

SAO PAULO Fri Jan 31, 2014 5:02pm EST

1 of 13. A Brazilian vendor sells bottles of drinking water between cars during a warm summer day in Sao Paulo January 31, 2014.

Credit: Reuters/Nacho Doce

SAO PAULO (Reuters) - Even by Brazilian standards - man, it's hot.

January was the hottest month on record in parts of Brazil including its biggest city, São Paulo. The heat, plus a severe drought, has kindled fears of water shortages, crop damage and higher electricity bills that could drag down the economy during an election year for President Dilma Rousseff.

The scorching conditions don't constitute a crisis quite yet, officials say. Weather has been mostly normal in other regions including Brazil's soy belt, where a record crop is still expected. Summer rains could return in February and March to refill reservoirs, as they did last year when similar concerns over a possible energy crisis proved to be overhyped.

Still, the risks are considerable because Brazil's economy is so fragile at the moment. Any disruption to food supplies or power costs would complicate the government's ability to meet the center of its 2014 inflation target of 4.5 percent, and the region's orange and coffee crops are already showing signs of stress, farmers say.

São Paulo's average maximum daily temperature in January through Friday was 31.9 degrees Celsius (89.4 degrees Fahrenheit), a degree hotter than the previous January record and surpassing February 1984 as the city's hottest month ever, according to INMET, Brazil's national meteorological institute.

Meanwhile, a high pressure system has blocked normal tropical afternoon rains during what is usually the year's wettest month. São Paulo's main reservoir is now at less than a quarter of its capacity, a 10-year low.

Meteorologists aren't hopeful for a change anytime soon.

"This is the hottest, driest January we've ever had ... and there isn't much hope for this heat to stop in the next two weeks," said Celso Oliveira, meteorologist for Somar weather service.

The weather has been so suffocating that many Brazilians have envied the so-called polar vortex causing snow and record cold in much of the United States. Some local meteorologists have speculated that the hot, dry weather in Brazil may be related to the same unusual atmospheric patterns.

People with air conditioning have driven nationwide energy consumption to an all-time high this week. The strong demand, which is being met partly through increased use of thermoelectric power, means that spot energy prices are set to double in coming days to record levels beyond 800 reais ($326.50) per kilowatt-hour, three electrical industry sources told Reuters on Thursday.

Those prices could trickle down to energy bills for customers and factories - a threat to economic growth already expected to be just 2 percent this year. Energy usage is expected to remain high - the national grid operator estimates a 7.1 percent increase of power usage in February compared with the same month a year earlier.

"I am very worried (about the weather) and I have been for the last month," said Jose Francisco de Lima Gonçalves, chief economist with Banco Fator in São Paulo. "It's a risky outlook without a doubt - it could affect industry."

MASSIVE CATTLE DEATHS

Other regions of Brazil are also suffering from extreme weather. The impoverished, less populated northeast is in its worst drought in at least 50 years, according to Funceme, the state meteorological agency in Ceará state. Hundreds of thousands of cattle have died from the dry conditions, local officials say.

"I have never seen a drought like this. Everything has dried up," said 85-year-old Ulisses de Sousa Ferraz, a farmer in Pernambuco state who said he has lost 50 cows.

There is some good news. Electricity shortages do not appear likely for now, nor does rationing, which took a huge bite out of Brazil's gross domestic product in 2001.

Average reservoir levels in the southeast and central-west regions, which account for 70 percent of Brazil's hydroelectric generation, fell in late January to 41 percent. That was well below the 58 percent average for January since 2000 but ahead of the 37.46 percent level seen in 2013, when fears of power rationing last flared. Before the government ordered power rationing in 2001, reservoirs had fallen to 31.4 percent.

A post on President Rousseff's Facebook page on Friday said that because of federal investments in electrical supply over the past decade, the risk of shortages had "disappeared."

Water shortages seem to be a bigger risk.

The leading water company in São Paulo, a metropolitan area of about 20 million people, is already running TV and radio ads asking customers to limit water use by not cleaning sidewalks with hoses, for example. Reports of isolated water shortages in poorer areas have also surfaced in local media.

"São Paulo has a significant risk of water rationing," Somar's Oliveira said.

Economists are watching closely because problems here tend to bleed quickly into the national economy. São Paulo state accounts for a fourth of Brazil's population and a third of its GDP. Several key local industries from cellulose to beer and soda production use large amounts of water.

Farmers in the world's leading exporter of soybeans, coffee, orange juice, sugar and beef are worried too, though they say it is too early to talk about any serious losses.

Yields from the 2014/15 coffee crop, which is forming fruit and will be collected starting in May in the southeastern states of Minas Gerais and São Paulo, were probably hurt by dry weather in January, according to the PROCAFE Foundation, an industry group. Concerns over the lack of rain have kept Arabica prices in check even allowing for a large global coffee surplus.

The region's sugarcane crop is less at risk, having just ended harvest, but could suffer if the dry weather lasts for long.

The drought is also apt to diminish yields on the current orange crop, but it is too soon to say how this might affect Brazil's juice production, said Eduardo Savanachi, spokesman for industry group CitrusBR.

Finally, there's political risk.

Ever since antigovernment street protests broke out across Brazil last year, problems with the country's infrastructure have become heavily politicized.

So if there are water shortages, for example, they are likely to be used against incumbents in the upcoming election as evidence that federal and state governments have not invested enough in new sources of drinking water.

Rousseff is running for reelection in October, as is São Paulo Governor Geraldo Alckmin of the opposition PSDB Party.

"We need to watch it all closely, considering how unlucky this government is," said Andre Perfeito, chief economist at Gradual Investimentos in São Paulo.

(Additional reporting by Reese Ewing, Leonardo Goy, Jeb Blount, Asher Levine, Sabrina Lorenzi and Anthony Boadle; Writing by Brian Winter; Editing by Todd Benson and Prudence Crowther)

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