Four-year old Daniel Santos da Silva and his older brother Diego Mota dos Santos, 10, heard their first gunshots in April. Their father was shot in a dispute over land on a cattle ranch near the Brazilian town of El Dorado, in the Amazonian state of Para. The boys heard he was taken to hospital, but they have not seen him since.

The ranch is called Espirito Santo, holy spirit, though goodwill to all men is hard to find there. Heavily armed guards protect the thousands of cattle that roam its lush pastures and the hacienda-style complex built on a hill at the farm's centre, complete with swimming pool.

Daniel and Diego live on the muddy fringe of the farm in a hastily erected collection of palm frond-roofed huts to shield them and a hundred-odd other families from regular tropical downpours. They are squatters, but squatters rights are rarely observed in Para.

Espirito Santo and thousands of farms like it raise cattle on Amazonian pasture that was once rainforest. The farms are huge, and so is their impact. The cattle business is expanding rapidly in the Amazon, and now poses the biggest threat to the 80% of the original forest that still stands. Where loggers have made inroads to the edge of the forest in the states of Para and Mato Grosso, farmers have followed.

A report today from Greenpeace details a three-year investigation into these cattle farms and the global trade in their products, many of which end up on sale in Britain and Europe. Meat from the cattle is canned, packaged and processed into convenience foods. Hides become leather for shoes and trainers. Fat stripped from the carcasses is rendered and used to make toothpaste, face creams and soap. Gelatin squeezed from bones, intestines and ligaments thickens yoghurt and makes chewy sweets.

Greenpeace says it has lifted the lid on this trade to expose the "laundering" of cattle raised on illegally deforested land.

The environment campaign group wants Brazilian companies that buy cattle to boycott farms that have chopped down forest after an agreed date. To get the industry onside, it is seeking pressure from multinational brands that source their products in Brazil, and, ultimately, from their customers. Three years ago, a similar exposure of the trade in illegally grown Brazilian soya brought a rapid response from the industry, and a moratorium on soya from newly ­deforested farms that still holds.

Last month, the Guardian joined Greenpeace on an undercover visit to the cattle farming heartland around the town of Maraba, deep inside the Amazon region. While saving the rainforest is a fashionable cause in faraway developed countries such as Britain, in Maraba it is a provocative and even ­dangerous ideal.

Many people in Maraba work at the slaughterhouse perched on a hill that overlooks the town. The facility is owned by the Brazilian firm Bertin, one of the companies targeted by Greenpeace for buying cattle from farms linked to illegal deforestation. After slaughter, Greenpeace says Bertin ships the meat, hides and other products to an export facility in Lins, near Sao Paolo. From there, they are shipped all over the world. The firm is Brazil's second largest beef exporter and the largest leather exporter. It is also the country's largest supplier of rawhide dog chews.

Bertin denies taking cattle from Amazon farms associated with deforestation. The company says it "makes permanent investments in initiatives that minimise impacts resulting from its activities" and that it seeks "to be a reference in the sector". It says it has already blacklisted 138 suppliers for "irregularities".

Brazilian government records obtained by Greenpeace show that 76 cattle were shipped to the Bertin slaughterhouse in Maraba from Espirito Santo farm in May 2008. Another 380 were received in January this year.

Standing on Espirito Santo's shady veranda, Oscar Bollir, the farm manager, insists they do nothing wrong.

Under Brazilian law, such farms inside the Amazon region must retain 80% of the original forest within their legal boundary. So why is there pasture for as far as the eye can see? The farm is very big, Bollir says, and most of the required forest is on the other side of some low-slung hills in the distance.

The squatters on the farm, part of a political movement to settle landless people on illegally snatched farmland, are troublemakers, he says. "They don't want land they just want trouble. They want to take all the farms." Earlier that day, he says, he and his men had been forced to visit a neighbouring farm where squatters had killed cattle. Unlike the previous incident on Espirito Santo, when Daniel and Diego's father was shot alongside several others, Bollir says, this time there had been no trouble.

He adds that he is aware of environmental concerns, but that his priority is to produce food and jobs. "Why are these other countries looking at Brazil and telling us what to do?"

The next day, Greenpeace investigators flew over Espirito Santo – the group has a single-engined plane donated by an anonymous British benefactor. Bollir's promised bonanza of forest was not there. GPS data combined with satellite images show that just 20% to 30% of the farm is forested. A local lawyer also reported that during the nearby dispute over the killed cattle, three squatters had been shot and injured.

The Greenpeace report identifies dozens of farms like Espirito Santo that it says break the rules across Para and Mato Grosso to supply Bertin and other slaughter companies. Campaigners say there are probably hundreds or even thousands more.

Cheap pasture from clearing and seeding rainforest is very attractive to farmers without easy access to the expensive agrichemicals and intensive land management techniques used in more developed countries. Within a few years, the planted pasture becomes overrun with native grass, unsuitable for cattle. Many farmers then take the cheap option and knock down adjoining forest to start again, leaving swaths of unproductive deforested land in their wake.

Andre Muggiati, a campaigner with Greenpeace Brazil based in the Amazon town of Manaus, says efforts to protect the forest in frontier regions such as Para are crippled by a lack of effective governance. Government inspections are inadequate and many farms are not even registered so checks cannot be carried out. Casual violence and intimidation are common. "It's totally unregulated and many people behave as if the law does not apply to them. It's like the old US wild west," he says.

Illegal deforestation is not the only problem: farms are regularly exposed as using slave labour, and, like many tropical forest regions, there are regular and violent clashes over land ownership.

The problem is clear a three-hour flight across the patchy forest from Maraba, where a clearing on the side of the river is home to a few hundred Parakana people, a tribe with no contact with the outside world until 1985.

Greenpeace can only reach the village because its plane is equipped to land on the sluggish water, but cattle farmers are steadily intruding. Hundreds of farms have been set up in the surrounding reserve, and they are not welcome.

"Since the invaders arrived there have been many problems," says Itanya, the village chief. Food is harder to find, he says, and discontent is growing. "If the government don't find a solution we will solve it ourselves. We know how to make poison arrows and we are ready to kill people." It is not an idle threat: in 2003 the bodies of three farmers were discovered in the jungle not far from the village. Itanya says it was the work of a neighbouring group.

"We asked them many times to stay away," Kokoa, the chief of the neighbouring group, told the Guardian through an interpreter. "They wouldn't, so one time we said to them that you will never go back and you will stay here forever. We killed them. We are proud that we defended our land."

Food for thought

How much of the Amazon rainforest has been lost and how quickly?

Since the 1970s, when satellite mapping of the region became available, around a fifth of the rainforest has been destroyed, an area the size of California. Greenpeace US estimates that, between 2007 and 2008, another 3m acres (1.2m hectares) of the Brazilian Amazon have been destroyed.

What is driving the destruction?

Logging, cattle farming and soy plantations are key, plus the increased construction of dams and road, and shifting patterns of farming for local people and mining (for diamonds, bauxite, manganese, iron, tin, copper, lead and gold). These factors are often interlinked – trees are cut down for timber and the cleared land can be used for grazing cattle. Soybeans are then cultivated on the same land. Land is also cleared for biofuel crops. According to Greenpeace, around 80% of the area deforested in Brazil is now cattle pasture. Brazil's biggest export markets for beef are Europe, the Middle East and Russia. Friends of the Earth Brazil estimate that cattle farming in Brazil has been responsible for 9bn-12bn tonnes of CO² emissions in the past decade, almost equivalent to two years worth from the US. Infrastructure projects such as hydroelectric dams also threaten the forests because they cause large areas to be flooded. Currently, the biggest planned project is the Tocantins River basin hydroelectric dam, the effects of which stretch over a distance of 1,200 miles.

Why are cattle a particular problem?

In 2006, the UN Food and Agriculture Organisation found that the livestock industry, from farm to fork, was responsible for 18% of all anthropogenic greenhouse gas emissions. In addition, livestock-rearing can use up to 200 times more water a kilogram of meat compared to a kilo of grain. Furthermore, global meat consumption is on the rise, having increased by more than two and half times since 1970.

Who is trying to stop the destruction?

At this year's climate change negotiations in Copenhagen, governments will consider the "Redd" mechanism. This is the idea that richer countries could offset their carbon emissions by paying to maintain forests in tropical regions. The idea has roots in the 2006 review of the economics of climate change by Nicholas Stern, who said £2.5bn a year could be enough to prevent deforestation in the eight most important countries. But Friends of the Earth says the proposals seem to be aimed at setting up a way to profit from forests, rather than stop climate change, and fail to protect the rights of those living in the forests.

In 2007, Greenpeace also came up with a plan to stop deforestation in the Amazon by 2015. It included creating financial incentives to promote forest protection; and increased support for agencies to monitor, control, and inspect commercial activities. So far, only some of these proposals have been taken up by the Brazilian government.

Alok Jha

• This article was amended on Tuesday 23 June 2009. We said that according to Greenpeace US, between 2007 and 2008 an estimated 3m acres of the Amazon rainforest have been destroyed. That figure was for the Brazilian part of the rainforest only. This has been corrected.