Domestic Support to Brazilian Agriculture on the Rise
Brazil has dramatically increased its financial support to its
agricultural sector in the past few years. Government agricultural
credit administered
by the Brazilian Ministry of Agriculture (Ministério da Agricultura,
Pecuária e Abastecimento, MAPA) and disbursed through the National
System of Rural Credit rose to US$13 billion (R$39.5 billion)
in
2004/05, up 48 percent from 2003/04 (see table).
(See footnote 2 in the table for details on the exchange rate used.)
International and domestic forces are driving these increases.
Lower international grain prices, the continuing appreciation of
the Brazilian Real (R) relative to the U.S. dollar, and higher production
costs have limited Brazil’s agricultural growth in 2005. The Brazilian
soybean sector is facing adverse effects from a drought that is
affecting nearly half the soybean-producing states, lowering production
by an estimated 4.5 million metric tons, and rising production costs
due to soybean rust.
There is increasing interest in examining Brazilian agricultural
support measures, particularly in relation to Brazil’s World Trade
Organization (WTO) commitments. Domestic credit programs and tax
policies that provide tax breaks to agricultural producers and processors
are important factors influencing production and marketing decisions
of Brazilian producers.
Credit in Brazil’s Agricultural Policy Framework
Government credit is by far the dominant source of financing available
to agricultural producers. The credit system provides financial
resources at subsidized fixed, low-interest rates through separate
production and marketing programs (60 percent), investment programs
(30 percent), and programs for financing agribusinesses at market
rates (10 percent). About half of the resources for production and
marketing come from a 25-percent bank reserve set-aside required
by the Brazilian Government for credit lines to farmers (table,
item 1). The remaining production and marketing funds come from
other government programs.
Through the Banco Nacional de Desenvolvimento Econômico e Social
(BNDES), the Brazilian Government also maintains long-term loan
programs that support agricultural production and farm income at
subsidized interest rates (see table, item
2 for individual programs). Under these programs, subsidized interest
loans (usually at 8.75 percent per year) are available to producers
depending on the program and the farmer’s annual income. Other BNDES
credit programs charge interest rates of between 9.75 and 12.75
percent per year for large producers. These subsidized rates compare
favorably to the current average market rates for farmers in Brazil
of between 16 and 20 percent per year. The average market interest
rate for business in general is 35 percent per year, well below
the average rate of 62 percent per year for consumer credit. The
terms for the subsidized agricultural credit programs also vary
by length of time and commodity.
The amount the Brazilian Government has budgeted for agriculture
has increased rapidly in recent years, almost doubling since crop
year 2000/01. The current “Crop and Livestock Plan 2004/05” announced
in June 2004 budgeted US$13 billion (R$39.5 billion) in credit lines
for producers, representing an increase of 48 percent from crop
year 2003/04 (see table 1, item 4). This amount
includes three major credit categories: resources for production
and marketing, resources for investment programs, and lending at
market rates. The largest increase from 2003/04 to 2004/05 was in
credit for investment, which more than doubled to US$4.0 billion
in 2004/05. The most significant program in this category is the
MODERFROTA Program (Programa de Modernização da Frota de Tratores
Agrícolas, Implementos Associados e Colheitadeiras), which funds
purchases of tractors, combines, and farm machinery. This program
is credited with contributing to the rapid growth of Brazilian agriculture
in generaland of the soybean sector in particularby
facilitating industry expansion and the development of the immense
interior Cerrado region (see Agriculture
in Brazil and Argentina: Developments and Prospects for Major Field
Crops for more information).
The annual amount of Brazilian Government funds available for the
purposes of domestic agricultural support (as reported in the initial
2004/05 plan) are likely to be understated, because the initial
budgeted figures usually increase during the year through enactment
of Provisional Measures (Medidas Provisórias). For example,
the 2002/03 plan initially announced a value of US$7 billion (R$21.7
billion) for rural credit, but the value was increased by an additional
US$2.3 billion for a total of US$9.3 billion (R$26.8 billion). The
2003/04 plan’s initial budget was US$11.3 billion (R$32.6 billion),
but Provisional Measures added US$1.5 billion, resulting in a total
of US$12.8 billion (R$36.8 billion) for the year.
In March 2005, the Brazilian Government announced an additional
US$2.2 billion (R$6 billion) line of credit for 2004/05 at preferential
rates for production and marketing of soybeans, cotton, corn, rice,
and wheat and debt-relief programs. About two-thirds of the new
resources are for renegotiation of old farm debts; the remainder
is for subsidizing interest rates (the "equalization of interest
rates program") at the preferential 8.75-percent rate. As of April
2005, there is no detailed information on the terms for the newly
approved debt-relief program for soybean farmers affected by the
drought in the South and by heavy rains and soybean rust in the
Center-West region of Brazil.
Debt-relief programs have been regularly made available to Brazilian
producers and, in some years, debt relief has had a major effect
on the agricultural sector. In 2001, agricultural producers had
US$8.5 billion in uncollectible debt. Much of this debt was accumulated
before macroeconomic and trade policies were liberalized in 1995,
but the crisis that preceded devaluation of the Brazilian Real in
1999 aggravated the situation. The debt-relief program implemented
in July 2001 allowed for rescheduling of the US$8.5 billion under
a 20-year repayment plan, with interest rates of 3 percent per year.
As a result, the debt was reduced to US$4.4 billion by 2002.
The new government policy to expand social programs and reduce
poverty in Brazil increased funding for the Rural Credit System,
including the Program for Family Agriculture (PRONAF) and the Program
for Rural Families (PROGER). Funds under these programs have increased
from US$1.2 billion in 2002/03 to close to US$3 billion in 2004/05.
These programs provide subsidized interest rates of 7.25 percent
to low-income producers.
The impact of all the programs under the National System of Rural
Credit varies by crops and region. For soybeans, southern farms
are smaller and producers receive subsidized credit to cover much
of their production costs. For medium and large farms, government
production financing is less significant, although producers can
still obtain subsidized credit lines up to a maximum amount set
by the Government. Soybean processors, exporters, and input suppliers
provide the bulk of production financing to large farms, which are
on an in-kind (crop) basis. Processors and exporters provide about
50 percent of soybean crop financing, input dealers cover 25 percent,
and commercial banks cover the remainder. Large producers also make
use of futures markets at times when the devaluation of the Real
vis-á- vis the U.S. dollar leads to forward selling of the new crop.
This practice has facilitated the financing of land opening, inputs,
and planting costs.
Exporters benefit from the Advance on Exports Contracts and Rural
Promissory Note (ACC-CPR) program, which entitles them to receive
cash advances from the Bank of Brazil, using the Rural Promissory
Note (CPR) as collateral (see table, item 3).
Cash advances are limited to 50 percent of the total export value
of the shipment.
For several years, Brazil appeared to achieve its agricultural
growth with relatively small levels of government support. This
pattern is changing quickly, as internal and external adverse circumstances
are being met with increased government funding. Brazil, a leader
of recent challenges in the WTO to U.S. and European Union farm
programs, is now increasing its own reliance on domestic support
programs. The level and nature of these programs could create new
Brazilian negotiating positions in upcoming WTO talks.
Brazil's Rural Credit
Programs and Use of Financial Resources, 2003/04 and 2004/05 1/ |
|
Item |
Program (and interest rate and length
of loan where appropriate) |
2003/04
|
2004/05 2/
|
|
|
|
Million US$
|
1
|
Resources for production and marketing |
5,467
|
6,000
|
|
Banks set-aside (8.75 percent per year) |
3,667
|
3,898
|
|
Rural savings (8.75 percent per year) |
1,300
|
1,525
|
|
FUNCAFE Fund (9.5 percent per year) 3/ |
267
|
339
|
|
PROGER (8.0 percent per year) 4/ |
234
|
238
|
|
|
Bank of Brazil |
117
|
119
|
|
|
Cooperative banks |
117
|
119
|
2
|
Resources for investment programs |
1,917
|
3,966
|
|
BNDES programs 5/ |
1,334
|
2,542
|
|
|
MODERFROTA (9.75-12.75 percent per year; up to
6 years) 6/ |
667
|
1,864
|
|
|
MODERAGRO, Prosolo (8.75 percent per year; up
to 5 years) 7/ |
200
|
203
|
|
|
MODERINFRA, Proazem (8.75-10.75 percent per year;
up to 8 years) 8/ |
167
|
169
|
|
|
PRODEFRUTA, Procaju (8.75 percent per year; up
to 8 years) 9/ |
80
|
81
|
|
|
PRODEAGRO, Proleite (8.75 percent per year; up
to 5 years) 10/ |
20
|
54
|
|
|
PROPFLORA (8.75 percent per year; up to 12 years)
11/ |
17
|
17
|
|
|
PRODECOOP (10.75 percent per year; up to 12 years)
12/ |
150
|
153
|
|
|
PROLEITE (8.75 percent per year; up to 5 years)
13/ |
33
|
NA
|
|
Other credit lines or programs |
583
|
1,424
|
|
|
Constitutional funds (6-10.75 percent year) |
333
|
678
|
|
|
FINAME (12.75 percent per year; up to 5 years)
14/ |
167
|
169
|
|
|
PROGER Investment (7.25 percent per year; up to
8 years) |
83
|
34
|
|
|
Other BNDES programs |
|
543
|
3
|
Lending at market rates |
1,667
|
3,407
|
|
Rural savings |
1,000
|
1,949
|
|
Resources at market rates |
333
|
780
|
|
Bank of Brazil, Rural Promissory Note (CPR) endorsement
for anticipated marketing of crops |
333
|
678
|
4
|
Total rural credit (1 + 2 + 3) |
9,051
|
13,373
|
NA = Not available.
1/ Crop year October through September.
2/ Exchange rate used is Brazilian Real $2.95/US$1.00. At the
current exchange rate of R$2.70/US$1.00 (May 2005), government
funding for crop year 2004/05 is US$15.8 billion.
3/ FUNCAFE (Fundo de Defesa da Economia Cafeeira) is the government's
fund for coffee production.
4/ Program for Rural Families.
5/ Banco Nacional de Desenvolvimento Econômico e Social.
6/ Resources allocated to MODERFROTA doubled from R$2.25 billion
in 2003/04 to R$5.50 billion for 2004/05.
7/ Soil Conservation Program for pasture and soil recuperation.
8/ Irrigation and onfarm storage. Farmers can finance up to
R$1.8 million for collective storage infrastructure.
9/ Program for the Development of the Fruit Industry.
10/ Program for Developing Milk Production.
11/ Program for Flower Production.
12/ Program for Cooperatives.
13/ Support program for milk production equipment. Incorporated
into the PRODEAGRO program in 2004/05.
14/ Agency for Industrial Financing; used for acquisition, maintenance,
and/or rebuilding of agricultural machinery.
Sources: USDA Foreign Agricultural Service, Brasilia; Ministério
da Agricultura; Pecuária e Abastecimento (MAPA); Ministerio
de Fazenda; BNDES; and Revista Politica Agricola, June 2004.
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