Brazil: Issues and Analysis

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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 general—and of the soybean sector in particular—by 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.