Issues on Brazil Agricultural Policy

Revista de Special ISSN 1413-4969 Edition Year XIV October 2005Journal of Agricultural Policy published by the Secretariat of Agricultural Policy - Ministry of Agriculture, Livestock and Food SupplyOECD ExclusiveReview of agriculturalpolicies in BrazilIssues on Brazil Ministry ofAgricultural Policy Agriculture, LivestockBuilding bridges between the and Food Supplyagribusiness and the financial market

ISSN 1413-4969 Year XIV Special edition October 2005 Brasilia, DF, Brazil Editorial council Summary Eliseu Alves (President) Agricultural Letter Elísio Contini Hélio Tollini The world view of the brazilian agriculture ..................... 3 Antônio Jorge de Oliveira Regis Alimandro Roberto Rodrigues Biramar Nunes Lima Paulo Magno Rabelo Foreword ....................................................................... 4 General secretary Stefan Tangermann Regina Vaz Review of agricultural policies in Brazil1 ......................... 5 Editorial coordination Vicente G. F. Guedes Highlights and policy recommendations Cadastre OECD Cristiana D. Silva Issues on Brazil agricultural policy ................................ 17 Editorial supervision Lillian Alvares Ivan Wedekin Lucilene Maria de Andrade 1 The opinions expressed and arguments employed herein do not necessarily reflect the official views of the OECD or the governments member countries. This document has been produced with the financial assistance of the European Proofreader Union. The views expressed herein can in no way to reflect the official opinion of the European Union. Francimary de M. e Silva Translation José SetteMarcelo Fernandes Guimarães Design and coverCarlos Eduardo Felice Barbeiro Photo cover MAPA’s archive Print and finishing Embrapa Publishing House

The Revista de Política Agrícola is a quarterly publication of the Secretariat of Agricultural Policy of the Ministry of Agri- culture, Livestock and Food Supply, aimed at technicians, entrepreneurs, agribusiness researchers and those interested on agricultural policy.Federal Republic of Brazil Subscription service Luiz Inácio Lula da Silva Ministry of Agriculture, Livestock and Food Supply President Secretariat of Agricultural Policy Esplanada dos Ministérios, Bloco D, 5º andar CEP 70043-900 Brasília, DF Phone: 55-061-3218-2505 Fax: 55-061-3224-8414www.agricultura.gov.br [email protected] Ministry of Agriculture, Articles and data may be quoted if their sources areLivestock and Food Supply mentioned. Signed articles do not necessarily reflect the official view of the Ministry of Agriculture, Livestock and Food Roberto Rodrigues Supply. MinisterSecretariat of Agricultural Policy Edition 5,000 copiesIvan Wedekin Secretary Department of Marketing,and Agricultural and Livestock SupplyJosé Maria dos Anjos DirectorAgricultural Economic DepartmentEdilson Guimarães DirectorDepartment of Rural Risk Management All rights reserved. Non authorized reproductions of this publication, either partial Welington Soares de Almeida Director or total, is a violation to the author's right (Law Nº 9610). International Data Publishing Classification (CIP). Embrapa Publishing House Revista de política agrícola. – Ano 1, n. 1 (fev. 1992) - . – Brasília : Secretaria Nacional de Política Agrícola, Companhia Nacional de Abastecimento, 1992- v. ; 27 cm. Trimestral. Bimestral: 1992-1993. Editores: Secretaria de Política Agrícola do Ministério da Agricultura, Pecuária e Abastecimento, 2004- . Disponível também em World Wide Web: <www.agricultura.gov.br> <www.conab.gov.br> <www.bb.gov.br> ISSN 1413-4969 1. Política agrícola. I. Brasil. Ministério da Agricultura, Pecuária e Abastecimento. Secretaria de Política Agrícola. II. Ministério da Agricultura, Pecuária e Abastecimento. Assessoria de Gestão Estratégica. III. Empresa Brasileira de Pesquisa Agropecuária. Secretaria de Gestão e Estratégia. IV. Companhia Nacional de Abastecimento. 2CDD 338.18 (21 ed.)Year XIV - Special edition - October 2005

Agricultural Letter The world view Roberto Rodrigues1 of the brazilian agriculture Over the last fifteen years, international Agricultural Policy (SPA/MAPA), from other agriculture has been marked by significant areas of the government and from research changes in agricultural and macro economic and teaching institutions. This initiative was policies in Brazil and other emerging nations, complemented by the text “Brazilian a phenomenon that has been repeated with Agricultural Policy in Perspective” made by lesser intensity in the OECD countries. SPA, which lays emphasis on agricultural policy transition and the launching of new These transformations, which are strongly financial instruments designed to foster market-oriented, resulted in greater agribusiness competitiveness. efficiency, increased production and income growth in emerging economies, bringing Considering the importance of these initiatives important changes to world agricultural trade. for a more ample knowledge of the Brazilian agricultural policy, this special bilingual The dynamism, size and high competitiveness edition of the Revista de Política Agrícola of the Brazilian agriculture have been presents a summary and the conclusions of responsible for its impressive growth and the study conducted by the OECD and the full participation in the international market, content of SPA study. strengthening its position as an agricultural powerhouse. The innovative feature of recently-approved agricultural policy instruments works as In order to enlarge knowledge about this bridges which will link the interests of rural reality, OECD conducted a study called producers, cooperatives and agribusiness “Review of agricultural policies in Brazil”, firms, to those related to financial and capital identifying the main changes in agricultural markets. This union of interests between field policy and the productive and commercial and city will strengthen Brazil’s agriculture performance of the agriculture sector, paying and agribusiness, which reveals the strength special attention to social and environmental and entrepreneurship of our agribusiness aspects. One of the study's main conclusions producers. is that Brazil is one of the countries that least subsidizes agriculture. In other words, the With the publication of these two studies, the growth of Brazilian agribusiness in the world brazilian government expresses its gratitude market is solely the result of its to the OECD and to all involved persons, for competitiveness. their contribuition to world agriculture and to Brazil. The publication of the study was preceded by an ample debate between the OECD team 1 Minister of Agriculture, Livestock and Food Supply. and specialists from the Secretariat for 3 Year XIV - Special edition - October 2005

Foreword Stefan Tangermann1This Special Edition presents the highlights of the of Agrarian Development (NEAD). InformationOECD Review of Agricultural Policies: Brazil. on trade policies was provided by researchers atThe Review was undertaken as part of an the Institute for International Trade Negotiationsinitiative to provide analyses of agricultural (ICONE), including Mário Jales, Antônio Neto,policies for four major agricultural economies Joaquim da Cunha Filho and Marcos Sawayaoutside the OECD area, the others being China, Jank. The analysis of changes in incomes,India and South Africa. The study measures the poverty and inequality was provided by Stevenextent of support provided to agriculture using Helfand and Edward Levine from the Universitythe same method that OECD employs to monitor of California, Riverside (USA). A database andagricultural policies in OECD countries. In framework for assessing the prospective impactsaddition, it focuses on key interactions between of global trade and agricultural policy reforms inBrazil and OECD countries, including the Brazil was provided by a research team at theimpacts of trade and agricultural policy reforms. FIPE / USP, including Carlos Azzoni, FernandoThe aims of the country study is to strengthen Gaiger, Joaquim Guilhoto, Eduardo Amaralthe policy dialogue with OECD members on the Haddad, and Tatiane de Menezes. This wasbasis of consistent measurement and analysis, complemented by modeling work undertakenand to provide an objective assessment of the by Scott McDonald (University of Sheffield, UK).opportunities, constraints and trade-offs thatconfront Brazil's policy makers. The study benefited greatly from the support of the Brazilian Ministry of Agriculture and Food,The study was carried out by the OECD the Ministry of Agrarian Development, and theDirectorate for Food, Agriculture and Fisheries. National Treasury, whose experts providedThe principal authors were Jonathan Brooks and essential information on the functioning ofOlga Melyukhina, who received valuable agricultural programmes in Brazil as well ascontributions from Darryl Jones, Andrea comments on the draft report.Cattaneo, Hsin Huang, and Garry Smith.Research and statistical support were provided The study was made possible through financialby Florence Mauclert and Adriana Verdier, and assistance from Germany, the Netherlands,technical and secretarial assistance by Stefanie New Zealand, Spain, Switzerland, the UnitedMilowski and Anita Lari. States, and the European Union.The study benefited from the substantive input of The study was reviewed in a roundtable witha range of Brazilian experts. Information on Brazilian officials and experts in Brasilia indomestic policies was provided by Guillerme March 2005. Subsequently, BrazilianLeite da Silva Dias from the University of São agricultural policies were examined by thePaolo (USP); Gervasio Castro de Rezende and OECD's Committee for Agriculture in its 141stJosé Garcia Gasques from the Institute of session in June 2005, bringing together policy-Applied Economic Research (IPEA); Antônio makers from Brazil, OECD Member countriesSalazar Brandão from the Federation of and some non-OECD countries. The report isIndustries of the State of Rio de Janeiro; and published under the authority of the Secretary-Vicente Marques from the Centre for Agrarian General of the OECD.Studies and Rural Development of the Ministry 1 OECD: Director of the Directorate for Food, Agriculture and Fisheries. Year XIV - Special edition - October 2005 4

Review of agriculturalpolicies in Brazil1Highlights and Policy RecommendationsBrazil provides relatively little support to its current growth rates. Agricultural growth hasfarmers. Producer support, as measured by the been mostly attributable to improvedPSE, accounted for 3% of the gross value of productivity and lower prices for importedfarm receipts in 2002-04 – a rate comparable inputs, with increases in agricultural area awith that of New Zealand (2%) and Australia more recent factor.(4%), and far below the OECD average (30%).The highest support levels are for import- The recent boom in Brazil's agriculturalcompeting staples (wheat, maize and rice) exports has been associated with a change inand cotton, ranging between 6% and 17% for the composition and direction of trade. Therethese products. has been a shift away from traditional tropical products, such as coffee and orange juice,Support to farmers accounts for about three- towards soybeans, sugar, and meats, notablyquarters of all support to agriculture, with the poultry and pigmeat. Although OECD countryremaining quarter delivered as general markets are still very important, with moreservices to the sector, such as research and than 40% of agricultural exports destined forextension, training, and the development of the European Union, the fastest export growthrural infrastructure. These general services is with countries outside the OECD area,include important long term investments, but notably China and Russia. Even so, thehave been declining in relative terms at the majority of agricultural production in Brazilexpense of credit subsidies, about half of serves the domestic market. The share ofwhich stem from the restructuring of farm debt agricultural production exported has typicallyaccumulated over the period of averaged around 25%, although that sharemacroeconomic instability in the late-1980s to climbed to 30% in 2004.mid-1990s. Having substantially liberalised its ownThe low level of producer support reflects the agricultural policies, the main source of futureradical transformation of the Brazilian benefits to Brazil is reforms in other countries,economy that has occurred over the last 15 where access to OECD country markets is theyears. The abandonment of import substitution most important issue. Brazilian exporters arepolicies has enabled agriculture to grow impeded by high tariffs in key markets, tariffrapidly. Livestock output rose particularly escalation according to the degree ofquickly in the 1990s, while more recently processing for several important commodities,there has been a boom in the production of unfavourable treatment under tradesoybeans, driven by high prices and a low preference schemes and tariff-rate quotaexchange rate. These effects have since systems, and significant non-tariff measuresdissipated, so it is unrealistic to extrapolate (notably for livestock products).1 Extract from the study “Review of Agricultural Policies in Brazil”, OECD 2005.5 Year XIV - Special edition - October 2005

At the domestic level, sectoral growth could import substitution policies in the late 1980s,be further supported through improvements in the government embarked upon a wide rangeinfrastructure, changes in the credit system of reforms. These included macroeconomic(notably on the treatment of outstanding debt), stabilisation, structural reforms and tradeand a simplification of tax policies. liberalisation. Macroeconomic stability was achieved in the mid-1990s when, followingAt the same time, there is a strong need for several unsuccessful stabilisation plans, theeffective social policies. Although rural poverty Real Plan invoked the budgetary restrainthas fallen significantly in Brazil, the situation for necessary to bring inflation under control.the poorest of the rural poor has actually Structural reforms included the privatisation ofdeteriorated, and poverty has become state-owned enterprises, the deregulation ofincreasingly concentrated in the North and domestic markets, and the establishment of aNorth East regions. This calls for targeted customs union, Mercosur, with other Southmeasures to upgrade the farming skills of American countries. Policy changes includedsmallholders, and to facilitate income deep tariff cuts and the elimination of non-diversification and the exploitation of non-farm tariff barriers to trade.opportunities. Investments at the individuallevel, for example through education and health Agriculture both contributed to these reformsexpenditures, are important, as are policies that and benefited from them. Through the 1990s,foster rural development, such as infrastructure there was a scaling down of expenditures ondevelopment. price support and subsidised credit; the markets for wheat, sugar cane and coffeeReforms and their impacts were deregulated; and trade was liberalised not just on the import side, but also forBrazil's economy has undergone exports, notably with the elimination of exportradical reforms that have provided licenses, quotas and taxes. Agriculturea more stable investment climate benefited in overall terms from the change inand stimulated agricultural growth. development paradigm, as it removed the discrimination against the sector that wasBrazil is a major player in the global implicit in the support for manufacturingeconomy, with a population of 180 million industry, and helped establish a more stableand a GDP of USD 1,300 billion (in PPP investment climate.terms) that places it among the ten largesteconomies in the world. The country is The Brazilian economy is now much moreendowed with vast natural resources, and has robust than it was ten years ago, but itan agricultural area that is exceeded only by remains vulnerable to outside shocks, asChina, Australia and the United States. evidenced by contagion from the Asian crisisPrimary agriculture accounts for 8% of GDP, in 2001, and the effects of weak marketwhile agricultural products account for about sentiment in the run-up to the presidential30% of exports. Agriculture thus plays an election of 2002.important role in the overall functioning of thenation's economy. Macroeconomic stabilisation, by removing the regressive effects of inflation, led to aOver the past 15 years, the Brazilian substantial reduction in the level of poverty,economy has undergone a radical which fell by 10 million in just two yearstransformation. Following the abandonment of (1994-95). But reforms also induced adjustment stresses, including within the agricultural sector, where producers of importable commodities (such as wheat) wereYear XIV - Special edition - October 2005 6

suddenly forced to compete. Moreover, access to imported inputs (notablyreforms have not resolved Brazil's social machinery). Allied to this, productivityproblems. The incidence of poverty remains improved substantially, with a 40%high, at more than 30% of the population, improvement in total factor productivitywhile the distribution of income is among the between 1990 and 2004. The productivity ofmost unequal in the world. importables (wheat, dairy) improved moreAgriculture has grown rapidly since the than that of exportables, as the former wereabandonment of import substitution policies, exposed to foreign competition while theand this growth has accelerated in the last latter were competitive anyway. In fact, somefew years (Figure 1). A large share of this crops that were formerly imported haveexpansion has occurred in the Centre West of recently become net exports (e.g. maize andthe country, where, through the 1990s, cotton). Yields have improved substantially,livestock output rose particularly rapidly. thanks largely to agricultural research tailoredMore recently there has been a boom in the to climatic conditions in the Centre West,production of soybeans and complementary while big improvements in labour productivitycrops (e.g. second crop maize). Much of the (77% between 1990 and 2004) reflect therecent boom is attributable to the combination release of farm labour from the sector.of a short term strengthening of world prices However, with high real interest rates, accessand a low exchange rate. These effects have to capital remains a problem for manysince dissipated, so it is unrealistic to farmers, and continues to dampen overallextrapolate current growth rates. productivity growth.Figure 1. Output indices for crops and livestock Until recently, it was productivity growthproducts, 1990-2004. rather than the mobilisation of new factor1990=100 resources that underpinned agricultural growth. Total agricultural area remained moreSource: IBGE / SIDRA. or less constant through the 1990s, as increases in the Centre West were offset byAgricultural growth has been mostly attributable reductions in the South and South East.to improved productivity and lower prices for However, between 2000-01 and 2003-04 theimported inputs, with increases in agricultural area planted to crops increased from 52 to 61area a more recent factor. million ha, with soybean area alone increasing by 50%. The rapid expansion ofThe growth in output has occurred despite soybean acreage in the Centre West can befalling long term prices for most commodities. seen as a precursor to more balancedOne reason is that output prices fell more agricultural development in this region, asslowly than input prices through most of the infrastructure development catches up and1990s, as the opening up of trade allowed producers stand to benefit from external economies of scale. The shift in the locus of agricultural production has also led to an increase in the average size of farm operations, as land in the Centre West offers greater economies of scale. The growth in soybean area and rising demand for pasture from livestock farmers threatens the Amazon rainforest. In addition there are concerns about the environmental impacts of agricultural development in the7 Year XIV - Special edition - October 2005

Cerrado grasslands. Since 1990, Brazil has The recent export boom has been drivenlost an area of forest equal to the size of the primarily by soybeans and soybean products,United Kingdom. Large scale commercial but supported by other products, such asranchers are responsible for the majority of sugar, poultry and pigmeat. In the last fewthis deforestation, ahead of logging and the years, Brazil has become an exporter ofmigratory slash and burn practises of many maize and cotton (both of which can besubsistence farmers. Some argue that soybean rotated with soybean production). Morefarming has contributed indirectly, by causing generally, there has been a shift in thethe migration to the forest frontier of displaced composition of exports, away from traditionalcattle ranchers and subsistence farmers. The tropical products, such as coffee and orangetrade-off between the economic benefits of juice, towards soybeans, sugar, and meats,agricultural expansion and the environmental notably poultry and pigmeat.benefits of forest preservation is a difficult The direction of agricultural trade has alsodomestic policy decision facing Brazil, while changed. Although OECD country marketsthe choice of instrument to achieve the are still very important, with more than 40%desired balance needs to take account of the of agricultural exports destined for thedifficulties of policing such a vast area. European Union (Figure 2), and exports toDeforestation would be more limited if more most OECD countries are increasing inintegrated farming practises with higher absolute terms, the fastest export growth islivestock stocking rates were adopted in the with countries outside the OECD area,Cerrado. Current research in Brazil is oriented notably China and Russia (Figure 3).towards this objective. Shifts in the scale, composition and location of production have been associated with profoundThe recent boom in Brazil's agricultural structural changes within the agricultural sector.exports has been associated with a change in These changes have had important implicationsthe composition and direction of trade. for the level and distribution of incomes, and the incidence of poverty.Despite rapid export growth, the majority ofagricultural production in Brazil serves the Figure 2. Brazilian agro-food exports by destinationdomestic market. The share of agricultural region, 2000-03 average.production exported has typically averagedaround 25%, although that share climbed to (1) EU/15; (2) Other countries include Cyprus, Iceland, Liechtenstein, Malta,30% in 2004. This share is similar to that of Norway and Switzerland.the United States (which also has a large Source: MDIC ALICE.domestic market), but lower than that of otheragricultural exporters such as Canada, where40% of production is exported, and Australia,where the exported proportion averagesabout two-thirds. The domestic market islikely to continue to be the main outlet forproduction. On the supply side, the recentproduction boom is likely to fade with weakerprices, a higher exchange rate, and theexposure of infrastructure bottlenecks. On thedemand side, there is considerable scope forpoorer Brazilians to consume more productswith relatively high income elasticities (suchas meat and fruit and vegetables).Year XIV - Special edition - October 2005 8

Figure 3. Changes in export shares of Brazil's major export destinations between 2000 and 2003(1) Includes Mainland China, Hong Kong, and Macao.Source: MDIC/ALICE.Although rural poverty has fallen significantly in The incidence of poverty is higher in ruralBrazil, the situation for the poorest of the rural areas, but because 80% of the population livepoor has actually deteriorated, and poverty has in urban areas the number of urban poorbecome increasingly concentrated in the North exceeds the number of rural poor. In theand North East regions. 1990s, rural incomes rose more rapidly than urban incomes (32% versus 23% between 1991In general terms, per capita income growth and 2000). This enabled rural poverty to fallhas led to a substantial fall in the incidence of from 72% of households in 1991 to 61% in 2000,poverty and extreme poverty. For Brazil as a and extreme rural poverty to decline from 45%whole, real per capita incomes rose by 29% to 36% over the same period.between 1991 and 2000, reducing theproportion of the population living in poverty However, the improvement in rural incomes hasfrom 40% to 32% (Figure 4), and the share not been principally attributable to agriculturalliving in extreme poverty from 20% to 15%2. incomes, which grew by just 2% between 1991 and 2000, compared with non-agricultural income growth of 38%. Moreover, agricultural income became more concentrated among richer households (although it remains less concentrated than non-agricultural income), and so made little contribution to poverty reduction.Figure 4. Poverty in Brazil, 1991 and 2000 – Per The situation for the bottom 20% of ruralcent of population below the poverty line. households, who are well below the extreme poverty line (more than a third of ruralSource: Helfand and Levine (2004) based on the Demographic Census. households), has actually deteriorated. A trebling of government transfers between2 The poverty and extreme poverty lines are set at ½ and ¼ respectively of the 1991 and 2000 helped poor households in August 2000 minimum monthly wage per person (BR 151). At the general, but many of the poorest missed out contemporaneous nominal exchange rate, this translated into a poverty line because they fell outside the remit of the formal of approximately USD 1.33 per person per day and an extreme poverty line economy and the coverage of pensions and of USD 0.67 per person per day. other programmes.9 Year XIV - Special edition - October 2005

These national averages mask important 2.7 billion) per year in 2002-04, or 0.5% of GDP.regional variations. Income growth in the Centre The cost of support to the overall economy isWest has been strong enough to reduce rural low relative to most OECD countries, and ispoverty, even though inequality has increased. roughly comparable to that in Australia (0.3%)Rural poverty has fallen more slowly in the and New Zealand (0.4%).North East and actually risen in the North(where the rural population has actually grown), Most of this support is delivered to producers, asmeaning that rural poverty is increasingly opposed to general services to the sector.located in these regions. Indeed, producers received about three-quarters of total support to agriculture in 2002-04Structural changes at the farm level have been (Figure 5). Producer support in Brazil, asreinforced by wider developments along the measured by the percentage PSE, accounted forfood chain. In particular, the increasing share of an average of 3% of the value of gross farmretail sales accounted for by supermarkets receipts between 2002 and 2004 – a rate ofcarries important implications for farm support that is comparable with that of Newstructures. The associated growth of contracting Zealand (2%) and Australia (4%), and far belowoffers opportunities for some producers, who the OECD average of 30% (Figure 6).may, for example, see their credit constraintseased through the forward supply of seed. The highest support levels are for import-However, it poses a threat to many smallholders competing staple crops (wheat, maize and rice)who may not be able to meet the standards set and cotton (Figure 7). These commoditiesby downstream purchasers, yet find it receive minimal border protection, butincreasingly difficult to find local outlets. producers are effectively compensated for having to compete with other MercosurThe opportunities for smallholders also depend partners, as the value of domestic assistance ison the success of land reform initiatives and approximately equivalent to Brazil's currentassociated credit programmes. So far, the scale extra-Mercosur tariff.of land reform has not been sufficient to make asignificant dent in the overall poverty figures, Producer support is provided mostly throughand it is likely that its ultimate potential will taxpayer transfers associated with preferentialdepend on how well it is complemented by credit to the sector (Figure 8). Brazil's officialbroader investments (e.g. in education) that credit system, which accounts for about 28% ofimprove households’ income earning potential agricultural borrowings, confers specialboth within and outside agriculture. treatment on the agricultural sector, through the administered allocation of credit resources andCurrent agricultural policies controlled interest rates. This system has been justified on the grounds that it offsets high marketBrazil provides a relatively low level ofsupport to its agricultural sector. Most of thatsupport goes to producers in the form ofpreferential credit.Brazilian agricultural policies have been Figure 5. Composition of the total support estimatebroadly liberalised, although there continues to in Brazil – Per cent.be an array of policy interventions. Total supportto the sector, as measured by the Total Support Source: OECD Secretariat.Estimate (TSE), averaged BRL 8.2 billion (USDYear XIV - Special edition - October 2005 10

Figure 6. Producer support estimate in Brazil and selected countries, 2002-04 average – As per cent of gross farm receipts. Note: 2002-03 average for China and Russia. Source: OECD Secretariat. Figure 7. Brazil's producer support estimate by commodity, 2002-04 average – As per cent of gross farm receipts. Source: OECD Secretariat.Figure 8. Composition ofproducer support estimate,1995-2004 – Million USD.Source: OECD Secretariat. 11 Year XIV - Special edition - October 2005

interest rates that are a legacy of the potential to correct market failures. On themacroeconomic instability (from which other hand, they also have the potential to retardagriculture suffered disproportionately). A further adjustment among farmers whose best prospectsrationale for special treatment of the sector lie ultimately outside agriculture.emanates from social goals, where affordabilityof production credit is seen as a crucial element To summarise, Brazil provides little support to itsof supporting income generation among the agricultural sector, yet it has become morerural poor. The preferences are to some extent distorting and less oriented towards long-termeroded by the practice of banks imposing development. The share of support provided toadditional requirements on rural borrowers (such producers, mostly in the form of credit subsidies,as the purchase of insurance) as a condition for is increasing, while expenditures on generalreceiving reduced interest credit. services are becoming less important. However, the latter category includes important long-termApproximately one half of the overall benefit investments for Brazil, in areas such as researchfrom credit support stems from the and extension, training, and the development ofrestructuring of large debt accumulated over rural infrastructure.the period of macroeconomic instability in thelate 1980s to mid-1990s. Debt rescheduling The future benefitswas unavoidable, given the need to renew of policy reformsthe flow of liquidity into the sector. However,successive rescheduling has created “moral The benefits to Brazil from multilateral reformhazard” and led to defaults that are likely to will come mainly from reforms in agriculturalcontinue in anticipation of further policies, where access to OECD countryconcessions. This may impede fresh lending. markets is the most important issue.Also, to the extent that debt reschedulinginvolves budgetary support, it may crowd out Given that Brazil has broadly liberalised itsmore productive public spending (e.g. for own agricultural policies, most of the futureinfrastructure development). benefits to the country from multilateral agricultural policy reforms are expected toAside from preferential credit, Brazil employs come from the removal of protectionistseveral mechanisms to support producer prices, measures in other countries. Indeed, Brazil issuch as intervention purchases and commodity expected to be one of the biggest externalloans. However, these do not result in broad, beneficiaries from reforms in OECD countriessector-wide price distortions. Indeed market and elsewhere.price support has tended to be close to zero inrecent years. For Brazil, agricultural reforms matter more than reforms to any other sector, and theThe purported aim of price support policies is to majority of the potential gains derive fromreduce price instability, as well as to provide a reforms in OECD countries (Figure 9). It islimited subsidy to producers who are considered estimated that a 50% cut in tariffs and exportto be at a disadvantage, either because their subsidies globally and for all sectors, togethercosts are raised by underdevelopment of with a 50% reduction of domestic support toinfrastructure, or because of locally depressed agriculture in OECD countries, would provideincomes. Insofar as these policies are locally a welfare gain to Brazil of USD 1.7 billiontargeted to keep potentially viable farmers afloat equating to about 0.3% of GDP. Of theseuntil they become profitable - either as gains, 59% would come from tariff reductionsinfrastructural development catches up, or asinvestments to improve semi-subsistencefarmers' competitiveness take hold - they haveYear XIV - Special edition - October 2005 12

Figure 9. Welfare gains to Brazil from multilateral favour Brazil. These mechanisms for controllingreform. imports tend to be relatively important in the sugar, beef and cotton sectors and are appliedSource: OECD Secretariat. most by those countries which represent Brazil's biggest overall markets, i.e. the Europeanon agricultural products by OECD members. Union, the United States, China and Russia.The gains to Brazil from agricultural policyreforms in OECD countries account for more Non-tariff measures, such as sanitary andthan half of all the gains to developing phyto-sanitary regulations, which, irrespectivecountries. of their legitimacy, impede market access. These are a particular problem for meatThere are two reasons why OECD reforms products, where several countries do not acceptmatter most: first, a large share of Brazil's Brazil's contention that specific regions shouldagricultural exports go to OECD countries be considered as free from foot-and-mouth(notably the European Union), and protection in disease, even if this is not the case for thethese markets is relatively high; second, OECD country as a whole.countries account for the majority of support thatundermines Brazil's competitiveness in third Reforms in these areas, and accompanyingcountry markets. That said, a rising proportion of reductions in domestic support promise gains toBrazil's exports is going to non-OECD country Brazil that are expected to be widespreaddestinations, notably China and Russia, which among different groups of households:makes policies in these countries of increasingimportance. Commercial agricultural producers with links to foreign markets are expected to reap most ofAmong the areas in which an agreement on the benefits that derive from higher internationalreforms is being pursued, market access is prices. Potential losses to import-competingparamount for Brazil, as for world markets sectors are less of a threat, since these sectorsoverall. Brazil faces a range of difficulties in have already been opened up to imports fromgaining access to foreign agricultural markets, low-cost Mercosur members (e.g. Argentineespecially among OECD countries. These wheat).include: Non-commercial “family” farms are alsoHigh tariffs in key markets (notably sugar, expected to benefit, to the extent that they arepoultry, orange juice, beef and pigmeat, and integrated with markets. This does not rule outtobacco). the possibility that some households will lose, for example because they are net consumersTariff escalation according to the degree of of agricultural products, or because landprocessing (notably in the soybean sector, and rental payments are forced up by more thanfor processed food products and coffee). any increase in farm receipts. But on balance this is not expected to be the case - even forDiscriminatory import regimes, such as the poorest farm households.country-specific TRQ allocations, andpreference schemes, which typically do not Non-agricultural households are also expected to gain from multilateral reforms, with the benefits from higher profits and wage payments in the agro-food sector and elsewhere exceeding the losses to consumers from higher food prices. Wage-earning agricultural employees should be a major beneficiary from the expansion in13 Year XIV - Special edition - October 2005

commercial production and exports; most likely within the constraints of environmentalfrom an increase in employment (i.e. a brake on objectives, and the design of specific policiesthe structural decline) rather than higher wages, that are tailored to the needs of poor farm andgiven the high rate of unemployment (and rural households.underemployment) in Brazil. Weak infrastructure is emerging as aIn the case of the reform scenario described significant bottleneck to agriculturalabove, real incomes are expected to increase development. Producers in Brazil arebetween 2% and 4% for agricultural typically a long distance from their principalproducers, by around 3% for agricultural markets, and face internal logistics systemsemployees and by about 1% for urban that are relatively underdeveloped. Forhouseholds. These income gains lead to a example, only 10% of all highways in Brazilmodest decline in the incidence of poverty. are paved, compared with 29% inBecause commercial farmers gain more than neighbouring Argentina. Moreover, transportsmallholders, inequality among producers is costs are relatively important for Brazilianexpected to increase. But the wider gains to exporters, as a relatively large share of theagricultural employees and urban households country's agro-food exports tends to be in the(who account for about 80% of the population) form of bulk commodities.imply that the overall effect on incomeinequality is likely to be broadly neutral. The upgrading of rural infrastructure need not be detrimental to the environment, but nor is itIn any event, these impacts are much milder likely that an unregulated expansion ofthan those induced by market changes, agricultural area will provide sufficientincluding global demand growth and protection to environmentally important areas.declining real agricultural prices. Indeed, it is Brazil's policies need to take account of theimportant not to confuse all the enhanced implicit trade-off between the economicopportunities for exporters, or the adjustment benefits and environmental costs ofstresses facing farmers (often operating on a agricultural growth in the Amazon region,small scale) whose productivity cannot keep while their design needs to reflect thepace with price declines, with the more difficulties of policing such a vast area.limited impacts of multilateral reforms. For many agricultural producers, the termsPolicy challenges and availability of credit are also a major constraint. Commercial agri-businessesBrazil's agricultural policies seek to reconcile typically receive their payments in hardthe pursuit of agricultural growth with social currency (mostly US dollars), which providesand environmental objectives. Sectoral evidence of creditworthiness to lenders. Ingrowth can be supported domestically many cases, these companies do their ownthrough improvements in infrastructure and lending to agricultural suppliers, either bythe country's credit and tax systems; while providing credit or financing inputs (such asinternationally the biggest need is for fertiliser) directly. In Brazil, for example,improved access to key markets. soybean farmers often find it cheaper to obtain finance from the crushers.Agricultural policy design in Brazil involvesreconciling multiple objectives. These The greatest difficulties arise for businessesobjectives include the promotion of that are obliged to borrow on the domesticagricultural growth and competitiveness market. Although the economy has stabilised in recent years, macroeconomic uncertainty still has a disproportionate effect on less well- established companies without easy access toYear XIV - Special edition - October 2005 14

overseas lenders. High real interest rates the sector's share of national income wasmean that access to credit from banks is more or less constant over the same period.almost prohibitive, despite governmentsubsidies. General credit subsidies risk Moreover, agricultural growth has made littlecrowding out non-agricultural investment impact on the problem of rural poverty. Moremore than targeted subsidies to land reform than 60% of the rural population has anrecipients and smallholders under the income below an absolute poverty line of halfPRONAF programme. the minimum wage, while income inequality in rural areas has gone up over the lastTax policies also have an important effect on decade and the poorest have become poorer.producers' opportunities. Under Brazil's ICMS Out-migration from rural areas may have(value added) tax system, each of the helped reduce rural poverty, but to a largecountry's 26 states imposes its own taxes and extent this has shifted the burden to urbanexemptions. This distorts producers' areas. Rural poverty is increasinglyincentives, while the system's complexity concentrated in the North and North East,places an additional burden on taxpayers. where there is a heightened need for effective development policies and social safety nets.The shadow that hangs over attempts toimprove competitiveness, and to build Poverty rates are influenced by twosuccessful agribusinesses around a core competing forces. On the one hand,comparative advantage in agriculture, is trade economic growth at the national level helpsprotection in important markets and raise incomes, and generates demand-subsidised production and exports by rival linkages throughout the economy. On thesuppliers. Some of the adverse impacts can be other hand, structural change poses a threat tocushioned by moves into products where poor producers who are progressively lesseffective demand is less constrained able to compete. The competitive pressure(e.g. tropical products), but these policies may come from imports or from domesticnevertheless impose an important constraint pressures. Given that Brazil has little tariffon the agro-food sector's growth prospects. protection, the major challenge to lessWith supply-side improvements likely to competitive producers comes not from furthercontinue, the need for further liberalisation of liberalisation, but rather from structuraltrade in agricultural products becomes more change within the country, where traditionalimportant. producers (often operating on a small scale) have experienced long-term price declinesThe social challenges presented by but not shared in the cost reductions thatagricultural development call for targeted generated them. Indeed, Brazil is becomingadjustment policies and effective safety nets. increasingly competitive in a number of products that have been important to smallIn addition to the need to continue scale farmers (e.g. dairy, maize); a positiveimprovements in agricultural competitiveness, development, but one that nevertheless putsBrazil also faces a number of social pressure on smallholders.challenges associated with agriculturaldevelopment. Agricultural employment fell by The key need is for targeted adjustment14% between 1992-93 and 2001-02. This policies. For some households, programmes todecline is not exceptional by international upgrade farming skills (e.g. through extension)standards, but it indicates particularly strong may enable them to become competitiveadjustment in the labour market, given that within the sector. At the same time, it is important to recognise that the long-term (inter-generational) future for most semi-15 Year XIV - Special edition - October 2005

subsistence farm households lies outside Policies to improve commercial competitivenessagriculture, so there is a parallel need for and address social objectives need to takemeasures that facilitate income diversification account of the macroeconomic constraints thatand the exploitation of non-farm opportunities. bind policy makers. Neither improvements inInvestments at the individual level, for competitiveness nor long term poverty reductionexample through education and health are attainable without economic growth andexpenditures, are important here, as are stability, which in turn require fiscal disciplinepolicies that foster rural development, such as and hence the adoption of well-targetedinfrastructure development. measures. Such policies have the potential to create a virtuous circle, with improvedMany of the policies that improve competitiveness and enhanced human capitalcompetitiveness, or facilitate adjustment, fall supporting faster economic growth.within the general services element of thecalculation of total support to agriculture. Yet In overall terms, Brazil has pursued essentialthis component of support has been falling at policy reforms that have benefited thethe expense of producer support, mostly agricultural sector and helped raise incomesprovided in the form of credit subsidies and and reduce poverty. A shift of support towardsdebt reduction. Moreover, the majority of longer term investments in areas such asproducer support has not been targeted at infrastructure, and research and extensionpoorer agricultural households, while the should further enhance competitiveness, whilepoorest of the rural poor are outside the scope better targeting of agricultural and economy-of several economy-wide social policies, wide social policies could enable agriculturalparticularly pensions. development to be more fully inclusive than it has so far been.Year XIV - Special edition - October 2005 16

Issues on Brazil Ivan Wedekin1agricultural policyThis text was based on a presentation made at 1. Brief history of thethe opening session of the Committee for brazilian agricultural policy2Agriculture of the Organization for EconomicCo-operation and Development (OECD), in Brazilian agricultural policy is based on twoJune 2005, which held a debate on draft study main tools: credit and producers income“Review of Agricultural Policies in Brazil”, guarantees. The first includes working capital,now published by that organization. The marketing and storage, and investment, andobjective of the presentation was to highlight the second one relays on a set of devicesthe Brazilian delegation viewpoints on Brazil developed under the Minimum Guaranteedagriculture and agricultural policy Price Policy (PGPM) to support prices,developments, including social and guarantee producers income and ensureenvironmental impacts. complementary food supply.The debate clearly demonstrated the Table 1 presents the key points of theinfluence of macroeconomic factors Brazilian agricultural policy which can be(monetary, fiscal and foreign exchange traced since its inception in 1931, when thepolicies) and the limitations imposed by Conselho Nacional do Café [National CoffeeFederal Government fiscal constraints Council] and the Comissão de Defesa da(balanced budgets requirements) to carry-out Produção de Açúcar [Commission for thethe agricultural policy. Analysts, negotiators Protection of Sugar Production] were created.and policy makers in the field of international Afterwards, it was replaced by the Institutoagricultural policy see a non evident Brasileiro do Café (IBC) [Brazilian Coffeecontradiction between the outstanding Institute] and the Instituto do Açúcar e doBrazilian agricultural growth in the last five Álcool (IAA)3 [Sugar and Alcohol Institute].years and the fact that Brazil has one of the Agriculture, mainly coffee, for many decadeslowest levels of farm support worldwide. generated most of the fiscal and foreignOECD concluded that only 3% of gross farm exchange revenues that enabled thereceipts in Brazil, in the period 2002-2004, implantation of Brazil’s urban and industrialwere derived from government support. development model.This paper is divided in three parts: the first In sectors such as grains (cereals, oilseedspresents a brief summary of the Brazilian and fibers) and regional products (such asagricultural policies and its instruments; the sisal, jute and cashew nuts), the effectivesecond deals with issues on agriculture and outbreak of agricultural policy occurred inenvironment with due considerations ofrecent concerns on the environmental impact 1 Secretariat for Agricultural Policy of the Ministry of Agriculture, Livestock andof growth in soybeans production; the third Food Supply. This paper counted on the contribution of SPA-MAPA team.presents remarks concerning the Brazilianagricultural policy in the future. 2 A more complete analysis can be found in the paper “70 anos de Política Agrícola no Brasil (1931-2001)”, by Carlos Nayro Coelho in Revista de Política Agrícola, Year X, Jul-Aug-Sep 2001. 3 Both institutes were abolished in 1990.17 Year XIV - Special edition - October 2005

Table 1. Syntheses of the Brazilian Agricultural Policy. Price and Income Support Credit and Financing1931 National Coffee Council Sugar Production Defense Commission1943 Production Financing Commission (CFP)1945 Minimum Price Garantee Policy (PGPM) National Rural Credit System - SNCR1965 (Law 4829/65)1966 PGPM Redesigning (DL 79/66)1967 Banking exigibilidades (Res. 69)1987 Rural Savings1988 Constitutional Funds (Law 7827/89)1991 Agricultural Law (8171/91) Stock Release Sales Price - PLE1994 Rural Product Note - CPR (Law 8929/94)1995 Rural Debt Rescheduling - Securitization (Law 9138/95)*1996 National Program for the Strengthening of Family EGF-COV (Federal Government Loans Agriculture - PRONAF (Decree 1946) with Sell Option) extinction Finame Special Line1997 Government Sell Option Contracts, Premium for Commercial Buyers (PEP) and Product Delivery Value (VEP)1998 PESA (Resolution 2471/98) and Prosolo1999 Recoop (Resolution 2666/99) and Proleite2000 CPR Financeira and Moderfrota2003 Support to the Rural Insurance Premium Marketing Credit Special Line (LEC) (Law 8423/94)2004 Rural Savings for Cooperatives Banks CDA-WA and Private Sell Option Contract - PROP New Agricultural Notes - CDCA, LCA, CRA (Law 11076/04) and Purchase Option Contract (Law 11076/04)2005 Commercial Agribusiness Note (NCA) - Agrinote (Instruction 422-CVM)Elaboration: SPA-MAPA. Year XIV - Special edition - October 2005 18

1943, when the Comissão para Financiamento Rural financing developmentda Produção (CFP) [Commission for ProductionFinancing] was established. This agency was Under Law 4829, which created the SNCR,later (in 1990) transformed into the Companhia the banks were obliged to reserve part of theirNacional de Abastecimento (CONAB) [National resources for rural credit, an exigibilidade4Food Supply Company], which arose from the which was regulated by the CMN in 1967.merger of two companies controlled by the Current rule requires that 25% of cashFederal Government: Companhia Brasileira de deposits in commercial banks must beArmazenamento (Cibrazem) [National invested in agriculture. The non-fulfillment ofWarehousing Company] and the Companhia this exigibilidade leads to the freezing of suchBrasileira de Alimentos (Cobal) [National Food resources by the Central Bank, without anyCompany]. payment to the financial institution.In 1945 it was created the PGPM and its main In 1987, twenty years after the establishmentdevices: the Aquisições do Governo Federal of these bank exigibilidade, a new source of(AGF) [Federal Government Purchase], a source funding was created – the Caderneta deof direct intervention in the market, and the Poupança Rural [Rural Savings Account],Empréstimos do Governo Federal (EGF) which was operated by Banco do Brasil,[Federal Government Loans], credits for Banco do Nordeste do Brasil and Banco damarketing and storage. The PGPM was modified Amazônia. The balance of deposits in Bancoin 1965 (Decree 57391) and underwent a deep do Brasil savings accounts is approximatelyreform in 1966 through the Decree-Law nº 79, USD 12.6 billion. From the 1st of August 2005whose characteristics remain in force. onwards, these three official banks must compulsorily offer 55% of these deposits toThe framework of preferential credit for the agricultural sector. The percentage ofagriculture was launched in 1965 under the compulsory funding will grow by 5Sistema Nacional de Crédito Rural (SNCR) percentage points yearly until up to 65% on[National System of Rural Credit], by Law 4829, the 1st of July, 2007.regulated by Decree 58380/66. The SNCR wasestablished once the Sistema Financeiro Until 2004, the so-called Poupança VerdeNacional [National Financial System] was set in [Green Savings] was operated only by officialDecember 1964, which instituted the Central federal banks. Private Banks and CaixaBank (BACEN) and the National Monetary Econômica Federal (CEF) attracted resourcesCouncil (CMN). The CMN remains the decision- from people through another type of savingsmaking body responsible for the main account, part of which is for the financing ofagricultural policy measures. The Manual de home building. They are not allowed by lawCrédito Rural (MCR) [Rural Credit Manual] to use those resources to finance agriculture,consolidated the guidelines of the SNCR, and official federal banks and cooperativeincluding the main types of credit: working banks do not deal with savings for homecapital, marketing and storage, and investment. building financing. Private Banks areThe legislation defined rural producers and their interested in financing agriculture with part ofcooperatives as public target, which have its savings deposits given that theseaccess to credit at interest rates below those operations have higher turnover and shorterprevailing in the internal financial markets. term, in comparison with real estateAgroindustry firms may also have access to rural financing.credit but always related to marketing creditoperations that benefit producers and In March 2004, the Government allowed alsocooperatives. the cooperative banks BANCOOB and 4 A certain share of banks obligatory sight deposits that can be allocated to rural lending.19 Year XIV - Special edition - October 2005

BANSICRED to deal with savings deposits BNDES investment programs for ruralunder the condition of investing 65% in rural producers and cooperatives. They rely oncredit. This opening of the rural savings market resources from the Fundo de Amparo aofor cooperative banks rekindled the interest of Trabalhador (FAT) [Unemployement Insuranceprivate banks facing difficulties in complying Fund] administered by the Banco Nacional dowith home building exigibilidade. Desenvolvimento Econômico e Social [National Economic and Social DevelopmentThe amendments of 1988 made in the Brazilian Bank] and contracted by financial agents7.Constitution provided for the creation ofconstitutional funds for the development of the Between 1998 and 2003, MAPA launched 16Center-West (FCO), Northeast (FNE) and North new programs, which gave a new allure to(FNO) so as to carry fiscal resources to productive investment in agriculture.investment in these less-developed regions. The Breaking with monetary indexation habitude,constitutional funds are important sources for the all these programs work with fixed interestfinancing of agriculture and agro-industry. Over rates (from 8.75 to 12.75% per annum), longthe last two crop years, the three funds have term repayment (5 to 12 years) and costinvested in agriculture approximately USD 700 compensation (equalização)8 by the Nationalmillion per year. Treasury. The strong demand for agricultural machinery was also met by a line of creditThe first private instrument for agricultural complementary to Moderfrota, the BNDESfinancing outside the SNCR, was the Cédula Finame Agrícola Especial [Finame Specialde Produto Rural (CPR) [Rural Product Note], Line], for which interest rates is 13.95% percreated in 1994 by Law nº 8929. It is a note, annum. After July 1st 2004, Moderfrota noissued by rural producers and cooperatives, longer included cost compensation.which enables the financing of workingcapital, mainly for the purchase of agricultural In the 2003-2004 Agriculture and Livestockinputs. In addition to notes financed, acquired Plan, the Government merged some programsor guaranteed by a bank, the market has also and reduced their number from 16 to 8, and to 7seen the rise of the so called “CPR de in the following crop year. This rationalizationgaveta”, which works mainly as a sort of facilitated the marketing and application ofguarantee on commercial transactions funds. Starting from the application of USDbetween rural producers and suppliers of 186 million in the 1999-2000 (Moderfrota -inputs, processing industries and foreign trade USD 114 million), the MAPA-BNDES programscompanies. The CPR-Financeira (CPR-F) reached a record of USD 1.9 billion in the[Financial CPR] was launched in 2000. The 2004-2005 crop, which ended in June, 2005.operation is settled in cash and thereto there When added to other sources of fundingis no physical delivery of merchandise. (Finame Special Line, Constitutional Funds and Rural Proger), investment credits provided toThe Law5 that created CPR-F opened the producers reached USD 2.9 billion in thedoors for an important source of 2004-2005 crop season.modernization for the Brazilian agriculturecalled Moderfrota6, a program which finances Brazil is characterized by significantthe agricultural machinery renewal. imbalances in the distribution of income onModerfrota put forward a “family” of MAPA- individual, regional and sectorial levels. The5 Provisional Decree 2117, of 1/10/2000, converted into Law 10200, of 14/2/2001.6 Program for Modernization of the Fleet of Agricultural Tractors and Associated Implements and Harvesters (Provisional Decree nº 2017-1, dated 2/17/2000, transformed into Art. 3º of Law nº 10200, dated 2/14/2001).7 Finame Special Line (BACEN Resolution 2314/96) was the first step of BNDES in financing rural producers. The programs Prosolo (1998) and Proleite (1999) were created before Moderfrota.8 Difference between the rate paid by producers and the costs with the remuneration of the FAT, BNDES and financial agents.Year XIV - Special edition - October 2005 20

expansion of agriculture has had a beneficial Rehabilitation], regulated by BACENeffect on the population residing in Brazil’s Resolution 2471/1998; and yet another stageinterior. Nonetheless, the per capita income of by means of the Programa de Revitalizaçãothe rural population is equivalent to 45% of de Cooperativas de Produção Agropecuáriaurban dwellers income. (RECOOP) [Program for the Revitalization of Agricultural Production Cooperatives], underMeasures for the reduction of poverty are BACEN Resolution 2666/1999. It is estimatedbeing implemented by several ministries and that the current stock of farm debt, originallyagencies, at the federal, state and local contracted with financial institutions, islevels. Brazilian agricultural policy has also approximately USD 13 billion, with asought to promote the social and economic compensation cost (equalização) whichinclusion of producers and rural inhabitants. represents the main share of FederalOne important example is the Programa Government agricultural policy expenditures.Nacional de Fortalecimento da AgriculturaFamiliar (PRONAF) [National Program for the Market price and income supportStrengthening of Family Agriculture], createdby Decree 1946/969. With a focus on The objective of the PGPM is to ensure ansustainable rural development, the program adequate income for producers andinvolves market instruments (such as credit accessible prices for consumers and toand insurance) and structural aspects complement supply in regions where the(infrastructure, research, education). demand for certain products may exceed local supply. In order to achieve these goals,From 2003 onwards, the emphasis has been government intervention seeks to correcton increasing the volume of and facilitating market failures, which are aggravated byaccess to credit. In two years – between the Brazil’s continental dimensions and deficientcrops season of 2002-03 and 2004-05 – the infrastructure.PRONAF showed an exceptional growth: thenumber of operations rose from 926,000 to The PGPM remained practically unchanged1.64 million, while the amount of credit from the 1960s to the 1980s. The Preço degranted jumped from USD 660 million to Liberação de Estoques (PLE) [Stock ReleaseUSD 2.3 billion. Sales Price] was set by the Agricultural Act in 1992. It is a criterion used to define theThe various macroeconomic stabilization market government stocks sales price. It wasprograms implemented in the 1980s and implicit for the legislator that the government1990s resulted in a rural debt crisis. The market intervention by means of stocks saledramatic situation was largely due to the might be detrimental to the interestsincompatibility between the rate applied to of producers.adjust the outstanding debt and those used tocalculate minimum prices, which serve as The fiscal crisis of the State forced thereference in the formation of producer extinction of EGF-COV in 1996, whichincomes. After a long and intense negotiation, combined financing with sales option. Thisthe rural debt question was settled in three instrument enabled the compulsory settlementstages: Law nº 9138, of 1995, opened the first of storage loans by delivery of the product tophase of debt securitization; followed by the the government, an eventuality which wasrescheduling of debts above R$ 200,000 by likely to occur in periods of high inflation.the Programa Especial de Saneamento deAtivos (PESA) [Program of Financial Assets The modernization of government market intervention was initiated in 1997 so as to9 In 1999, the program's management was transferred from MAPA to the Ministry sustain farmers income, without necessarily of Agrarian Reform, today Ministry of Agrarian Development.21 Year XIV - Special edition - October 2005

including the purchase of goods and credit using as parameter a price above themaintenance of costly stocks by CONAB. minimum price established by the government, which serves as a reference forSales Options Contracts for the sale of EGF contracts. This instrument has theagricultural products to the government is one additional advantage of being simpler thanof the most important PGPM instruments. A the EGF.standard contract defines the date, locationand exercise price of the option. The The management of the PGPM is complexdifference between the price prevailing on because it involves managerial,the market on the date of auction and the macroeconomic and fiscal issues. MAPAexercise price at a future date signals the Secretariat of Agricultural Policy isupward trend in prices desired by the policy responsible for defining the government’smakers. In auctions organized by CONAB, intervention measures in agricultural markets.rural producers and cooperatives – the target These policies are then carried out bypublic of the policy – purchase the right, CONAB. Annually, the federal budget sets outsubject to payment of a premium, to deliver revenue and expenditure forecasts andthe product to the government if, on the authorizes a limited deficit for the executioncontracted date, market prices are below the of the PGPM, in the budget of the Operaçõesexercise price. If the measure is efficient, in Oficiais de Crédito (OOC) [Official Creditother words, if it helps market prices to Operations], under the control of the Nationalrecover, it will guarantee income to Treasury. Thereby, the effectiveness of marketproducers, who will not exercise their options, interventions depends on the size of thethereby freeing the government from the need authorized deficit and the generation ofto use scarce funds in order to build up stocks. revenues from the sale of stocks. According to the Fiscal Responsibility Law, no expenditureBy the Prêmio de Escoamento de Produto may be made without a corresponding(PEP) [Premium for Commercial Buyers] and availability of resources in the budget.the Valor de Escoamento de Produto (VEP) Considering that agricultural policy measures[Product Delivery Value], the government may affect the economy (price levels forenables the transfer of products from regions example), there is a need of coordination withwith excess production (and low producer Federal Government personnel in charge ofprices) to other regions with supply deficits the economic policy. It means that there is a(especially North and Northeast). The PEP permanent process of negotiation notoperation occurs when the transferred product restricted to the need of ensuring resources tobelongs to the farmer or cooperatives. In this provide price and income support tocase, an auction defines the premium that the producers.government will grant to consumers for thepurchase of goods in the region with excess Three outstandingproduction, paying the minimum price to the agricultural policy phasesproducer. In the VEP, the premium is paid toconsumers for the removal of public stocks The last four decades of Brazilian agriculturaldeposited in warehouses. In both cases, the policy can be divided into three periods withauction opening premium, set by the markedly distinct characteristics. The firstgovernment, takes into account the product phase, which lasted from 1966 to 1985, wasimportation parity in the destination region. one of “Massive Intervention” by government in agriculture (Figure 1). There was a strongEstablished in 2003, the Linha Especial de increase in the supply of rural credit, reachingCrédito à Comercialização (LEC) [Special its peak in 1978, when the volume ofCredit Line for Marketing] provides storageYear XIV - Special edition - October 2005 22

Figure 1. Four decades of brazilian agriculture policy.Elaboration: SPA-MAPA.Sources: BACEN, IBGE, CONAB.preferential credit for rural producers was plunged from 85% of agricultural GDP in theequivalent to around 85% of agricultural GDP. late 1970s to 29% in 1994. On the other hand,By means of the PGPM, the government due to the big 1987 crop (a consequence ofmarket price support to agricultural products Cruzado Plan) the government providedshowed a similar trend. The share of grain market price support for up to 19% of theproduction benefiting from price support grain production in 1988, by means of themeasures rose from approximately 5% of total Minimum Guaranteed Price Policy (PGPM).production in the early 1970s to about 12% in But the support fell down close do zero in the1982. In addition to the accumulation of high early 1990s.levels of stocks, government interventionincluded price controls and even full The third period – characterized by “Lowregulation of an entire sector such as wheat. Inflation” – started with the Real Plan and persists until today. This period is marked byFrom 1985 to 1994, agricultural policy the almost complete depletion of traditionalreflected the “Debt Crisis and Economic agricultural policy instruments. In 1996, theLiberalization”. The deep governmental fiscal supply of rural credit fell to only 11% ofcrisis and the measures taken to open up the agricultural GDP and then was graduallyeconomy, especially import tariffs cuts in the recovered, reaching 25% in 2004. In thisearly 1990s, caused a strong competitive period Government support to marketingshock in the agricultural sector. The reduction remained between 2% and 5% of grainin credit was enormous: in relative terms, it production.23 Year XIV - Special edition - October 2005

In the 1965-85 period, about 80% of rural lines has jumped from USD 9.6 billion, incredit was derived from the government’s December 2002, to USD 23.7 billion inmonetary budget, 12% came from banking August 2005, an increase of 137%. In spite ofexigibilidades and 8% came from other the high interest rates prevailing in Brazil, thesources (Figure 2). During the following government has decided to maintain theperiod, the 1990-94 “Debt Crisis”, the interest rate of 8.75% for commercial farmersgovernment budget (National Treasury) fell and up to 4% for small family farmsdrastically cut to 26% of total rural credit (PRONAF).supply. The worsening of public accountsobliged the government to modify the rural There is a strong correlation between thecredit. In 1983, the CMN started to reduce the increase in grain planted area in recent yearsinterest rate implicit subsidy and adopted the and the availability of investment credit formonetary indexation of loans. In 1986, agriculture. In the 1999-2000 crop, the areaBACEN Conta de Movimento held in Banco under cultivation was 37.8 million hectares,do Brasil was eliminated. It allowed the which grew to 48.7 million in 2004-05.transfer of high amount of resources from the During the same period, rural investmentmonetary budget for rural credit. But what is credit rose from USD 900 million to a recordmore impressive are the statistics for 2004, of USD 2.9 billion in the crop year that endedwhich show that the National Treasury in June 2005 (Figure 3).accounted for only 4% of total rural creditsupply. Banking exigibilidades (41%) and In recent years, there was a recovery of therural savings (26%) became the two main lending to the agriculture sector and asources of rural credit. A point worth substantial improvement in the quality of credit.emphasizing is the redirection of rural credit The rescheduling of agricultural debt approvedtowards productive investments. MAPA- in the 1990s, along with exchange rateBNDES programs represent 11% and the devaluation and favorable conditions on worldConstitutional Funds a further 6% of total commodity markets, improved the agriculturalagricultural credit in 2004. sector performance and reduced its credit risk. In December 2004, about 94% of total rural credit were classified as normal risk, e.g. within the four least risky levels (AA, A, B and C), according classification as defined by the CMN (Figure 4). By the end of August 2005, the share of lendings classified as normal risk fell to 90%, a reflection of income crisis in the grain sector in 2005, caused by an increase in the value of national currency and a crop lower than it was expected.Figure 2. Rural credit funding (%). The challenge of guaranteeing prices and incomeElaboration: SPA-MAPA.Sources: BACEN, BB, BNB, BASA, BNDES, STN. Empirical evidence demonstrates that agricultural markets are much more volatileStarting in 2003, great efforts have been made than those for industrialized products. If this isto broaden the supply of rural credit. The true for the world, in the case of Brazil theamount of resources invested in rural credit volatility is even grater due to chronic infrastructure deficiencies and of macroeconomic instability.Year XIV - Special edition - October 2005 24

Figure 3. Planted area and agricultural investiment.Elaboration: SPA-MAPA.Sources: CONAB, BNDES, BB, BNB, BASA Figure 4. Loans and rural credit risk. Elaboration: SPA-MAPA. Source: BACENCorn is a good example of a volatile market. In Figure 5. Annual corn price variation (%).the USA, the maximum annual price variationsare in a range of 20%, upwards or downwards. Elaboration: SPA-MAPA.In Brazil prices reductions are frequently Source: Safras e Mercados and USDA.observed from one year to the other and attainfrom 20% to 40%; and peaks of price changecan reach 60% in one year, as occurred in thesecond half of 2002 and 2003 (Figure 5).In view of this instability and market failures,the demand for government intervention tostabilize producer prices and income is veryhigh in Brazil. The PGPM is established bylaw, but comes into conflict with another25 Year XIV - Special edition - October 2005

more recent act called Fiscal Responsibility production. In addition, Brazil has a stock ofLaw, which prevents the government from 106 million hectares of arable land that hasincreases in spending without the respective not yet been exploited.budgetary funding. In other words, Brazilian agriculture isLast decade saw a strong reduction in the already highly competitive and has a greatOfficial Credit Operations (OOC) budgetary potential for expansion because the ampleshare for the market price support. The budget availability of land (land prices are low inhas fallen from about US$ 9 per produced ton of relation to its international levels) and angrain in 1997 and 1998, to less than US$ 0.90 enormous stock of technology related toper ton in 2003 and 2004. It is an insignificant agricultural production in tropical andvalue when compared with grains average subtropical areas. Considering also theprice of about US$ 200 per ton. The lack of economy of scale advantages of bigger farmsbudgetary funding is preventing an effective and the prospects of logistic and transport costpolicy of price stabilization, food supply and reductions, Brazil can increase strongly itsovercome agricultural market failures. Here is participation in the world agrofood market.one of the greatest dilemmas faced by Brazil Therefore, issues on the environmental impactagricultural policy. of the Brazil agricultural growth are an important aspect of the competitiveness2. Agriculture and Environment among major world agricultural producers and exporters.In recent years, international press has givengreat emphasis to the Brazilian agriculture for Environment in Brazil is much more atwo reasons. Firstly, it was due to production question of law enforcement than policyand export increases, which allowed Brazil to concerns. After May 2000, the Brazilianachieve the largest trade surplus in the world, environmental legislation became even moreaccording to World Trade Organization (WTO) restrictive concerning land use by farmers.criteria. Secondly, because the pressure made Out of the total farm area (exclusiveby environmentalists, especially regarding the permanent preservation areas), the law for therapid expansion of soybeans cultivation. Legal Amazon requires that the 80% of forestCompeting international producers manifest areas and 35% of cerrado areas shouldtheir perplexity and concern about the fact remains out of use. For other regions thisthat cultivated area in Brazil may expand requirement is 20%. Formerly, these figuressubstantially. were 50%, 20% and 20%.Indeed, the Brazilian agriculture potentialities The impact of soybeans cultivation on therelated to the availability of land are Amazon forest is small. Only 2.7% of theimpressive. Brazil currently uses 48 million Brazilian soybeans are produced in the Northhectares for annual or temporary crops and a region, and it does not necessarily come fromfurther 15 million hectares for permanent land originally covered by the Amazoncrops. Cattle herd has reached 200 million rainforest. Soyabeans production representsheads which occupy a pasture area of only 1.2% of the Legal Amazon area, out of200 million hectares, showing a very low rate which 98% are in the States of Mato Grosso,(0.9) of animals per hectare. In view of Tocantins and Maranhão.technological developments in livestockbreeding in the last two decades, it is An analysis of soybeans production data byestimated that 30 million hectares of pasture municipality, between 1990 and 2003, revealscould be shifted over to the production of that its cultivations were increasinglycrops without any adverse effects on meat concentrated in traditional producing areas.Year XIV - Special edition - October 2005 26

The map shows the soybeans growth in Brazil already planted in 1990, and expanded towardstakes a “Y” form (Figure 6). It starts in the new cities, most of them in the same region.southeast and northeast regions of Rio Grandedo Sul, passes through Santa Catarina, Paraná, In addition to rigorous environmental legislation,São Paulo and reaches the Cerrado of Minas technology has strongly contributed to theGerais. From this point onwards it splits into two sustainability of brazilian agriculture. Onebranches: westwards, including Goiás, Mato example of good practices in Brazil is the directGrosso do Sul and Mato Grosso; and towards tillage. Indeed, it is an example to the world.the northeast, encompassing the Cerrado of This technology spares land, reduces erosionWestern Bahia and, more recently, Tocantins, and improves soil quality, especially with regardMaranhão and Piauí. to microorganisms and the percentage of organic material. It lessens the need to till theDuring the period under consideration, soil and, therefore, the demand for capital andsoybeans production increased from 20 million fuel, and also cuts the consumption of plantto 52 million tons. However, the most important protection products, thereby reducingproducing cities, responsible for 81% of environmental impacts and production costs.soybeans planted area in 1990, remainedimportant in 2003, accounting for 63% of the In 1992, direct tillage was utilized in 2 milliontotal soybeans area. Production became hectares, about 4% of the grain planted area,concentrated in cities where soybeans were and 22 million hectares in 2003, representing 37% of total cultivated grain area in Brazil. Legal Amazon “Cerrado” division line division lineFigure 6. Soybeans expansion in Brazil.Elaboration: SPA-MAPA.Source: IBGE.27 Year XIV - Special edition - October 2005

3. The future of agricultural policy The deficiencies in infrastructure represent a prime example of how the “Brazil cost”Macroeconomic restrictions affects agriculture, with a powerful effect on producer’s income since agricultural andThe nature of agricultural markets makes livestock products typically have low unitthem vulnerable to infrastructure deficiencies value, increasing the relative share ofand dependent on macroeconomic policy- transportation and distribution expenses in themaking. Brazil has been forced to live with final price of goods in consuming markets.high real interest rates, above 20% per Under a situation that has dragged on forannum, as registered 1998 and 1999 and in more than ten years, Brazil invested less thanthe second half of 2002. Although real interest 1% of GDP in transportation in 2004, and therates have fallen in recent years, Brazil is still value of interest rate payments wasa world champion in terms of high real equivalent to 7.4% of GDP.interest rates, whose level was about 14% perannum in October 2005. Building up agribusiness competitivenessSuch high levels of interest rates accentuate According to Michael Porter, a company,the market failures and reduce demand, region or country is competitive when itsespecially in harvest season, when a large long-term performance exceeds the averagevolume of product comes on the market. of its competitors. The construction ofConsequently, market volatility is increased, sustainable competitive advantages is theto the detriment of farmers at the very moment result of strategies and actions on three levels:in which they must market their crop. a) cost leadership, indispensable in case of commodity products; b) product and serviceIn view of the high degree of insertion of differentiations, by the addition of value andBrazilian agriculture in the international special features to the product (quality, brandmarket, for the majority of farmers their image, services etc.); and c) focus, e.g.,income is the result of a combination of selection of a target market for action,international commodity prices and exchange whether broad (national and international) orrate. In this sense, the exchange rate is the narrow (local and regional).key variable for the agribusiness. Thedevaluation of the Brazilian currency which Therefore, competitiveness is the result of:began in 1999 stimulated agricultural growth in investments in research and development;subsequent years. From 2004 onwards, quality and food safety; infrastructure;however, there has been a continuous marketing, sales and distribution; and gainsdownward trend in the exchange rate, from an from economies of scale, among other factors.average of R$ 3 per US dollar in the second half In order to strengthen the competitiveness ofof 2004 (inputs purchasing period for planting the Brazilian agribusiness, the “First Brazilianthe 2004-05 crop), to around R$ 2.50 in the Agribusiness Congress,” organized in 2002,second quarter of 2005, when the crop is sold. by the Brazilian Agribusiness AssociationThis situation put an unexpected pressure on the (ABAG) and MAPA, recommended thebalance sheet of grain production in 2005. The implementation of strategies and actions setgross value of the production of the five main forth in the “Ten Commandments oftypes of grain – rice, cotton, corn, soybeans and Competitiveness” (Figure 7):wheat – fell from USD 20.5 billion, in 2004, toan estimated USD 18.8 billion in 2005. The fall 1) Capital: credit, finance and insurancein prices is responsible for 83% of this reduction, mechanisms to increase the supply and reducewhile the remaining 17% is due to the reduction the cost of capital and limit the risks associatedin crop size caused by the weather. with agricultural activities.Year XIV - Special edition - October 2005 28

Figure 7. The 10 commandaments of agribusiness inclusion; fight hunger and reduce povertycompetitiviness. levels, including in rural areas.Source: ABAG. 8) Clustering – Inland movement and local development: stimulate the formation of2) Bring to market: facilitation of the flow of clusters and similar local productiveproducts by means of improvements in arrangements, and strengthen sustainableinfrastructure and logistics. production chains, taking advantage of market opportunities and promoting rural and3) Marketing and Foreign Trade: new local development.instruments to increase the liquidity ofagricultural markets and facilitate prices 9) Human capital: improve rural producersstabilization measures and income guarantees and workers skills and access to education,for producers. bearing in mind that 80% of the brazilian illiterates live in rural areas.4) Technological Knowledge andCommunication with the Consumer: 10) Coordination: govern with society, byimprovements on technology, by investing in means of institutional organizations thatresearch and development, and information to facilitate the formulation of stable policies, byfacilitate communication with consumers and increasing public and private sectorsthe society. responsibility, commitment and joint actions.5) Tax burden: reduce taxes on production, Coordination is a vital element for theespecially exportable goods and Brazilian efficiency of the competitive strategies abovestaple food. suggested. For this purpose, in addition to two bodies with a wider frame of reference – the6) Conservation of natural resources and the Conselho Nacional do Agronegócioenvironment: guarantee the sustainable (Consagro) [National Agribusiness Council]development of agriculture; take advantage of and the Conselho Nacional de Políticaopportunities in the carbon market Agrícola (CNPA) [National Agricultural Policy(environmental commodities) and the market Council] –, MAPA has already implanted 25for bioenergy products; and promote sector oriented chambers divided byalternative uses of low productivity areas. production chains and themes, such as financing and rural insurance, rural science7) Citizenship and social inclusion: enhance and international negotiations. The boards arethe opportunities for social and economic composed of government officials, representatives of all links in the production chain and providers of essential agribusiness services. The Ministry uses these mechanisms to receive the demands and recommendations from the brazilian agribusiness leadership, facilitating the implementation of their proposals through its operational structure and interaction with the other areas of the Federal Government. The agricultural policy considers as priority the following commandments: “Capital”, “Bring to Market” and “Marketing”. Preferential credit at controlled interest rates accounts for 30% of the agricultural sector’s29 Year XIV - Special edition - October 2005

requirements of working capital. Farmers Law 11076, dated 30/12/04, created threereceive financing from suppliers (agricultural new notes for the refinancing of receivablesinputs industry), buyers (processors and originated from commercial relations betweenexporters) and from financial institutions, at farmers and companies operating in theinterest rates that exceed 25% per annum. In agribusiness chains. These are the Certificadoaddition, the high interest rates prevailing in de Direitos Creditórios do AgronegócioBrazil increase the opportunity costs of its (CDCA) [Agribusiness Credit Rightsown capital. Certificate], the Letra de Crédito do Agronegócio (LCA) [Agribusiness Letter ofThe combination of scarce official credit at Credit] and the Certificado de Recebíveis dofavorable interest rates with farmer’s own Agronegócio (CRA) [Agribusiness Receivablesresources and expensive credit from other Certificate]. The main difference among thesesources results in a weighted average interest three notes is the type of issuer institution. Therate for the financing of working capital that is CDCA is issued exclusively by cooperatives,much higher than those of Brazil’s service companies and suppliers orinternational competitors. In other words, purchasers of agricultural production. LCA is aBrazilian agriculture works with limited and note issued by financial institutions (banks andexpensive credit which reduces its credit cooperatives), and CRA is issued bycompetitiveness. securitization companies, firms constituted specifically to act in the agribusinessThis was the main motivation for the receivables market.implementation of measures related to“Capital” – credit, financing and insurance for The supply of inputs to producers for paymentthe agribusiness (Figure 8). at harvest time by means of financingFigure 8. New agribusiness instruments. 30Elaboration: SPA-MAPA. Year XIV - Special edition - October 2005