South America Calling

Brazilian Farmers Face Credit Issues

Brazilian farmers are one of the few groups that have managed to ride out the massive slump in the economy over the last 18 months, mainly due to the jolt of competitiveness that the devaluation of the Brazilian real has provided.

But the crisis is deep, some analysts say the South American giant is in the middle of the worst recession since records began, and could still contaminate the sector through credit shortages.

The farm sector managed to get through the 2015-16 season, helped by the fact that official credit eventually came through.

According to central bank figures, a late surge in lending meant the volume of official farm credit extended in the first nine months of the season was actually 1.5% higher than last year at 117 billion Brazilian reals ($44 billion).

But this figure hides the fact that credit was already a very real problem for farmers in 2015. For while overall lending has risen slightly in reals, the combined effect of a one-third devaluation of the real and 10% inflation means that money didn't go half as far.

Indeed, in the July-March period, the number of loan contracts signed dropped 12% year-on-year. Fertilizer sales fell 4% in 2015.

In an attempt to calm nerves for the 2016-17 season, the government made available a budget of R$10 billion in operating credit for the acquisition of inputs -- the purchase of which is normally concentrated between March and July for summer grains.

But it remains far from clear whether the Agriculture Ministry will be able to maintain the official credit budget for 2016-17 amid the political crisis.

With a vote on the impeachment of President Dilma Rousseff just two weeks away, the federal government is in lockdown.

But the paralysis will not necessarily end with the vote If Rousseff remains, it is unclear how she will govern without support in Congress. If she loses, it is far from certain that an interim government will have the power to take necessary measures to restart the economy.

Given this level of uncertainty, nobody is taking any risks and credit is at a premium.

The government can't fill the credit gap because it is in the middle of a huge budget squeeze, made critical by an economy in free-fall.

In 2015-16, farmers responded to credit tightening by using cash reserves. According to a study sponsored by the Brazilian Cooperatives Organization (OCB) and the Sao Paulo Federation of Industry (FIESP), farmers used their own resources to cover 41% of their needs in 2015-16, up from 35% in 2014-15.

But farmers will have burnt through spare cash come next season and the guarantees demanded on official credit are making it harder to access it. Probably farmers will have to resort to commercial credit lines that can carry interest rates of 25% or more a year.

The political and economic uncertainty has inevitably caused long-term investment on the farm to slide.

According to the central bank, lending on official investment credit lines for farmers fell 30% to R$26 billion ($9.7 billion) in the July-March period.

Grain farmers invested heavily in their operations in the five years to 2014 but rising costs mean they have to keep improving efficiency.

Meanwhile, after reducing fertilizer use last year, farmers can't afford to scrimp again on inputs this year.

This lack of credit is one of the key reasons why analysts think the expansion of Brazilian soybean planted area will slow dramatically in 2016-17 from the average of 5% over the last nine year



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