South America Calling

Tight Credit Could Limit Brazilian Area Expansion

Much has been said about the advantage the slide in the Brazilian real has given local grain farmers. But if you look at longer-term graphs, perhaps even more important has been the expansion in the availability of farm credit over the last decade.

The surge in Brazilian grain planted area since 2005 was driven by substantial jump in available farm credit, said Andre Nassar, farm policy analyst at the Sao Paulo-based Agroicone consultancy.

"Increased financing was a determining factor in the recent expansion story," said Nassar, who was a top official at the Agriculture Ministry till earlier this year, told an event in Sao Paulo.

In this explanation lies hope for U.S. farmers rooting for the inexorable expansion in Brazilian soybean and corn area to relent.

The official farm credit budget dropped sharply, by 11% to 160 billion Brazilian reals ($49 billion) in 2015, and will likely be static in 2016 due to the brutal economic crisis that has caused GDP to shrink around 7% in two years and led government revenues to dive.

With the economy expected to recover slowly in 2017 and the current governors committed to putting the federal finances in order, official credit is unlikely to expand for the next couple of years.

That will likely trim the capacity of farmers to expand area, Nassar warned.

In 2015-16, Brazilian soybean area grew 5%, despite a lack of credit, as trading firms and input sellers filled the void by offering forward contracts on production.

Area is expected to grow again in 2016-17, by around 2% to 3%, with suppliers and trading firms again stepping in.

But the lack of credit will eventually take its full toll, Nassar warned.

The solution is to switch the farm support from subsidizing credit to subsidizing crop insurance.

If 1 billion reals ($306 million) of the 2.1 billion reals used to subsidize farm operating credit were diverted to its underfunded crop insurance system, Brazil could cover all its grain crops, Nassar claims. Government official credit accounts for about 30% of total farm operating credit.

That doesn't happen, Nassar explained because the crop insurance budget isn't protected like the farm credit budget and is constantly cut by the ministry.

Unfortunately, such an adjustment is not currently being discussed.

That may lead grain production to stagnate, which would be very bad for Brazilian agriculture. Among other things, it would disincentive investment in improving logistics through the Amazon region and northern ports, which is so vital to reducing Brazil's onerous grain transport costs.

Alastair Stewart can be reached at talk@dtn.com

(CZ)

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