- Mongabay has begun publishing a new edition of the book, “A Perfect Storm in the Amazon,” in short installments and in three languages: Spanish, English and Portuguese.
- Author Timothy J. Killeen is an academic and expert who, since the 1980s, has studied the rainforests of Brazil and Bolivia, where he lived for more than 35 years.
- Chronicling the efforts of nine Amazonian countries to curb deforestation, this edition provides an overview of the topics most relevant to the conservation of the region’s biodiversity, ecosystem services and Indigenous cultures, as well as a description of the conventional and sustainable development models that are vying for space within the regional economy.
- Click the “A Perfect Storm in the Amazon” link atop this page to see chapters 1-13 as they are published during 2023 and 2024.
There is only limited potential for finance to change agricultural practices in the Andean Amazon, because landscapes are largely populated by smallholders who are notoriously risk-adverse in how they manage their finances and cropping systems. They are cautious because the consequences of a crop failure are catastrophic for their families; consequently, they are less likely to adopt novel production systems that require a capital investment that would have to be financed by debt. Nearly all understand the value of credit and its potential to transform their lives; however, the options available to them are neither friendly nor fair.
Andean governments have launched multiple efforts over several decades trying to create mechanisms and institutions to provide financial credit for rural communities, but they have failed to change the calculus that impedes investment on smallholder landscapes. One manifestation of the challenge is the high proportion of families that are unbanked, a term economists use to describe individuals who, by choice or circumstance, do not use financial services. Another is the role of microfinance institutions that provide credit to individuals who do not qualify for loans from conventional banks; instead, they borrow money based on ‘good faith’ and reputational integrity.
Their presence has materially benefitted the lives of tens of thousands of individuals, many of them female, by allowing them to participate in the informal market economy that characterises commerce in these nations. In addition, they offer savings accounts and provide families with a digital identity for interacting with government agencies and utility companies. Unfortunately, these institutions lend money at interest rates that are out of reach for small farmers.
The microfinance business model was born in the marginalised neighbourhoods of major cities, but these institutions are now present in most mid-sized cities where they also cater to the needs of surrounding rural communities. Interest rates, which range from 20% to 80%, reflect the risk of default associated with their clientele and the high transaction costs associated with administering tens of thousands of small loans.
Most microfinance entities operate with capital obtained from conventional banks and investment funds and pay those institutions standard commercial interest rates (5% to 8%). Microfinance, which is marketed as a pro-poor public service, is also a highly lucrative business model.
Presumably, a farmer would be a low-risk debtor when compared to an individual engaged in speculative commerce, but the financial sector considers small family farms as high-risk creditors due to weather and pests. In Peru, inflation-adjusted interest rates for small farmers are between 20% and 30%, a value that is out of reach for all agricultural production systems, much less smallholders living on the edge of poverty.
Large and medium-scale producers have access to conventional forms of credit because they can meet the conditions required by lending agencies, particularly legal title to their land and a documented history of production and sales. Even these numbers are disappointing, however. In 2019, government agencies reported that $US 33 million were loaned to 4,199 beneficiaries in a country with an estimated 2.2 million farmers.
Peru has attempted various models to channel funds via savings and loan cooperatives (COOPACS), privately-owned rural savings banks (Caja Rurales), mixed associations of private capital and local government (Caja Muncipales) and a specialized state-owned development bank (Agrobank). None have succeeded in providing affordable credit to small farmers. The most recent attempt, a special fund (FAE-Agro) that is capitalised by the national development bank (COFIDES) is doomed to failure because recipients are required to show legal title for their properties, a condition enjoyed by only fifteen per cent of the small farmers of Peru.
Civil society has had better success working with grower’s associations that simultaneously provide technical support in agronomics, pest management and business administration for individual growers and their umbrella organisations. Successful initiatives are characterised by a long-term commitment on the part of civil society organisations and specialty buyers willing to invest in programs that guarantee a supply of coffee and cacao that is certified as deforestation-free, organic, indigenous and/or gender positive.
Bolivia’s agricultural sector is similar to Brazil’s but also quite different. There is a limited number of large-scale producers, quite a few (upper) middle-class landowners and a large, dynamic small-farm constituency. It lacks, however, a state sponsored rural credit programme that obligates the financial industry to channel money to its producers. Large and mid-scale farmers access capital via the commodity trading companies, as well as from an informal credit market best described as a normalised system of loan sharks. Ranchers rely on family capital, personal savings or cash flow generated by urban business ventures (medical services, real estate, commerce).
The smallholders of Bolivia are also active participants in the national foodstuffs market, and quite a few have evolved into successful soybean farmers. Many are descendants of Andean indigenous migrants with a strong cultural tradition of savings and investment, traits shared by a large Mennonite community. These groups also have an informal credit market they use for short-term finance. Microfinance institutions are present and, as in Peru, they have opened offices in regional cities. Government policies to distribute cash income to elderly and school-age children have motivated tens (hundreds) of thousands of rural families to open savings accounts. High interest rates, however, preclude their ability to borrow money to invest in agricultural technology.
Ecuador’s microfinance industry is dominated by savings and loan associations that serve both urban and rural populations; interest rates range between 25% and 28%. The traditional banking system treats agricultural credit as one of several types of ‘productive enterprise’, all of which have annual interest rates between 8% and 12%. The government hopes to support its agricultural sector via a newly constituted public bank, BanEcuador, which offers loans specifically designed for, and marketed to, producers of coffee, cacao and oil palm.
Producers can borrow up to $US 150,000 for both short-term credit and to improve productive capacity (plantations); for the latter, terms of up to fifteen years are available, with a grace period of between three to five years. Loans greater than $US 20,000 require a mortgage guarantee.
The BanEcuador programmes show an understanding of the needs of their potential clientele, including payment schedules based on the cash flow of individual production strategies (monthly, quarterly, or annually). Annual interest rates range between 9.75% and 16.5%, in line with business loans from private banks and significantly lower than those available from microfinance institutions.
Regardless, interest rates at this level are not likely to catalyse a wave of much-needed investment in agricultural production. In 2019, BanEcuador loaned $US 3 million to 700 producers, a relatively small amount that would translate into only about 500 hectares of new oil palm plantations.
Colombia has a programme similar to the SNCR of Brazil. It is administered by FINAGRO (Fondo Para el Financiamiento del Sector Agropecuario), a public agency that operates as a second-tier lender to private institutions and a guarantor for a variety of financial products, including short and long-term credit and crop insurance. The FINAGRO system establishes standard terms and rates for a diversified portfolio of credit products specifically designed for the needs of producers in agriculture, livestock and plantation forestry.
Programmes span the landholder spectrum and include special initiatives for producer associations. Interest rates range from three to ten per cent above a base rate set by the central bank, which has fluctuated between three and five per cent since 2010 . FINAGRO also offers discounts to the intermediary institution to make the loan more accessible to the retail client. For a commission, FINAGRO will guarantee the loan for the producer, which is essentially a form of crop insurance; it also offers conventional crop insurance to protect the producer and the lending agency from climate risk and pests.
At the national scale, FINAGRO facilitated financial credit worth approximately $US 7.1 billion in 2020, up from $US 2.9 billion in 2011, increasing by an impressive twenty per cent annually over the same period. Although the Colombian programme is well designed and considers both market reality and the special needs of producers, it operates only on landscapes where the state has imposed the rule of law.
Unfortunately, Amazonian landscapes are characterised by the absence of the state, either because they are remote or because they are under the control of armed criminals. In Amazonian departments, FINAGRO facilitated only about $US 80 million in 2020, a number that has remained essentially flat since 2010. Approximately half of that was in Caquetá and, presumably, was lent to the cattle sector, which is also the largest single recipient of agricultural credit within the FINAGRO system.
Harnessing finance to change behavior
Rural finance has enormous potential to reform conventional agricultural production systems. Consequently, it is a common component of policy proposals to combat deforestation where it is viewed as a ‘carrot’ to accompany the ‘sticks’ that seek to coerce landholders to reform land use practices.
The experience of the Cattle Agreement and the Soy Moratorium show the potential when commercial intermediaries are used as pressure points to eliminate illegal deforestation. These initiatives, which focus on excluding transgressors from supply chains, could be expanded by conditioning access to the billions of dollars of short-term loans provided annually by international commodity traders and meat packing companies. As a driver of sustainability, credit might be even more effective if these same companies offered long-term loans with concessionary rates that motivated their suppliers to restore forest that had been converted illegally in the recent past.
Similar changes to the Sistem Nacional de Credito Rural (SNRC) could likewise catalyze widespread change, particularly within the Brazilian cattle industry where decades of over grazing have degraded millions of hectares of pasture. Pasture restoration begins and ends with soil conservation, which relies on management practices to increase soil organic matter and, in the process, create a long-term carbon sink. This is essentially the goal of Brazil’s Agricultura de Baixo Carbono (ABC) programme, a subcomponent of the SNCR with attractive interest rates and an extended pay-back period. Supported technologies include reduced tillage, pasture renovation, integrated crop and livestock management, and the restoration of riparian habitat.
The ABC programme has enjoyed modest success – in 2020, the programme lent approximately $R 2 billion ($US 400 million) – nonetheless, that is less than one per cent of the total channeled through the SNCR in 2020. The potential, given Brazil’s history of using the SNCR to subsidise its agricultural producers, is massive and eminently practical.
Green bonds and similar types of ESG finance are the fastest growing component of Brazil’s financial sector. International capital markets are frenetically seeking viable projects to satisfy massive global demand for ESG investment. Brazil’s potential to satisfy this demand by reducing GHG emissions caused by deforestation can be leveraged by an equally massive capacity to sequester carbon via economically advantageous technologies to make conventional agriculture more sustainable. This type of risk-limited green investment will be a magnet for global investors. The country’s attractiveness is reinforced by the nation’s cultural commitment to a market economy, its openness to international capital and the abundant natural resources that are the foundation of its rural economy.
The performance of green bonds in Brazil is being closely watched by policy analysts, because of their potential to drive climate change action ‘at scale’. Nonetheless, these instruments, and others like them, risk being labled as ‘greenwash’ if they succeed in improving the performance of participating companies but fail to resolve the deforestation crisis. That outcome will depend, in large part, on the ability of the Brazilian state – and its private sector partners – to incorporate smallholders in a revitalised and reformed rural economy. Brazil has created the institutional mechanisms for pursuing that goal (INCRA, EMBRAPA, PRONAF, SNCR), but its track record for dealing equitably with its own citizens is not particularly encouraging.
In the Andes Amazon, the potential to link finance, including short and long-term credit, with effective policies to transform their agricultural sector is even more challenging. No nation has succeeded in delivering affordable credit to their Amazonian populations, nor develop an extension system capable of ensuring those resources are invested in productive enterprises that are globally competitive and environmentally sustainable. If they have any advantage, compared to Brazil, it is the preponderance of smallholder systems that creates a precondition that favours social equity. That advantage, however, is a double-edged sword. It may ensure that a reformed system will be socially sustainable, but it also makes it enormously more difficult to implement.
If the Amazon forest is to be saved, deforestation must end. Full stop. Global and national markets, however, will continue to demand more commodities from the farmers and ranchers of the Southern Amazon and Andean Piedmont. They will respond by increasing production. Full stop. They could intensify their systems by investing in technology, or they could purchase more land to expand production. Left to their own devices, they would pursue both options because that is the logical pathway to maximise the return on their investments. Farmers and ranchers do not operate in a vacumn, however. Producers, large and small, allocate their resources in response to regulatory and market forces that govern the agricultural economy. Among the most important are the constraints and incentives in rural real estate markets. When the forest frontier ceases to be a source of inexpensive land, the agricultural sector will be forced to invest in the land under production — and only the land under production. Making that happen sooner, rather than later, is essential for saving the Amazon.
“A Perfect Storm in the Amazon” is a book by Timothy Killeen and contains the author’s viewpoints and analysis. The second edition was published by The White Horse in 2021, under the terms of a Creative Commons license (CC BY 4.0 license).
Read the other excerpted portions of chapter 3 here:
Chapter 3. Agriculture: Profitability determines land use
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- Agriculture: profitability determines land use October 10, 2023
- Agriculture in the Pan Amazon: Beef production models October 11, 2023
- Industrial infrastructure in the Pan Amazon October 17, 2023
- National versus global markets – beef in the Brazilian Amazon October 19, 2023
- Livestock farming in the Andean Amazon and the rest of the Amazon October 24, 2023
- Intensive agriculture in the Pan Amazon: Soy, maize and other field crops October 25, 2023
- Agriculture in the Pan Amazon: Global markets for soybean and corn crops October 31, 2023
- Agriculture in the Pan Amazon: Industrial infrastructure for grains and cereals November 1, 2023
- Agriculture in the Pan-Amazon: Swine and poultry – Adding value to farm production November 8, 2023
- Oil palm in the Pan Amazon November 9, 2023
- Palm oil cultivation in Colombia, Ecuador, Peru and Brazil November 13, 2023
- What does oil palm require to reach international markets? November 14, 2023
- Biofuels in the Pan Amazon November 21, 2023
- Coffee and cacao in the Pan Amazon November 22, 2023
- Cultivation and processing of Amazonian coffees November 28, 2023
- High quality cacao in Amazonia November 29, 2023
- Local and national food crops in the Andean Amazon December 5, 2023
- Coca in the Amazon – The anti-development crop December 6, 2023