Rural finance in the Pan Amazon: the Brazil success case

The agricultural producers of the Amazon have access to radically different levels of credit depending upon national policies, the willingness of each country’s financial services industry to engage rural populations and, most importantly, the scale of their production system.

Brazil has the most sophisticated agricultural sector and, not surprisingly, the most generous and far-reaching system to support its producers. Industrial-scale farmers have access to multiple forms of credit, which they access to pay operational costs, acquire technology and invest in on-farm infrastructure. If they are entrepreneurial, and many are, they borrow money to acquire land and expand production. Small family farms have fewer options, but the federal government has programmes to provide them with affordable short-term credit. Regardless, the cash economy predominates on forest frontiers and within smallholder landscapes where producers must overcome barriers imposed by physical isolation and subsistence livelihoods.

Financial credit to support production is largely absent in the Andean Amazon, where small farmers operate within an informal economy with limited access to financial services.

Brazil’s financial system operates on two tracks: the Sistema Nacional de Crédito Rural (SNCR), which is managed by the financial industry according to rules established by the federal government; and an independent system managed by multinational trading companies designed to capture commodities for their competing supply chains. The latter includes the four well-known western giants: ADM, Cargill, Bunge and Louis Dreyfus, as well as second-tier companies based in Brazil (Amaggi), Japan (Gavilon), Europe (Sodrugestvo) and China (COFCO).

Within the Amazon, the SNCR provides most of the credit used by the livestock sector, while the region’s grain farmers depend upon credit obtained from the SNCR, loans from commercial banks and, most importantly, short-term credit provided by commodity traders.

The SNCR was established in 1965 in conjunction with government policies to promote settlement and investment in the agricultural frontiers of the Southern Amazon. Its main objective is to provide producers with working capital at below-market interest rates so they can plant and harvest a crop or raise a herd of cattle for slaughter.

The national rural finance plan (Plano Safra) of 2020/2021 provided $R 236 billion (about $45 billion) in loans to the livestock, farm and plantation sectors; 75% was used for short-term credit, and 25% was allocated for medium to long-term investments. Small producers had access to R$ 33 billion $6.7 billion) with interest between 2.75% and 4%, while medium-sized producers received a similar sum at 5%. Large-scale producers, who receive the bulk of the finance, were charged between 6 and 7% annual interest.

The SNCR programme has been, and remains, an important element in national development strategies and has catalysed the impressive growth of Brazilian agriculture. The success of the SNCR rests on its ability to leverage the domestic savings of the Brazilian people with the technical capacity of Brazil’s commercial banking sector.

Its genius was to provide low-cost credit to strategically important producers in an economy characterized by high interest rates. The lion’s share of the SNCR’s financial resources is generated by a regulatory requirement that obligates commercial and savings banks to either: (a) transfer 34 per cent of their deposits to the Banco Central do Brasil or (b) use those resources to fund loan portfolios in agriculture and forestry.

Attractive interest rates are a magnet for investors, especially when combined with an easily understood business model based on conventional economics. Brazil’s abundant soil and water resources are the foundation of its rural economy, but the SNCR shares much of the credit for creating an agricultural powerhouse. It also shares responsibility for the conversion of approximately eighty million hectares of Amazonian rainforest and an approximately equivalent area of Cerrado savannas.

The SNCR channeled hundreds of millions of dollars into the Southern Amazon during the 1970s to establish a cattle industry on land being distributed to influential families and corporations. In the 1980s, the programme loaned money during a period of hyperinflation at interest rates well below the rate of inflation, an untenable situation that led to its near-collapse in the early 1990s.

The SNCR was revitalised following the stabilisation of the Brazilian economy in the administration Fernando Henrique Cardoso, who introduced two additional programmes managed by the national development bank: PRONAF, which is targeted at smallholders, and PRONAMP, which provides finance to medium-scale producers. Regional development banks, known as Fundos Constitucionais de Financiamento, also have credit programmes targeted at their rural constituents.

A recent review revealed that between $US 9 and 12 billion dollars were loaned annually via the SNCR to Amazonian producers during the last decade. Of this amount, approximately 44% went to Mato Grosso, followed by Tocantins (18%), Pará (13%), Maranhão (13%), and Rondônia (9%).

This study looked only at four commodities considered to be the main drivers of deforestation and reported that 64% of the loans went to cattle ranchers and 35% to soy farmers, with smaller amounts to timber (0.5%) and oil palm plantations (0.7%).

Data for PRONAF were reported only at the national level, but small farmers cultivating soy, beef and palm oil received only two percent of the resources channeled via the SNCR. The contribution of the trading companies is difficult to know because they do not break out those numbers in their annual reports. They can be estimated, however, using bottom-up methods and government reported statistics.

In the 2019/2020 crop-year, soy and maize were cultivated on approximately eighteen million hectares in the states of the Legal Amazon, where the leading extension agency reported the cost of seed, fuel, agrochemicals and labour at $US 650 per hectare. Assuming that a hundred per cent of crop is planted and harvested using short-term credit, then agribusiness would need approximately $US 13 billion to plant and harvest a crop.

Since only $US 1.6 billion was obtained via the SNCR, the remaining $US 11.4 billion was probably supplied by the commodity trading companies. That may be an overestimate, however, because large-scale producers, who control approximately 46% of the agricultural land in Brazil, are often subsidiaries of diversified corporations. As such, they have access to multiple forms of credit, including domestic bond markets and overseas private equity.

Bond markets include corporate bonds, which are ‘debentures’ backed by the reputation of the company and Certificados de Recebíveis do Agronegócio (CRA), which are securities that place a lien on a physical or contractual asset. Both are used by agribusinesses and banks to finance medium to long-term investments (2 to 12 years).

If the CRA is issued by a bank, it is likely to be a basket of loans to family farmers, while corporations use them to fund individual projects or activities. The Brazilian bond market has attracted international attention over the last several years (post-2015) because it is viewed as a venue for sustainable finance that seeks to minimise risk from ‘environmental, social and governance’ (ESG) factors that harm society and, presumably, increase the risk of losing money.

The most common types, and the largest by volume ($US 10 billion) have been ‘green bonds’ issued by corporations accessing capital markets without the intermediation of banks. In the Amazon, companies are committing to consume (self-generated) renewable energy, increase productivity, sequester soil carbon and, allegedly, conserve biodiversity and water resources.

One of the largest initiatives is FS Bioenergia ($US 639 million) a maize-based ethanol producer that is a joint venture between the Iowa-based Summit Holdings and a Tapajos Participaes S/A, a Brazilian subsidiary of a Chinese holding company (Hunan Dakang). Brazilian agribusiness giants are likewise accessing the green bond market, including SLC Agrícola ($US 480 million) that farms 150,000 hectares in Mato Grosso and Maranhão; and Amaggi S/A ($US 750 million), which operates an integrated supply chain spanning 259,000 hectares (640,000 acres) in Mato Grosso and includes logistics and processing facilities in Rondônia, Amazonas and Pará.

One of the most controversial offerings, is a ‘transitional loan’ to Marfrig Alimentos S/A ($430 billion), a beef packing company committed to eliminating illegal deforestation and unfair labour practices from its supply chain. The tender is classified as a loan rather than a bond due to the contractual terms of the offering

It is controversial because most of the resources will be used to support their dedicated supply chain (Marfrig Club) without adequate guarantees to reform or exclude calves originating from independent producers who are not in compliance with the Forest Code. The criteria for evaluating the ESG performance will rely on Key Performance Indicators (KPIs) specified in the prospectus of individual that are validated by independent third party review.

“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: