Brazil’s Agricultural Subsidies

Brazil is considered a developing country, but has become an economic power as a major exporter and agri-food now accounts for 28 percent of GDP.  Brazil’s Ambassador to the WTO, Roberto Azevedo, is one of two candidates to become Director General of the WTO.  The Brazilian government’s recent notification to the WTO of agricultural subsidies for the 2009/10 crop year has raised issues about Brazil’s positions on trade-distorting domestic support policies.

Total farm support by the Brazilian government as defined by the WTO was valued at $10.0 billion for 2009/10.  Almost half of that, $4.91 billion, was in the ‘green box’ considered to be minimally trade distorting and not subject to limits.  The largest category was domestic food aid at $1.72 billion.  That is typical of many countries, including the U.S.  Government holding of food stocks for food security purposes was reported at $653 million.  This included $386 million ‘for acquisition of agricultural products from family farming’.  There is a proposal at the WTO to greatly expand this category for developing countries.   Other major categories in the green box were extension and advisory services at $800 million, infrastructure at $622 million, agrarian reform at $430 million and research at $285 million.

As a developing country, Brazil can have some development programs under ‘special and differential treatment’ that are also exempt from limits.  These programs totaled $1.65 billion, most of which was for investment in improving rural structure, acquiring equipment and machinery and animal services at $1.44 billion.  Other programs included production credit for low-income or resource-poor farmers, debt rescheduling and input subsidies.

Brazil had $3.48 billion of Aggregate Measures of Support (AMS) in 2009/10 in domestic support that was classified in the ‘amber box’ as trade-distorting subsidies that must be limited and reduced over time.  Non-product specific AMS totaled $2.53 billion.  Debt rescheduling programs accounted for $1.53 billion of the total AMS and production and marketing credit was another $822 million in AMS.  The remaining $176 million was for direct outlays for a risk minimizing agribusiness program.  Non-product specific support is considered ‘de minimis’ for developing countries if it is less than 10 percent of the total value of production.  Non-specific product support was only 2.47 percent of total value of production of $102 billion.

The remaining amber box AMS was in $950 million of product-specific domestic support.  Corn had the highest AMS at $293 million, followed by cotton at $269 million, coffee $137 million, rice $126 million, wheat $75 million, sugar cane $24 million and edible beans $23 million.  Developing countries are allowed product-specific AMS up to 10 percent of the value of production of the product before the AMS is considered beyond the de minimis and reportable to the WTO.  Cotton was the only crop beyond the limit at 11.5 percent of value of production and its AMS value of $269 million was the only AMS subject to the amber box AMS ceiling of $912 million for trade-distorting domestic support.  Sugar’s AMS of $24 million for a production cost equalization program, is an insignificant 0.15 percent of a crop value at $16.0 billion.

Brazil reporting a low total AMS for 2009/10 was no great surprise because market prices have been relatively high since 2008.  Those high prices reduce payments for crops with minimum price guarantees and the high value of the crop makes payments low as a percent of total value.  Also, Brazil has the 10 percent of value de minimis trigger compared to a 5 percent limit for developed countries.

According to reports from the U.S. Agricultural Attaches in Brazil, there are three main ongoing payment programs.  The Subsidy Auction Program (PEP) is similar to the U.S. loan deficiency payment program. The government pays the difference between the prevailing market price and the minimum price of the product.  Payments were made for edible beans, corn and wheat in 2009/10.

The Equalization Premium Paid to the Producer (PEPRO) is a premium granted to the farmer or cooperative which sells its products at public auction, where the government pays the difference between the reference value established by the government and the value of the premium.  All the cotton payments in 2009/10, $269 million, were made under this program.  Corn payments under the program were $38 million.

The Risk Premium for Private Option (PROP) is a price support program managed by CONAB, equivalent to the Commodity Credit Corporation of USDA, which is linked to the Ministry of Agriculture.  It represents the maximum amount that CONAB will pay to cooperatives and processors in order to guarantee a certain price to producers, which is above the market price.  About 15 percent of the soybeans produced in 2006 and 2007 where involved in one of the programs, but soybean producers have not received payments since then.

While direct government payments, except for cotton, were relatively small or nonexistent in 2009/10 and since then, that does not mean that farmers are just relying on market conditions.  Brazil has had a continuing problem of farmers with heavy debt loads from past years of borrowing to rapidly expand production and low incomes due to weather conditions.  Low-cost government lending and debt rescheduling shown with an AMS of $1.53 billion in 2009/10 affect every crop, including sugar and soybeans.  The Brazilian government of President Dilma Rouseff is expected to announce later this month a government credit program for 2013/14 with subsidized interest rates of 2.5 percent, down from 5.5 percent this year, and larger than this year’s program of $58 billion.

The 2009/10 total AMS subject to the amber box ceiling for Brazil is not a good indication of what the AMS could be in the future, just as the U.S. or any other country that has relatively low price and income guarantees at a time of high market prices.  Lower prices will occur, and the Brazilian government showed in 2006 and 2007 that they have the programs in place to buffer the adjustments that need to occur.  Brazil could very quickly develop AMS limit problems.

Ross Korves is a Trade and Economic Policy Analyst with Truth About Trade & Technology (www.truthabouttrade.org). Follow us: @TruthAboutTrade on Twitter | Truth About Trade & Technology on Facebook.