Brazil is well known for its successes in WTO cases against the EU sugar program and the U.S. cotton program. Brazil’s recent moves to provide government assistance to soybean growers have raised questions about violation of its own commitments to the WTO. Its actions point up the fundamental political fact that governments cannot resist intervening when economic difficulties arise among farmers and ranchers, particularly in a Presidential election year.
Whatever is true for governments in general is true for Brazil in particular and soybean production specifically. Production agriculture and the broader food industries accounts for 30 percent of Brazil’s GDP, 35 percent of total employment and 40 percent of total exports with an agricultural trade surplus of $30 billion per year. Agricultural production, processing and transportation are engines of economic growth in rural areas. They are also part of Brazil’s long-term energy production plans.
The Brazilian government had three goals in providing assistance to soybean producers. First, it wanted to get soybeans from the 2006 harvest into commercial trade channels. Farmers were refusing to sell at prices that guaranteed substantial losses. Second, old debt needed to be rolled over to future years. Farmers suffer from many of the same debt problems that plagued U.S. farmers in the early and mid-1980s. Third, the government had to provide financing for planting the 06/07 soybean crop. Early economic signals indicated that soybean acreage could be down as much as 10 percent for the new crop after being down 4 percent for the crop just harvested. Acreage for 2006/07 is now expected to be down less than 5 percent.
Brazil has a WTO commitment problem not faced by developed countries. They had fewer trade distorting domestic subsidies, amber box programs, during the base period of 1986-88 used in the Uruguay agreement. While developed countries had to cut their amber box limit by 20 percent from the base period, developing countries had to cut only 13 percent. According to USDA’s WTO Agricultural Trade Policy Commitments database, Brazil’s amber box limit is only $1.0 billion per year compared to $19.1 billion for the U.S.
Brazil has a second problem in that soybeans have not had a government price support program. Corn, rice and wheat have programs like the one for soybeans and press reports indicate that a similar price support program may be created for cotton. The May and June announcements indicated a cost of about $1.0 billion for the price support program for soybeans, but reports over the last two months indicate that actual costs may be higher.
Much of the latest assistance package centers on extending repayment times for debt. A 24-month grace period is provided on government financing used to purchase fertilizer and other crop input needs. Farmers in southeastern and southern soybean areas, where most farms are relatively small and subsidized credit is most common, will have 55% of their government debts automatically rolled over for another five years. The larger farms in the center-west, north and northeast regions have debt extensions ending on Dec. 31, 2007. A new credit line was created for fertilizer purchases, with subsidized interest rates as low as 3% per year, to a high of 8% compared to the benchmark interest rate in Brazil of 15.25% per year and market rates at 18 percent. The total level for government credit program for agricultural in 2006/07 is $26.1 billion, a 12.5 percent increase from 2005/06.
In theory about 75% of Brazilian farmers` financing comes from the private sources like soybean processors, exporters, input suppliers and commercial banks. According to information on the USDA Economic Research Service website’s Brazil Briefing Room, processors and exporters provide about 50 percent of the private soybean financing and input dealers and commercial banks 25 percent each. Exporters can receive cash advances from the Bank of Brazil for up to 50 percent of the loans made to farmers. Some of the bank credit is subsidized at interest rates of 8.75 percent.
Rolling over debt is not new in Brazil. In July of 2001 $8.5 billion of debt accumulated in the mid-1990s was rescheduled under a 20 year repayment plan at 3 percent interest. This new effort at debt expansion comes on top of government credit programs that had been growing at rapid rates. From 2003/04 to 2004/05 government agricultural credit programs had grown by 48 percent from $9.1 billion to $13.4 billion according to ERS estimates.
While creating a minimum price support program for soybeans appears to be inconsistent with the WTO goals of phasing out these types of programs, it is not the heart of the problem. Years of cheap credit programs encouraged soybean acreage to increase by 68 percent from 1999 to 2004. From 1998 to 2002 total factor productivity in agriculture grew by 5.7 percent per year as acreage expanded and new equipment was purchased with borrowed money. A combination of drought and soybean rust that reduced yields and increased per bushel costs and a strong currency versus the U.S. dollar brought to a head a problem that was going to surface sooner or later.
These policy adjustments could be forgiven as part of a policy learning process if there were some light at the end of the policy tunnel. Rolling over debt in hope of a price cure next year seldom works out. Creating a price guarantee program does not encourage production reforms. Transportation and other infrastructure problems continue to hurt the competitiveness of Brazilian soybean producers. Producers in developed and developing countries alike should be concerned about government credit programs in other developing countries that could cause the same result as is now being played out in Brazil.