Factors driving production gains in Brazil – Ohio Ag Net

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By Guil Signorini, Department of Horticulture and Crop Science, Ohio State University

Last month, this column featured an article on the acidification of fertilizer and chemical costs facing Brazilian farmers in the 2020/2021 season. The latest developments show that farmers in the South have not changed their planting and cultivation plans due to these challenges. On the contrary, projections from the CONAB (Federal Agency for Agricultural Supply) indicate that grain farmers have intensified their production. Soybean production is forecast to reach 4.9 billion bushels, a 7% increase from last season, and the highest production mark on record. Equally important are the projections for the maize crop. Estimates indicate the country will produce 4.6 billion bushels, a vital recovery from last season’s drop in production due to drought.

Guil Signorini

Nonetheless, what catches our curiosity is how Brazilian farmers have managed to improve production projections given the pandemic and the heavy pressure from high farm input costs. What can we learn from our fellow farmers? What marketing factors favor the expansion of production?

An important factor is the likely stability of the prices of the two products until May 2022, when most producers are expected to be near the end of the season. Ipea (Institute for Applied Economic Research) reported in December that international prices are expected to remain stable or see marginal increases. CME Chicago’s future prices corroborate with Ipea. Soybean contracts for May 2022 were set at $ 12.73 a bushel, and corn contracts were traded at $ 5.86 a bushel on December 6, slightly above current prices in Chicago.

Two other factors deserve attention: the adoption of sustainable agricultural practices and the use of innovative financial tools to finance production. On the agricultural practices front, no-till, the use of beneficial rhizobacteria and crop-livestock-forest integration systems are examples of practices listed in a recent report by MAPA (Brazilian Ministry of Agriculture). to explain the results reported in the USDA International Agricultural Productivity Document. In the latter document, the USDA estimates a Total Factor Productivity (TFP) index. The TFP index reflects the overall rate of technical change and production efficiency over time. The calculations return positive estimates for the index when total agricultural production increases faster than the sum of inputs used. Brazil’s index is above the world average with an annual growth rate of 1.7% in the last years of analysis (2015-2019). The world average is 1.2% and the US index shows an annual growth rate of 0.04%. Brazil has in many ways been a benchmark in the sustainability practices applied to corn and soybean crops. As a result, farmers experience yield gains, reduce reliance on inputs or conventional practices, and help maintain a healthy growth rate of domestic production.

The third overall factor supporting production growth in Brazil is the development of innovative financial instruments to borrow working capital. These instruments were designed out of necessity rather than farmers’ preference. The operating costs of a representative corn and soybean farm in Brazil are considerably higher than those of a Midwestern farm. Our estimates suggest that an acre of soybeans grown in Brazil requires five times the operating costs required by an average Midwestern farm. Likewise, operating an acre of corn in Brazil costs twice as much as operating an acre of corn on a typical Ohio farm. Since the cost of establishing a soybean or corn crop is constraining for most producers in Brazil, several financial instruments have been designed and continue to evolve to alleviate the constraint. The potential challenges associated with spikes in agricultural input prices can be managed using the financial tools available. (As long as grain prices at harvest lead to a positive net result).

We would like to draw attention to two private financing instruments commonly used in Brazil: the CPR (Rural Product Exchange Title) and the CRA (Certificate of Agro-Industrial Claims). Together, these instruments raised $ 5.1 billion in 2019. Farmers can also access working capital at reduced interest rates through season plans (Plano Safra, in Portuguese) set up by the federal government each season. In 2019, the government made about $ 43 billion available to farmers in need of capital to cover establishment costs, including seeds, fertilizers and chemicals.

A quick discussion of the two private financing instruments is needed. CPR refers to an agreement between a farmer and a financial institution. The agreement is often signed a few months before planting, and the expected harvest is used as collateral. Farmers can choose to use the harvest to liquidate title at the end of the season. ARC is a type of income security issued by a non-financial institution, often a multinational agricultural input company or commodity trader. The security is then traded with a financial institution which undertakes to anticipate the capital of the company or the trader. In possession of working capital, the agricultural input company or trader signs agreements with producers in exchange for money.

The latter instrument has gained popularity in Brazil for two main reasons. First, farmers prefer to borrow capital from business partners rather than banks. Second, agricultural input companies and traders are in a position to allow for scale gains before turning to a financial institution for working capital. In this sense, they tend to get the capital at reduced interest rates, which are passed on to producers with little or no additional cost. Agricultural input businesses and traders are primarily interested in the sale of inputs or grain production rather than profit through financial transactions.

It should be noted that Brazilian grain farmers rely on two factors of resilience. The first stems from technical decisions made in the field. Sustainable practices have paid off as they tend to reduce reliance on conventional agricultural inputs, promote nutrient cycling, and improve tolerance to abiotic stresses such as droughts. The second factor refers to the financial tools available to help farmers cope with high operating costs. From an agricultural financial management perspective, possible increases in the prices of fertilizers and chemicals can be managed with appropriate financial instruments, especially when the products show signs of price stability at harvest. Apart from that, Brazilian farmers must work their fields and hope that the projections are maintained and that the abiotic stresses are gentle on the crops. The bottom line should be safe then.

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