Agricultural Policies

3. Marketing and Income Warranty Agricultural Policies......... 14 3.1 Marketing Support Policy Instruments............................ 14 Cataloguing Source Agriculture National Library - BINAGRI

4. Rural Insurance....................................................................... 22 Brazil. Ministry of Agriculture, Livestock and Food Supply. 4.1 Rural Insurance Premium Subvention............................. 23 Brazil agricultural policies / Ministry of Agriculture, Livestock and Food Supply. Secretariat of Agricultural Policy. – 2nd ed. – Brasília : MAPA, 2008. 31 p. 5. Climatic Risk Agricultural Zoning.......................................... 25 ISBN 978-85-99851-37-1

1. Agricultural - Brazil. 2. Agricultural policy. I. Secretariat of Agricultural 6. Agricultural and Livestock Activity Guarantee Program....... 26 Policy. II. Title. AGRIS E10 7. Agroenergy.............................................................................. 27 CDU 63:338 (81)

8. Infrastructure.......................................................................... 29

9. Measures deemed as crucial for straightening the Brazilian Agribusiness. ........................................................ 31 Introduction 1 T he restructuring of the Brazilian economy in the 1990s was marked by deep changes in economic policy based on the liberalization of domestic and foreign markets and on the deregulation of the domestic market. This is a guiding process which continues to be followed. In the course of the aforementioned process of economic adjustment and consolidation of macroeconomic stability, the credit and minimum price policies were reformulated and the levels of official support for the sector were substantially reduced, being among the smallest in the World. Not only subsidies were eliminated, but there was also a substantial reduction in the real volume of rural credit, creating space for price support and producers’ income guarantee programs as the main agricultural support instruments. The merit of such policy was to reduce government’s intervention in the market and its spending in the sector, helping to stabilize prices and control inflation. This has been particularly true since the mid 1990’s, when new marketing and agricultural credit instruments were created so as to increase the participation of private sources of financing. The reform of the Brazilian agricultural policy sought to avoid the need for government’s casual interventions in situations of crisis, caused by economic and climatic factors, minimize the use of public resources to support the sector, and increase the sector’s efficiency, as well as ensure better conditions for rural producers to overcome adversities. Other challenges faced in the effort to improve policy instruments consisted of promoting the continuity of agribusiness’s competitiveness gains, reducing price and income fluctuations inherent to agricultural production, reducing imbalances in the relationship between producers and processors of agricultural and livestock products, promoting a more equitable distribution of the sector’s income, and avoiding that the increase in agricultural production for energy purposes might hinder the development of the agro-food complex. Thus, it was sought to equip Brazilian agricultural policy with instruments that would give it sustainability, bearing in mind the limitations dictated by the public budget and the need of coherence with other governmental policies. Emphasis was attributed on the invigoration of market mechanisms, on the participation of private initiative in agricultural financing, and on the support of agricultural prices. The continuous effort to modernize agricultural policy and consolidate its instruments will allow farmers better adjust themselves to market incertitude and expand and consolidate their insertion into the international market. 5 Agricultural Financing Agricultural Financing 2 2.1 National System of Rural Credit (SNCR) The government guarantees the availability of agricultural credit resources at preferential interest rates for working capital and marketing, mainly from demand deposits in commercial banks, and for investments, which are provided through specific programs for inputs, products, and rural activities. These resources correspond to 40% of the required amount to finance agriculture, and the remaining R ural credit has ceased being the main instrument of support to agriculture, but continued to play an important role, contributing to increase productivity and production. The magnitude of rural credit has been strongly influenced by the 60% are covered by farmers self financing and by resources financed at market interest rates. limited availability of public resources to support official credit operations, due The resources for working capital and marketing provided by the government to the control of government’s fiscal deficit and prevalence of high interest rates. are complemented by resources offered by commercial banks, including the official This situation lead to the reformulation of agricultural financing policy based on ones, at market interest rates, as indicated in Table 1. the introduction of supporting instruments operated by the market according to the criteria established by the government in order to minimize the participation of public resources. This is particularly the case of governmental spending on Table 1 Brazil Rural Credit Sources* agricultural working credit, due to the introduction of new instruments for raising Interest Participation Maturity Credit Sources Main Activities resources, mostly since this decade, when several commercial notes aimed Rate % % (Years) at facilitating access to financial and capital markets were created. Regarding Agriculture preferential credit to agriculture, the participation of the National Treasury has 1. Working capital and 8.63 84.6 1 Working credit for expenditures related to the productive Marketing cycle of periodic crops, off season of permanent crops or been drastically reduced, reaching levels close to zero in the last few years. the drawing of vegetable products, including primary processing and storage. Marketing credit to allow producers and cooperatives to storage their crops and The foundations of a private system of financing the agribusiness were better distribute their supply throughout the year. implemented and agricultural policy was reformulated, but it may be further 1.1 Preferential Interest Rate 6.75** 82.5 1 improved and its instruments adjusted so as to fully attain the objective of greater 1.2 Free Market Intere Rate 17.5 17.5 1 efficiency on the operation and distribution of public resources. It is equally 2. Investiment 7.47 15.4 - Rural facilities; acquisition and maintenance of vehicles, machines and equipments; irrigation, drainage and soil important to disseminate the use of those instruments by rural producers and modification; clearing of timber and clearing from stubs or financial agents in order to consolidate the insertion of agribusiness in the stock trunks to make the land arable; reforestation; permanent crops; pasture; rural electrification and telephony; market. acquisition of breeding and working animals, small household allotment ; Preferential rural credit at interest rates controlled by the government Total - - corresponds to 30% of the demand of resources for working capital. Rural producers Programs receive financing from suppliers (input industry), buyers (processing industry and Moderagro 6.75 8.5 8 Implementation or improvement of fruit trees, investments related to floriculture, sheep and goat raising, aquiculture, exporters), and free resources¹ from commercial banks, at interest rates that reached apiculture, swine, poultry, dairy, sericulture and systems of 25% in the 2006/2007 period and at present is about 20%. The prevalence of high- cattle and buffalo tracking. interest rates increases the opportunity cost of resources owned by producers. Moderinfra 6.75 5.0 8 Irrigation and modernization of farm warehouses and other facilities. Moderfrota 9.5 25.0 6a8 Farm tractors, harvesters and equipments for processing The insufficiency of official credit resources at preferential rates and the high coffee, and used tractors and harvesters. cost of the resources owned by producers (self-financing) and the ones obtained in Moderfrota - Proger Rural 7.5 5.0 6a8 Financing of small and micro rural producers for the the free market result in a weighed average interest rate for the financing of working creation of jobs and income. capital which is higher then the one paid by international competitors. It means Prodecoop 6.75 10.0 12 Value adding to agricultural production by cooperatives. Proflora 6.75 1.5 12 Commercial forestation, forest prervation in areas of legal that Brazilian agriculture works with limited and expensive credit, which reduces reserve, and wood production for burning in the drying of its competitiveness. That was the basic motivation for the implementation of new grains. 6 measures related to agricultural and livestock credit, financing and insurance.  7 Agricultural Financing Agricultural Financing  Table 1 Brazil Rural Credit Sources* holding of demand deposits in commercial banks and, consequently, exonerating Credit Sources Interest Participation Maturity Main Activities government’s expenses with rural credit policy³. Rate % % (Years) Produsa 5.75 and 10.0 5 a 12 Recovery of degraded soil and pasture, and support to 6.75 the use of environmentaly sound practices, which is a requirement introduced by this Program on the financing 2.2 New Instruments of Agricultural Financing for soil correction and preservation, recovery of pastures and systematization of food forests. Law No. 11.076/04, of 12/31/2004, created new agricultural policy instruments Constitutional Funds 5—9 35.0 12 The 1988 Federal Constitution establishes that 3% of the and new credit titles specially designed to finance the agribusiness. Afterwards, resources from income tax and IPI (tax on industrialized the Securities and Exchange Commission (CVM) regulated the Commercial products) shall be utilized to finance production in the the estates of North, Northeast and Center-West. Agribusiness Note (NCA), or Agrinote, by means of the Regulatory Instruction No. Total - - - - 422, of 9/20/2005. * Exclusive Pronaf: National Program for the Strengthening of Family Agriculture. ** Exclusive Coffee (7.5%) and Proger Rural (6.25%) The new negotiable instruments will continue to strongly modify the financing of Brazilian agribusiness because their aim is to attract urban investors, whether small savers or huge pension funds, to finance the rural activity, complementing Historically, rural credit resources were applied almost exclusively at preferential the credit regulated by the Government. In this sense, the accentuated cultural interest rates, but as a consequence of agricultural policy reforms implemented in differences that characterize the receivers and potential providers of funding are the 1990s there was an increase in the participation of resources applied at market a challenge whose overcoming shall be realized precisely through those credit interest rates, reaching 22.4% in the 2006-2007 harvest, and then declined to about instruments. 15% in the 2008-2009 harvest. There are three agribusiness refinancing instruments: the Agribusiness Credit Bite (LCA), the Certificates of Agribusiness Credit Rights (CDCA), and the Certificate Table 2 RURAL CREDIT RESOURCES FOR THE 2008-2009 HARVEST of Agribusiness Receivables (CRA). These instruments are pegged to documents Resources July ‘08 to June ‘09 (%) representing previous financing operations denominated receivables. Thereby, Controlled Interests 85.2 any commercial note issued by rural producers that corresponds to a promise of future payment, such as Agricultural Credit Notes, Rural Product Certificates, Rural Liabilities 49.2 Promissory Notes, Rural Trade Notes, and export supply contracts, among others, Rural Saving 16.9 will always be issued by rural producers or cooperatives. BNDES 10.0 Constitutional Funds 5.4 Those three instruments are differentiated fundamentally by the type of issuing FUNCAFE 3.4 entity. The LCA is issued exclusively by financial institutions and the CDCA is issued Other 0.3 exclusively by agribusiness companies, such as cooperatives, companies that supply inputs to the rural sector or demand raw material from agriculture (processing Free Interests 14.8 industry, businesspeople, exporters, etc.). The CRA is issued by securitization Rural Saving 4.0 companies. These instruments are subject to the Tax on Financial Operations Free Resources 10.8 (IOF), and the earnings provided by these and other agribusiness instruments, as Total 100.0 is the case of the CPR, were exempted from Personal Income Tax (Law No. 11.311, Source: SPA/MAPA of 6/13/06). The participation of resources from rural credit liabilities², excluding the National Agribusiness Credit Note – LCA Program for the Strengthening of Family Agriculture (Pronaf), in total rural credit As shown in Figure 1, at planting time the producer goes to a bank to obtain has increased since the mid-1990s and became the main source of agricultural resources for the purchase of inputs whose loans are accomplished utilizing Rural funding. This is mainly due to the stability of the economy, stimulating the Credit Note (CCR), Rural Promissory Note (NPR), or other similar instruments. 8 9 2 It refers to the requirement that commercial banks should devote 25% of their demand deposits for the financing of agriculture, with the charging of interest rates established by the government at below-market levels. 3 Rural credit resources from liabilities do not have any cost for the government. Agricultural Financing Agricultural Financing Consequently, rural producers have a higher availability of resources to finance It is important to observe that investor’s face risk only at the LCA’s issuing their activities. This increase of liquidity until redemption date is important for bank, given that in case of rural producer default the bank is obliged to honor the agricultural modernization through the use of modern inputs and better handling payment of that instrument. and cultivation practices. Instead of keeping the instruments resulting from those operations in its Certificate of Agribusiness Credit Rights – CDCA portfolio, the bank may issue an LCA, pegged to those instruments, and trade it In this case the operation is similar to that of the LCA and occurs with the in the market. Thus, an urban investor can buy LCA, which provides additional participation of a company, or cooperative, which provides inputs to agriculture resources to the bank for the financing of agricultural projects. This is equivalent and livestock farmers, or any other non-financial private company that finances the to say that the urban investor – buyer of the LCA – feeds the bank with resources agricultural sector, such as an agroindustry, an exporting company, etc. It should be that will finance other farmers who otherwise would not count on the expansion noted that a cooperative may work as an issuer of receivables or CDCA’s. of bank credit. In the past, the capacity of vendors to offer financing to its customers was determined by its budget or by the availability of working capital. This limit be Figure 1: Operational Flow of LCA strongly expanded and the company may use the CPR’s it receives from its customers to peg the CDCA’s to be offered in the market and thus obtain new resources to expand its sales (Figure 2). Figure 2: Operational Flow of CDCA At the respective maturity of those instruments, the producer will redeem his debt at the bank and will pay the LCA to its holder, completing the operation. In order to increase the security of the operation, it is required that the issuance of LCA’s and the respective sources to which it is pegged be in a system of recording 10 and settlement of assets, authorized by the Central Bank (BM&F and Cetip)4. 11 Agricultural Financing Agricultural Financing The use of CDCA implies that the agricultural and livestock financing capacity Figure 3: Operational Flow of CRA of a company or cooperative is no longer linked to its working capital and depends fundamentally on the level of risk to which it chooses to be exposed, and on its credibility in the financial market. As it occurs with LCA’s, the CDCA’s and their respective pegging ought to be registered in systems of recording and settlement of assets. It is obligatory that the receivables which serve to peg the CDCA’s be kept in the custody of a financial institution. The issuing company is responsible for the CDA pegging instruments. Therefore, the investor will be exposed only to the risk related to the CDCA issuing company. Certificate of Agribusiness Receivables – CRA Operations with CRA’s have their own characteristics (Figure 3) and are exclusively carried out by specific purpose societies (SPE’s), specially formed to carry out securitization businesses. The legislation prevents securitization companies from assuming any risk in the market. For that reason, operations with CRA’s are negotiated in advance among the parties. Another important characteristic of these operations is the fact that CRS buyers are exposed to the rural producers’ risk, and not to the risk of the securitizing company, as in the two previous cases. According to the diagram of Figure 3, the securitizing company has among its customers a traditional cooperative or an agribusiness company with good standing in the market. The securitizing company tries to identify investors willing to take that type of risk. Once the negotiation among the parties is done and the In close cooperation with the private sector, the Government created the details of the operation, such as investor’s remuneration, expiration date of the foundations of a private agribusiness financing system, almost 40 years after the instruments, etc., are agreed upon, the securitizing company buys the receivables inception of the SNCR. In that new system the beneficiaries are not only rural from the cooperative, issues a CRA pegged to them, and immediately transfers the producers and cooperatives, but the whole agribusiness. It is the beginning of a CRA to investors. Thereby, the default risk is fully assumed by the investor. process of strengthening the Brazilian agribusiness competitiveness, providing The set of instruments for obtaining resources, created by Law No. 11.076, greater liquidity to the sector and reducing capital cost as well as the operational is a new “agribusiness financial highway” that provides access to financial and risk. capital markets, with the objective of taking advantage of its immense potential of financing Brazilian agriculture. 12 13 Marketing and Income Guarantee Agricultural Policies Marketing and Income Guarantee Agricultural Policies 3 within the sphere of family agriculture for the purpose of supporting them and building strategic stocks. Federal Government Loan (EGF) It is an instrument for the financing of producers, cooperatives, and agro- S ince 2003 the government has promoted an ample revision of its marketing and income guarantee agricultural policy instruments. The objective is to increase public resources efficiency and expand the direct participation of private industry, based on the minimum price, with the objective of making it possible to form stocks and contribute to improve supply distribution throughout the year. initiative in the process of stabilizing producers’ income. Therefore, the government Special Credit Line for Marketing (LEC) has promoted the improvement of cooperation and coordination among members of the productive chains in order to overcome budgetary restrictions in executing This credit line was created in 2003 to support agricultural marketing. Its operation the programs of price and income guarantee. is similar to EGF. While in the EGF the value of the operation must be based on the minimum price, the LEC allows the Government to arbitrate another price as Law No. 11.076, of 12/31/2004, authorized the Federal Government to offer parameter for the calculation of the amount to be financed. This instrument allows economic subsidies for contracts of agricultural product sale option, when issued by the execution of a stock carrying financing operation even without adjustments in the private sector on behalf of rural producers and cooperatives. In this partnership the minimum price when it is not updated. The products eligible for that operation the private companies take the place of the government with respect to the price are defined by the MAPA and the Ministry of Finance. guarantee. Sale Option Contract 3.1. Marketing Support Policy Instruments The Government offers this instrument to rural producers and cooperatives through auctions. The purchase of an option guarantees its holder the right to sell Minimum Prices Guarantee to the Government the amount of product linked to the contract, at its expiration, This is an instrument that works as a basis for several types of purchase or at a certain price (option price), provided that the specifications of quality, place financing operations, always with the objective of supporting the producer’s of delivery, etc., are met. This contract indicates to market agents the government income. expectation of future prices, and constitutes an insurance price for producers and cooperatives. This is a more efficient way of intervention in the market than the In the past, minimum prices were practically the only income support instrument, Government’s purchase of stocks through the AGF. leading the Government to make purchases and keep stocks that reached almost 20 million tons of grain. Since 1996 new support mechanisms were created, such as Repurchase or Transfer of Sale Option Contract the Sale Option Contract, the Premium for Commercial Buyers Program (PEP), and the Product Drainage Value (VEP). The advantage of these intervention mechanisms The economic subvention mechanisms, operated through auctions, exonerate is that they are low cost for society. the Government from the obligation of receiving the product from a Sale Option Contract, without any damage to the interests of their holders (producers and Despite the intense process of modernizing agricultural policy tools, which cooperatives). The repurchase happens when the Government is not interested in started in the mid-1990’s, the Policy of Minimum Prices Guarantee (PGPM) still plays receiving the product and makes a reversion auction of the option contracts, so as an important role on producer’s planting decisions, mainly in low-price settings. to induce the holders of the options, by means of a subvention, to forgo delivering the product to him. Generally speaking, the holders of the options receive, in cash, Federal Government Purchase (AGF) the difference between the option price and the current market price. The Transfer consists in the substitution of the Government – the original issuer of the option This instrument allows the Government to acquire agricultural product from contract – by a private agent, and attains the objective of supplying a certain region. rural producers or cooperatives at the minimum price, whenever this is higher The buyer of the transfer auction assumes Government’s obligations towards 14 than market price. It also allows for the acquisition of products at market prices 15 Marketing and Income Guarantee Agricultural Policies Marketing and Income Guarantee Agricultural Policies the holders of the option contracts. In both cases, the Government assumes the Private Sale Option Contracts and Private Option Risk Premium – PROP subvention, equivalent to the difference between the option price and the market The PROP was also created by the aforementioned Law No. 11.076, of 12/31/2004. price. This instrument works in a similar way to the classic Contract of Options of Sale to the Government. The government may make auctions of Sale Option Contracts of Premium for Commercial Buyers Program (PEP) and Product Value of the that product, according to the previously set price, amount, quality, place, and time Commercial Buyers Program (VEP) of delivery, with the objective of supporting price quotation for a given product or PEP is an economic subvention (premium) offered through public auction to signaling to the market the price trajectory it works with. Producers who want the buyers interested on the purchase of products in a given region directly from a guarantee that they will be able to sell their stocks to the Government must qualify producer or cooperative, by the minimum price set by the Government. It does themselves for those auctions and buy the options, paying a premium. If at the not require government acquisitions. The payment of the difference between the option’s expiration date market prices are higher than the price established in the minimum price and the market price made to a producer or cooperative through option contract, the producer will lose the paid premium and will sell the product the final buyer is a tool that Government uses to complement the supply in deficient in the market. If, however, the prices are below that value, the producer will sell regions making use of private stocks. That is also the purpose of VEP, in which case the product to the Government, thus receiving a price above the one of market. the product comes from public stock. When the producer purchases an option and pays for the premium, he acquires an insurance against price falls. In this new instrument, unlike the Private Sale Option Rural Product Note (CPR) Contract, the private sector issues the options instead of the Government, which is always subjected to budgetary restrictions in executing the agricultural policy. This instrument was created in 1994 to allow producers to anticipate the commercialization of their harvests and obtain resources to finance them. It can The rural producer, or cooperative, is the holder of the option sold at auction be issued by producers or cooperatives and represents a promise of future delivery and is entitled, but not obligated, to deliver the corresponding product to the of the product linked to it. The “CPR Financeira” was created in January 2000. It issuing company. The issuing company is obliged to receive the product under can be liquidated in cash and is frequently used as collateral for input financing the condition of fulfilling the specifications set at the time when the options sale operations. In 2004 it was canceled the authorization given to banks to finance auction is noticed. Therefore, the options issuer is exposed to the risk of being industries interested in the early purchase of agricultural products, through CPR, forced to pay a higher price than the one in effect in the market. The Government using resources from bank liabilities. created the Private Option Risk Premium (PROP) to stimulate the issuance of Private Sale Option Contracts, which eliminates, up to a certain price level, the risk to Rural Promissory Note and Rural Trade Note (NPR and DR) which the issuing company is exposed. The use of NPR’s and DR’s allows processors of agricultural origin inputs to According to the diagram in Figure 4, the application of the aforementioned obtain rural credit resources to pay agricultural producers. instrument begins with the government’s decision to hold an auction of PROP’s to make possible the holding of Private Sale Option Contracts.The government anticipates Equalizing Premium Paid to Producer (PEPRO) the conditions of that operation, indicating the limit of official resources committed with PROP, sale option prices, option exercise dates, product quality, place of delivery, This is a new instrument that allows the Government to provide price guarantee etc., and interested companies must qualify themselves for PROP auction. In this to producers (reference price), whose operation is similar to the ones of the Premium auction there is no premium payment. If the demand for PROP’s by private companies for Commercial Buyers Program (PEP). The main difference is that the premium is surpasses the offer that the Government is willing to make, the value of the guarantee paid directly to the producer. This instrument exonerates the government from (the premium) will be reduced until offer and demand conditions match each other. acquiring the product and allows the drainage of product from the producing regions to complement the supply in consuming regions. It is an operation in The PROP purchasing companies assume the obligation of holding Private Sale which the difference between the market price and the reference price defined by Option Contracts under previously set conditions of price, period, quality, delivery the Government, through public auctions, is paid to producers or cooperatives. places, etc. If at options’ expiration date the market price exceeds the option price, there will be no contractual obligation to any of the parties. However, when market 16 17 Marketing and Income Guarantee Agricultural Policies Marketing and Income Guarantee Agricultural Policies price exceeds the option price, there is usually an understanding among the parties Agricultural Deposit Certificate (CDA) and Agricultural Warrant (WA) so that they can negotiate the delivery of the contracted products at the price in The Agricultural Deposit Certificate (CDA) and the Agricultural Warrant (WA), effect in the market. created by Law No. 11.076/04, are credit instruments pegged to the production If at option’s maturity market price is below the option price, the option issuing deposited in warehouses. company will be obligated to pay more for the raw material than its competitors The CDA represents the promise of delivery of deposited goods, and WA grants who did not adhere to the program. The Government, for its part, will be obligated the lien right on the goods described in CDA. Those instruments are twins, in that to support the operation until the limit set in the PROP auction, but above that limit they are issued in the same moment and refer to the same lot of goods. They are the option issuing company will be responsible for bearing the risk of overprices. issued by the depository of goods that belong to the owners of the stocks or to With respect to the cooperatives, they have the advantage of working in one the successive buyers of those instruments. It must be registered in a system of side as issuer of private option contracts for their producers, and in another side as recording and settlements of assets authorized by the Central bank. purchaser of option contracts issued by a given private company. In the past, after making a deposit of his production in a warehouse the producer could request that the depository issue the CD-W. The Warrant allowed him to pledge the goods as collateral for a loan, and the CD could be sold. That operation, however, was equivalent to a physical product sale that paid ICMS (State Sales and Figure 4: Operational Flow of PROP Auctions and Private Sale Option Contracts Service Tax) and hindered the execution of purchase and sale operations without the participation of the economic agent interested in processing or exporting the raw material. Consequently, it also prevented other economic agents from getting involved in the commercialization process, targeting as an example the carrying of price risk for a certain good. Figure 5: Maturity of Private Sale Option Contracts 18 19 ¹ Cooperatives, poultry and swine farmers, feed and food industries, exporters, etc. Marketing and Income Guarantee Agricultural Policies Marketing and Income Guarantee Agricultural Policies Figure 6: Operational Flow of CDA-WA A large number of operations became feasible by the creation of those instruments, because the depositor of the goods can request the issuance of the CDA-WA in lots equivalent to fractions of the deposited quantity. It allows the holder of the instruments to program the sale of the deposited product alog the time. The non-incidence of taxes in each commercial transaction that uses CDA-WA allows the holder of the instruments to sell them to someone who is not interested in the physical product as, for instance, the case of a pension fund that wants to carry the market risk of the deposited product, betting on price rises. The CDA-WA made it possible an expansion of the demand for rural production and created a new investment alternative for financial market operators. A new type of policy shall be created by the insurance market to insure those transactions. Agrinote or Commercial Agribusiness Note – NCA Regulated by the Securities and Exchange Commission (CVM) through Regulatory Instruction No. 422, the Agrinote or Commercial Agribusiness Note (NCA) is mainly characterized by its flexibility. Inspired by the old Promissory Note or by a The new instruments bring a new dynamic to the commercialization of the contemporary stocks deposited in warehouses. As shown in Figure 6, the producer harvests the product, deposits it in a warehouse he trusts, and requests from the depository the Commercial Paper, the Agrinote can be issued by an institution linked to any of simultaneous issuance of CDA-WA. The producers take these instruments go to a the chains of agribusiness, by companies organized as corporations, limited liability bank and request that they be registered and held in an entity authorized by the companies, and cooperatives, or by rural producers organized as a legal entity. Central Bank. From that moment on the negotiation of the instruments necessarily The pegging of those operations can be based on receivables, on future or al¬ready becomes electronic. The WA allows its holder to pledge the product as collateral for available production, or simply on the good standing of the issuing company, and a bank loan, while the CDA allows its holder to sell the goods, without any tax being it is possible to add to them any type of insurance (performance, rural, moral, etc.), due until the owner of the instruments, as economic agent, effectively desires to bank guarantee, rating, etc. The resources mobilized through this collateral can use the stored product for processing or sale. be used to finance working capital, commercialization, exportation, investment After depositing the goods, and issuing and registering the CDA and WA programs, modernization of the productive process, or for any other purpose. instruments, the owner of the stored product has the following options, as indicated Commercial Agribusiness Note are always issued and settled in Reais, but in Figure 6: they can have any other currency as their reference and be distributed in Brazil,

1. Sell the CDA-WA (the equivalent of selling the totality of its rights on the abroad, or in both markets concomitantly. They were conceived in such a way as stored product); to attract foreign in¬vestments, such as in the case of an importer of “in natura” or processed agricultural prod¬ucts, interested in financing an investment program

2. Sell the WA (meaning the pledging of the goods as collateral for a financing of its supplier. However, the NCA can equally be used in shorter-term transactions, transaction, and the producer may, at a future time, pay off the debt and fully such as those of funding credit or produc¬tion stocking financing, for two or three retake his rights on the deposited goods); months, preventing the issuer from having to sell its harvest after the crop.

3. Sell the WA and then the CDA (the equivalent of making a loan guaranteed by It is important to state that CVM’s regulation is extremely rigorous when the the deposited goods and later selling the CDA for the difference between the value tar¬get public is formed by small investors, but quite liberal when it refers to big of the CDA and the debt balance of the WA. In that type of operation the buyer can investors. 20 use deposited goods by redeeming the pledged WA). 21 Rural Insurance Rural Insurance 4 4.1 Rural Insurance Premium Subvention The Rural Insurance Premium Subvention Program (PSR) main guidelines are to promote ample access to rural insurance, assure the role of rural insurance as an income stability instrument, induce the use of appropriate technologies, and modernize the administration of agricultural enterprises. T he rural insurance market comprises a large number of modalities and products, focused on agricultural income and productivity. In Brazil, whose insurance market is still incipient, productivity insurance is the most common The operations of the PSR began middle November 2005, benefitting seven cultures. In 2006, the PSR expanded its assistance to all cultures in the agricultural modality and included livestock, aquiculture and forest as beneficiaries of modality. It offers protection to farmer’s investments in the case of bad weather, the subvention. Other measures taken by the government that represented plagues and diseases or other adversities, under the condition of performing important advancements in the implementation of rural insurance include the appropriate production and harvesting techniques. following ones: Rural insurance is one of the most important agricultural policy instruments, indispensable for the good performance of agribusiness, especially considering its a) Expansion of the credit limit size, dimension and socio-economic importance. Producers willing to buy rural insurance receive an increment of 15% in their The Brazilian government is determined to expand and consolidate a private credit limit related to resources financed at preferential interest rates (controlled rural insurance system in the country and passed Law No. 10.823, of 12/19/03, resources). regulated by Decree No. 5.121, of 6/29/04, which authorizes the granting of economic subventions to the rural insurance premium. It seeks to ensure the compatibility b) Financing of the rural insurance premium between the value of the premium that the producer can pay and the value that The rural insurance premium can be financed with controlled resources, which the insurance companies need to charge to keep the actuarial balance of their increases the rural producers’ liquidity as there is no need to allocate their own portfolios. Thus, the government provides subvention to part of the producer’s resources to cover that expense at the beginning of the harvest. The Government expenses with the rural insurance. pays part of the premium and the remaining share is financed by the rural credit. The idea is to introduce a new culture among rural businesspeople and insurance Thanks to this support instrument and the increasing amount of resources allotted market’s leaders, and overcome the challenge of popularizing the use of insurance to it, the rural insurance program will cover 10% of the cultivated area in the harvest and break the vicious circle created by the idea that insurance is expensive because 2008/2009. it is not used and it is not used because it is expensive. c) Support to insurance companies against climatic adversities considered Among the factors inhibiting the expansion of the rural insurance market, the catastrophic following standout: In May 2008, the administration sent to the National Congress a complementary • The risk of loss in rural activity, mainly due to adverse climatic events; bill that creates a fund to support insurance and reinsurance companies in case of climatic events considered catastrophic. It will make possible the offer insurance • Producers are unaccustomed to purchase rural insurance, hindering its products in regions of more unstable climate that was not assisted by insurance popularization and reducing the value of the premium; companies. • The reduced number of insurance companies whose offer is concentrated in The financial and operational administration of the aforementioned insurance the South and Southeast regions. system would be private and would count on federal government’s financial support through annual economical subventions and Government collateral, such Rural insurance premium is very high, which keeps producers from buying it, as National Treasury securities to be deposited in a federal financial institution for forcing the government to take the aforementioned measures for the development a consortium of insurance companies that would manage the system. 22 of the rural insurance market in the country. 23 Rural Insurance d) Opening of the reinsurance market Complementary Law No. 126, of January 15, 2007, opened the Brazilian reinsurance market to international reinsurers. There was a monopoly of the “Instituto de Resseguros do Brasil” (IRB – Brazil’s Reinsurances Institute) whose Climatic Risk Agricultural Zoning 5 elimination will stimulate competition and further expand the insurance market, reduce premium values and improve the quality of insurance products through the incorporation of new technologies mastered by the international reinsurers. T he climatic risk agricultural zoning, published by MAPA, is a technical- scientific tool of support to the management of risks in agriculture which seeks to guide the granting of agricultural working credit and the acquisition of rural insurance and Proagro. The program was introduced in 1996 and expanded gradually, widening its utilization throughout the Country. Unlike other existing zonings, the agricultural zoning of climatic risk is based on the concepts of potentiality and agricultural aptitude. It analyzes the parameters related to soil, climate and plants, using mathematical and statistical functions to determine the probability of the occurrence of adverse climatic events that may cause crop losses. The agricultural zoning of climatic risk identifies the best planting time for the cultivars for each municipality, analyzes historical climatic series of at least 15 years, and cross-checks those data with information on the cycle of cultivars and type of soil according to its capacity of retaining water. The goal is to reduce the possibility that the cultivars suffer from climatic adversities in their more sensitive phases by following restrictions imposed by the zoning, which are easily assimilated and adopted by rural producers, agronomists, extension officer, financial agents, insurance companies, and other users. Considering the technological content of that program, the ministerial ordinances that annually publish the agricultural zoning also indicate the cultivars included in the National Cultivar Registration (RNC) of MAPA, adapted to each region in the country. This technical-scientific tool results from the work of a multidisciplinary team of nearly 50 specialists and uses the methodology developed and published by federal and state agricultural research institutions, following the methodological standardization and technical assistance set by the Brazilian Agricultural Research Company (Embrapa). In this year of 2007 there are 272 zoning studies available for 23 cultivars, but they will be expanded to 600 until 2012. 24 25 Agricultural and Livestock Guarantee Program (Proagro) 6 Agroenergy 7 P roagro seeks to exempt rural producers from meeting financial liabilities in rural working credit operations when they have income loss as a consequence of climatic adversities or diseases and plagues without a widespread method T he world agriculture plays a new role in the economy as a source of energy and increases its participation in the energy market as supplier of raw material for the production of biofuel. In this area Brazil is acknowledged as a world leader of combat, control, or prophylaxis. This program also indemnifies the resources in the generation and implementation of modern, tropical agricultural technology owned by producers and applied in production. and has a robust agro-industry. The insurance operations made under the Program for the Strengthening of Family The Brazilian Federal Government created the Agroenergy Development Agriculture (Pronaf), which is carried out by the Ministry of Agrarian Development, Program whose aim is further insert agroenergy in the country energy matrix was included in Proagro in the 2004-2005 harvest and was denominated “Proagro and contribute to its strengthening. This Program establishes both a framework Mais.” and an orientation for the public and private actions involved in the generation of knowledge and technology that will contribute to the sustainable production Producer’s adhesion to Proagro occurs through the payment of a premium fee, of renewable sources of energy. The main goal is to enhance the competitiveness whose rates vary according to the technology used, kind of product and compliance of Brazilian agribusiness and provide support to public policies aiming at social with the conditions established by the agricultural zoning of climatic risk published inclusion, regional development and environmental sustainability. Thus, its purpose by MAPA. is to organize and develop the technological research, innovation and transfer in support to the sustainability and competitiveness of the agroenergy chains. The Brazilian Agroenergy Program also establishes institutional arrangements need to structure research, under which it was created an agroenergy consortium and a new Embrapa unit, the Embrapa Agroenergy. The actions undertaken under the Agroenergy Program, oriented towards the domestic market, are the identification of raw material that might be more adequate for biofuel production; the fostering of research with focus on productivity; regional studies on potentialities related to the production of bioenergy; support to improve producer organizations and technology transfer. In the foreign sector, the government main goal is that biofuels become commodity in the international market. Thus, Brazil intensifies its initiatives of cooperation with major world producers and consumers, and with developing countries for which biofuel production and consumption might be an important source of economic and social development. Governmental strategic actions on agroenergy • Sugar Cane Agro-ecological Zoning: The agro-ecological zoning identifies areas suitable to sugar cane production and the ones where the planting should be avoided (environmental protection areas, vulnerable ecosystems, Indian reserves 26 and areas used for other agricultural activities). 27 Agroenergy • Oilseed Agricultural Zoning for Biodiesel Production: Mapa works with Embrapa and MDA on the expansion of the zoning program for other crops considered as priority by the National Program for Biodiesel Production and Use. These measures shall stimulate farmers to choose the best regional investment alternatives, contributing to increase production efficiency and mitigate the risk of Infrastructure 8 harvest loss, and improving the access to rural insurance and credit. • Strengthening of International Partnership: The Brazilian Government T he Brazilian agricultural and livestock sector’s production and productivity has increased substantially in the midst of strong transportation and logistic constraints. Infrastructure deficiencies have strong impact on production costs and undertook actions for the creation of the International Biofuel Forum, with the participation of the USA, European Union, China, India and South Africa. Brazil on food prices as well, which need to be properly faced to consolidate the country has cooperation agreements and memorandum of understanding with several status as a major agricultural producer and exporter. The ongoing initiatives countries (South Africa, Germany, Argentina, Denmark, EUA, France, Holland, India, under the Enhanced Development Program (PAC) are deemed vital to solve Brazil Mexico, Paraguay, United Kingdom, Suede, Uruguay and others). The purpose is to infrastructure problems in the long run. work jointly for the development of the biofuel market. Investments on the construction and maintenance of roads, railroads, waterways • Guidelines for Biofuel Social and Environmental Certification: The Brazilian and port facilities are essential for the adequate flow of agricultural production Government provides specific guidelines on safety at work and environment to the domestic and foreign markets, so as to ensure the country’s agricultural requirements so as to ensure that Brazil biofuels are produced according to desired competitiveness and income. Therefore, the coordinated actions between the social and environmental criteria. These measures shell qualify the country exports Ministry of Agriculture and other ministries indicate the initiatives that should be to the more demanding markets. undertaken and were included in PAC, such as dredging the navigation channel and the work on the basin to boatage service at the Itaqui port. This port and the • Complementary Actions: Creation of an electronic information system Grain Terminal (Tegram) of São Luis in the State of Maranhão will allow the increase (SAPCANA) to work on information provided by sugar and alcohol producers so as shipping capacity from 2.1 to 3 million tons of grains in 2009 and up to 5 millions to improve sugar cane harvest forecasts and have greater information accuracy, afterwards. including on the use of new areas of sugar cane production. Highways The ongoing work of restoration, duplication, pavement, maintenance and construction deemed as essential to transport the harvest, mainly in the Center- West region, are the following: BR 158: pavement of 400 km between Ribeirão Cacalheira, in the State of Mato Grosso (MT) and Mato Grosso frontier with the State of Pará (PA); BR 364: construction and pavement of 185 km between Diamantino (MT) and Campo Novo dos Parecis (MT). The work shall be concluded in 2010; BR 163: pavement and conclusion of its construction (1024 km), between Guarantã do Norte (MT) and Santarém (PA). The work shall be concluded in 2011; BR 242: construction from Ribeirão de Cascalheira (MT) to Sorriso (MT); BR 174: conservation and maintenance of it in MT until the end of 2008. 28 29 infrastructure Waterways The first Tucuruí navigation lock in Tocantins River (PA) construction will be completed by 2010. Measures deemed as crucial for straightening the Brazilian Agribusiness 9 Railways The recovery of railway investments will bring a better equilibrium in the transport matrix favorable to the outflow of agricultural and livestock production. Among the works under way is the construction and extension of the railways that Merchant Tax Elimination (AFRMM) will compose the passage (corridor) Center-North, and will contribute to reduce freight costs and alleviate the problem of overcapacity in the ports of the southern and South-west regions. T his tax of 25% is paid over the freight on the imports of agricultural and livestock raw materials and on the cabotage for the transport of agricultural goods. It has strong negative impact on agribusiness production costs and The railway North-South will interconnect the States of Tocantins, Goiás, Mato competitiveness. The Ministry of Agriculture is in favor of eliminating this tax. Grosso do Sul e São Paulo, and will have 2258 km. 358 km will be completed by the end of 2009, covering the North part of the railway between Açailândia (MA) and Market openness of cabotage navigation for agricultural and livestock goods Palmas (TO). Out of it, 147 km is already finished. Market reserve for Brazilian flag ships on the cabotage transport, mainly Another important railway for the Center-West is the so called Ferronorte (MT) after Mercosul, became an obstacle to domestic marketing of Brazil agricultural on its interval of 260 km between Alto Araguaia (MT) and Rondonópolis (MT). The production, as a consequence of the luck of maritime transport competition between agribusiness will benefit from the construction of a railway branch of the so called Brazilin flag ships and foreign ships whose effects are higher freight costs. The Railway of the West of Paraná (Ferroest) between Cascavel (PR) and Maracaju (MS). Ministry of Agriculture believes this market reserve should also be eliminated. In the North-East region, the emphasis is on the construction of the railway Fertilizer Nova Tansnordestina, which will connect the ports of Pecém, in the State of Ceará (CE) and Suape, in the State of Pernambuco (PE), to Eliseu Martins in the State of Fertilizer in Brazil is a strategic issue for agriculture due to its dependence on Piaui (PI). This work shall be concluded by 2010. foreign market, high participation on production costs, price hikes and oligopoly in the domestic market. Feasibility studies for the construction of the railways Transnordestina and North-South, between Estreito (MA) and Eliseu Martins (PI), shall be concluded by The government mobilized its institutions in order to identify short and long 2008. run means of dealing with those constraints and evaluate the perspectives of auto- sufficiency along the next 10 years on phosphatic fertilizer and mineral nitrogenous Ports fertilizer, and lower dependence on potassium. The National Program of Drainage under implementation by the Special Secretariat of Ports will benefit 16 ports in the country. Most of them are of great importance for the import/export of raw materials and agricultural and livestock goods, such as the ones of Rio Grande (RS), Paranaguá (PR), São Fracisco do Sul (SC), Itajaí (SC), Santos (SP), Vitória (ES), Aratu (BA) and Itaqui (MA). 30 31 Brazil ISBN 978-85-99851-37-1 9 788599 851371 Agricultural Policies Ministry of Agriculture, Livestock and Food Supply