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$Unique_ID{bob00136}
$Pretitle{}
$Title{Brazil
Chapter 3F.   Government Policy}
$Subtitle{}
$Author{Darrel R. Eglin}
$Affiliation{HQ, Department of the Army}
$Subject{percent
credit
agricultural
government
farmers
exports
loans
prices
1970s
land}
$Date{1982}
$Log{}
Title:       Brazil
Book:        Brazil, A Country Study
Author:      Darrel R. Eglin
Affiliation: HQ, Department of the Army
Date:        1982

Chapter 3F.   Government Policy

     Throughout the 1950s and the early 1960s, agriculture was handicapped by
a variety of policies designed to encourage import substitution and
industrialization. Both the overvalued exchange rate and direct controls to
ensure food supplies to domestic markets affected farmers adversely. Real
spending on agricultural research declined; policymakers made only ineffective
efforts to stabilize farm prices. The highway system was expanded into the
interior-a move that generally aided farmers. Modest sums were allocated to
agricultural credit, and fertilizer use was subsidized. Agricultural exports
received some preference. Overall, however, the government relied on Brazil's
extensive frontier to increase agricultural production. After 1964 the
military regime liberalized trade policy, eased price controls, and instituted
currency exchange reforms. The moves came in the midst of rising world prices
for some of Brazil's export crops, chiefly soybeans. At the same time,
policies favoring manufactured exports gave rise to a number of
export-oriented industries specializing in processing agricultural products.

     After the 1973 oil crisis the country faced a worsening balance of
payments coupled with growing inflation (see Growth and Structure of the
Economy, this ch.). The combination generated mixed policy results for
farmers. There was an increase in agricultural price controls in an effort to
hold down the cost of living in urban areas. At the same time, policymakers
continued to subsidize manufactured exports. By the early 1980s a number of
trends combined to make the government increasingly aware of agriculture's
importance. Poor harvests in 1978 and 1979, fears of protectionist policies
against Brazilian manufactured exports on the part of the industrialized
world, the spiraling external debt, and the costly oil import bill all
underscored the salience of agriculture to Brazil's continued economic growth.
The regime increasingly counted on that sector to augment the domestic food
supply (and thus cut inflation) and to contribute to exports (and so limit the
balance of payments deficit). By the same token, policymakers hoped that the
sugar alcohol program would reduce dependence on imported oil. Finally, the
Second National Development Plan (1980-85) emphasized agriculture's
significance in creating new jobs and alleviating poverty.

     Since the mid-1960s credit has been the government's principal policy
instrument in dealing with the agricultural sector. The Agricultural Credit
Law 4829 (1965) was designed to help finance production and marketing costs,
spur capital formation, give incentives to the adoption of improved
technology, and enhance the small- to mid-sized producer's position in the
marketplace. Implicitly, the legislation attempted to redress the imbalance
created by the policies of the 1950s that penalized agriculture. It was an
effort to compensate farmers for the price and currency controls aimed at
encouraging industrialization at the expense of agriculture. The notion was
that subsidized credit would indemnify farmers the price they paid for the
overvalued cruzeiro and the increased costs they faced through import
substitution, i.e., buying higher priced Brazilian manufactures rather than
cheaper foreign imports.

     Cheap agricultural credit subsidized farmers' purchases of a variety of
improved inputs; fertilizer, tractors, and improved seeds were the most
prominent. All of these were the subject of import-substitution policies in
the 1960s and 1970s, so agricultural credit has helped farmers absorb the
higher cost of domestically produced products. Fertilizer was a partial
exception; although domestic prices have been higher than the world market,
domestic prices have generally lagged behind the prices farmers received for
their crops, and fertilizer became relatively cheaper. In the mid-1970s,
however, fertilizer prices rose significantly, and the government responded
with a 40 percent subsidy. The number of tractors and the use of fertilizer
grew sharply in the 1960s and 1970s. The stock of tractors increased 11
percent annually (1960-77), and fertilizer use, roughly 20 percent (1965-79).
Farmers' use of improved seeds has been limited to a few crops, mainly
soybeans, wheat, and cotton, followed by lesser amounts of rice and corn.

     Nominal interest rates for agricultural loans were lower than those of
other forms of credit. In the 1970s, especially, they ran well below the rate
of inflation, and farmers enjoyed negative real rates of interest. Small
loans, in theory targeted to small farmers, ran 1 to 2 percent less than
the rates for large loans. A variety of incentives and controls encouraged the
flow of credit to the agricultural sector despite the low interest rates. A
certain percentage of commercial banks' sight deposits was earmarked for
agriculture. A substantial portion came from federal budgetary transfers. The
Bank of Brazil was slated for Cr$1.7 trillion in credits, the Central Bank for
another Cr$200 billion, and commercial banks for Cr$600 billion (see Banking
and Monetary Policy, this ch.).

     The supply of credit to farmers grew dramatically in the 1970s (see table
21, Appendix). Credit expanded some fivefold, while agricultural production
grew roughly two and one-half times. In 1975, a peak year, credit was greater
than the net value of agricultural production. Loans dropped slightly in real
terms in 1977-a combination of high inflation and monetary policies limiting
the supply of money. Livestock credit took most of the loss. Credit rose
again in 1978: livestock producers recouped their losses while crop producers
suffered. In 1979 the regime exempted production credit from restriction.
Nonetheless, inflation continued to take a substantial bite out of farmers'
credit cruzeiros. In 1981 credit in real terms was scarcely more than
two-thirds its 1975 value. In 1982 the government allocated Cr$2.5 trillion,
an increase of more than 60 percent over the nominal value of 1981
agricultural loans. Most observers, however, anticipated a decline in real
value once inflation's toll was tallied.

     Interest rates for agricultural credit were set well below market rates.
In 1979, a year in which the inflation rate was in excess of 75 percent,
production loans cost farmers 13 to 15 percent; investment loans, 13 to 21
percent; and the much used storage loans, 15 to 18 percent. Beginning in 1980
the government made sporadic attempts to bring the cost of agricultural credit
more in line with the market. There was a halfhearted effort at indexing that
brought the nominal rate on some loans to 36 percent when the annual inflation
rate was around 100 percent. The regime eventually dropped indexing in favor
of a general rise in nominal interest rates and a series of changes in the
amount of financing available to individual producers. On the 1982 crop the
nominal interest rates were in the range of 35 percent in the Northeast and
North and 45 percent in the rest of the country. Large producers were able to
finance up to half their production costs (down from 60 percent), and medium
producers could underwrite up to 70 percent of their costs (a decline from 80
percent). Small farmers continued to be eligible for 100-percent financing.

     In late 1982 there were limited national data indicating which farms get
these bargain loans. A study in the early 1970s by the United States Agency
for International Development (AID) found that small producers were
disadvantaged in the grab for credit. It was not only a matter of their
relatively deprived position in the rural economy but also the credit
program's unwieldy administration. High overhead costs encouraged large loans
if only to cut processing expenses. Policy makers revamped the program in an
effort to reach more small farmers. Nonetheless, the distribution of credit
by size of loan in the mid-1970s still revealed a significant measure of
concentration. Loans of the equivalent of US$25,000 or more (some 4 percent
of loan contracts) represented more than 50 percent of all credit. Those of
less than one-tenth that amount-nearly three-quarters of all
contracts-received 11 percent of credit. A 1977 survey of credit use in Sao
Paulo underscored the concentration in credit resources. Forty percent of all
farms, those of less than 20 hectares, received roughly one-third of all loans
but less than 10 percent of credit. Farms of 200 hectares or more (8 percent
of all farms) commanded nearly 40 percent of agricultural credit.

     In view of the minimal real cost of credit, a surprising percentage of
farms of all sizes forgo the bargain. The Sao Paulo study found less than
one-third of all farms surveyed used any credit. The finding is amazing in
that Sao Paulo uses credit more intensively than virtually any other state.
Small- to mid-sized farmers were the most committed credit users on a per
hectare basis; they accounted for 15 percent of farm area and 28 percent of
agricultural credit. Overall, farms of that size used more than five times
the credit per hectare of their counterparts of 200 hectares or more.

     Between 1975 and 1979 some 80 percent of agricultural credit went to
six crops: soybeans, wheat, rice, corn, coffee, and sugarcane. Soybeans
alone received 20 percent. There were noteworthy imbalances in the ratio of
credit to agricultural output. In 1977, for example, wheat received 11
percent of credit and contributed 3 percent of gross agricultural output;
rice garnered 16 percent of credit and produced half that percentage of gross
output. In general the credit system has favored grains and export crops to
the detriment of basic foodstuffs. Black beans received some 3 percent of
credit, but its portion of gross output was double that percentage. Manioc,
accounting for a scant 1 percent of credit, represented 11 percent of gross
production.

     Credit use was strongly oriented to the South and the Southeast The
South, with 23 percent of the nation's farms and some 14 percent of its
agricultural land, received roughly two-fifths of credit in the late 1970s.
Sao Paulo alone received 23 percent of all credit. The Northeast, having
nearly half of all farms and one-quarter of the farmland, obtained less than
15 percent. On a per hectare basis the regional disparities were even more
marked. The South's credit per hectare was nearly three times that of the
Northeast. Sao Paulo outdistanced the Northeast by more than 400 percent.

     The minimum-price program is the government's major price
interventionist strategy. Congressional Law Number 1506 (1951) laid out the
basic provisions, but the program has since undergone a variety of political
and administrative transformations. The programs's intent was to reduce the
price uncertainty that farmers face in making production decisions. Through
its minimum-price supports, the government tried to smooth out price
variation throughout the crop year for producer and consumer alike. In
addition, the government hoped that minimum prices would stimulate increased
production.

     Minimum prices functioned in two ways: the government could either buy
crops directly through the Federal Government Acquisition program
(Aquisicao do Governo Federal-AGF) or use a system of federal loans against
crops by Federal Government Loan (Emprestimo do Governo Federal-EGF). Direct
purchases and payments (the AGF side of the program) were made locally
through agents of the Bank of Brazil and agents of the federal government.
The government then held the stocks as a buffer to be sold at a more
propitious time. AGF purchases were the smaller portion of the program;
throughout the 1970s they represented about 10 percent of the value of the
EGF loans. AGF was a significant component of the minimum-price program in
the North and Northeast in the early 1970s, but by the mid-decade the
Center-West and South accounted for more than half of all direct purchases.
Rice, corn, and sisal (in that order) were the main crops the government
bought.

     EGF loans included two main varieties: with or without an option to sell
to the government. In the case of loans with an option to sell to the
government, the farmer received 100 percent of the crop's minimum, price for a
stipulated period. If the price exceeded the minimum, the individual sold on
the open market; if not, the farmer simply did not repay the loan, and the
stocks reverted to the government. The great advantage of these loans from the
farmer's viewpoint was that they did not carry storage fees or interest. In
the late 1970s the government made a number of changes to bring more small
farmers into the loan program. "Pre-EGF" loans were designed to give the
smallholder short-term credit immediately before and after harvest and so tide
the farmer over for the period between delivery to a storage facility,
classification, and payment. A substantial portion of "pre-EGF" funding was
targeted for the Northeast.

     The EGF loans enjoyed tremendous expansion in the 1970s, as did credit.
Even with the contraction in real spending after 1977, the real value of the
loans grew at an average annual rate of approximately 30 percent. The most
spectacular growth occurred at mid-decade; the real value more than doubled
each of two consecutive crop seasons (1972-73 through 1974-75). Continued
efforts to channel funds to the Northeast had only limited success. The
Center-West and South received nearly 90 percent of EGF credit over the
decade. Overall, the program tended to intensify regional and crop
disparities, much as agricultural credit had. Roughly half the allocation
went to producers and cooperatives, the other half to processors and
distributors, who were eligible only if they could demonstrate that they had
paid farmers at least the minimum price for farm commodities. In the
Center-West and South producers predominated, while in the North and
Northeast processors did. Soybeans and cotton accounted for 57 percent of
total funds; corn and rice supplied another 33 percent.

     EGF interest rates, like those of the credit program, were heavily
subsidized. Government attempts to control expenditures in this field
followed the pattern set by credit. There were cutbacks in the late 1970s.
In 1981 rates were raised to roughly 45 percent for producers and
cooperatives and to 50 percent for processors. Eligibility for these loans
was cut to 60 to 70 percent of the previous year's financing for most crops.

     A shortage of storage facilities and late announcement of minimum prices
during an agricultural year have impeded the program's impact on farmers'
production decisions. For much of the 1970s there were sizable annual price
fluctuations for specific crops, which hampered any long-term specialization
or production strategy on the part of farmers. Minimum prices rose with most
agricultural market prices during the early 1970s. For the rest of the decade
real minimum prices declined in the face of steep inflation. It was the
storage credit that EGF loans provided, rather than the price supports
themselves, that drew farmers to the program. In 1980-81 minimum prices
increased significantly; black beans, corn, and manioc registered some of the
largest gains. In 1981-82 minimum prices-renamed basic prices-were indexed
in an effort to make price supports more responsive to inflationary trends.

     There was a variety of other programs affecting prices and supplies of
agricultural products. The government maintained a complex network of price
controls at the farm level as well as at the wholesale and the retail levels.
It paid the cost for its own stockpiles and distribution system for a number
of commodities in order to curb urban price increases and ensure a reasonably
secure (short-term) supply of foodstuffs to urban areas. There have been
efforts to increase storage capacity.

     Coffee growers have long had access to special price supports, credit,
and storage facilities. In the early 1980s the government continued to play
an extensive role in the marketing of wheat, and self-sufficiency in wheat
production remained a high government priority. The government was the sole
purchaser of the grain, served as the only supplier to mills, and established
the retail price. Policies subsidized producers, millers, and consumers alike.
After the early 1970s, however, most of the subsidy had been in favor of
consumers. The level of farmers' subsidy remained constant, whereas that of
the consumer soared-a reflection of official efforts to shelter city dwellers
from rising world prices for wheat. Retail prices for fluid milk were fixed;
this policy's main impact seemed to have been to divert milk supplies into
processed dairy products (see Livestock, this ch.). The maximum retail price
of beef was controlled. Beginning in 1975 the government initiated a program
to freeze beef for sale in the off-season.

     The Land Reform Statute of 1964 was one of the military regime's earliest
laws. Land reform had been a vital topic during the waning days of Joao
Goulart's presidency (see The Presidency of Joao Goulart, ch. 1) Political
efforts to draft land reform legislation were hamstrung by the 1946
constitution which, although it empowered the state to redistribute private
property for the commonwealth, did so only with full cash payment before
expropriation. The military chose to attack the problem of land reform
through the progressive taxation of unproductively used land.

     The core of the Land Reform Statute is a complex land classification
scheme whereby each farm is rated according to its productive capacity. The
basis of the scheme is identified as the module (since 1979 the fiscal
module). The module measures the amount of land in a given municipality
necessary to support four adults while generating a slight surplus for
"social and economic progress." Based on the number of modules a farm
represents, it is classified as a minifundio, a rural enterprise, or a
latifundio. A minifundio is a farm having less than one module. A rural
enterprise is a holding that meets the government's standards of productivity
in land use, economic efficiency, yields, and employment. A latifundio is
any farm larger than a module that fails to qualify as a rural enterprise, or
a holding of 600 or more modules. Latifundios are taxed at a higher rate and
(ultimately) threatened with expropriation. Family farms of less than 25
hectares are exempt from taxes; land sales among those of less than one module
are, in theory, regulated in an effort to limit further land fragmentation.

     A number of circumstances have limited the statute's impact. The value of
unimproved land is based on the owner's assessment. Throughout the 1960s and
1970s underreporting was frequent, and audits were virtually nonexistent. For
much of the period delinquent tax payments were not readjusted to reflect
inflation. Overall, tax rates were hardly such that landowners were deterred
from keeping land that they were not using productively.

     In late 1979 the regime changed the tax structure, exempting many more
farms from any tax liability and making tax rates much more progressive. The
new basic tax rate increased rapidly for farms failing to meet minimum levels
of efficiency. It doubled the first year a farm fell below the minimum,
tripled the second year, and quadrupled the third and following years.

     A landholder could still avoid the steeply rising tax rates by filing a
plan for land use development with INCRA. The impact of the 1979 change
depended on the extent to which the agency's limited resources permitted
adequate policing. Procedures to cross-check land tax records with income tax
returns and loan applications could-if applied rigorously-cut down on under-
reporting. Although higher and more progressive than previous measures, the
new land tax still did not tax owners at a rate that would deter individuals
from speculating in land as a hedge against inflation.

Agricultural Exports

     In the early 1980s Brazil was the third largest exporter of agricultural
products in the world; it ranked first in coffee and frozen orange juice
concentrate, second in cocoa and soybeans, and fourth in sugar and
unmanufactured tobacco. Agricultural exports remained a major source of
foreign exchange earnings, despite a decline in their overall portion of
exports. In the 1970s they continued to represent some 40 to 50 percent of
total export sales. Historically, agricultural exports had been the country's
sole source of income and growth. Brazil's economic history was, to a large
extent, the history of sugar, cotton, tobacco, cocoa, rubber, and coffee.
Although the 1970s saw a significant diversification in exports, the
government still relied on agriculture to produce foreign exchange to help
meet the balance of payments crisis. The importance of agricultural exports
was underscored in the early 1980s in the midst of fears that Brazilian
industrial goods might meet increasing protectionist barriers on the part of
its trading partners.

     From 1964 through 1968 agricultural exports accounted for some 85
percent of all exports; in 1981 they were scarcely more than 40 percent.
During the same period there was a steep rise in the value and volume of
semiprocessed and manufactured agricultural products relative to raw
agricultural products relative to raw commodities. Between 1964 and 1978
unprocessed commodities declined from some 73 percent of exports to less than
30 percent; at the same time semiprocessed goods rose from 9 to 15 percent,
and manufactured agricultural products skyrocketed from roughly 3 to 14
percent. The relationship held for volume and value alike. The average annual
growth rate for semiprocessed and manufactured agricultural exports was more
than double that of raw products. The rate of change was greatest from 1968
through 1973, but the trends continued throughout the decade.

     At the same time, there was a general diversification in the agricultural
products exported. From 1964 through 1968 two crops accounted for fully half
of all agricultural exports, 11 did so by the late 1970s. Soybeans enjoyed a
meteoric rise in both domestic consumption and export. Introduced in the early
1960s, by 1977 soybeans accounted for 18 percent of total export earnings and
fully one-quarter of agricultural export earnings. Brazil's share in the world
soybean market grew dramatically; when the United States placed a temporary
embargo on soybean exports in 1973, Brazil stepped into the void. Brazilian
soybeans represented 3 percent of the world market in 1970, but by 1975 they
were 75 percent of all world trade in that crop. After that year whole bean
exports dropped relative to soybean meal and oil; in 1978 Brazil accounted for
nearly half the meal and one-third of the oil in world trade. Soybeans
particularly benefited from government policies favoring semiprocessed and
manufactured exports.

     The transformation in agricultural exports was linked to the government's
efforts to encourage domestic manufacturers. Policies taxed raw crops; there
were a variety of restrictive export policies that aimed at ensuring raw
materials for local industries and agro-industries. And whereas unprocessed
commodities were taxed, semiprocessed and manufactured agricultural goods
received a net subsidy. The government's thinking was that the markets for
semiprocessed and manufactured goods were less mercurial than those for the
raw products that Brazil had traditionally relied on. Some economists
questioned whether the effort was worth the loss in export earnings (at least
in the short term) from raw crops when their prices were high. In the early
1980s the earnings of soybean and cocoa (semiprocessed and manufactured)
products ran behind those the raw products offered in the late 1970s.
Similarly, Brazil's savings from oil imports through the alcohol and gasohol
produced from sugar in 1980 were less than might have been earned from sugar
exports. This does not take into account the impact an exporter of Brazil's
volume might have had on world prices. Economists also questioned whether the
processing and manufacturing industries that relied on government subsidies
were efficient; in the late 1970s there was evidence of significant idle
capacity in cocoa and soybean processing plants.

     Agricultural export earnings in the early 1980s were up from a late 1970s
plateau. In 1980 Brazil earned the equivalent of roughly US$9.4 billion from
agricultural exports, a nominal rise of nearly 30 percent from the previous
year's earnings. In 1981 agricultural earnings held steady at virtually the
same level. The general rise masked considerable variation in the markets that
different crops enjoyed. Traditional export commodities-coffee, cocoa, and
sugar-faced lower world prices; earnings dropped by roughly one-third between
1980 and 1981. These crops' portion of agricultural export value declined from
half to some 36 percent (see table 22, Appendix).

     Soybeans (including processed soybean products), frozen orange juice
concentrate, and meat and poultry products took up most of the slack. Soybean
exports were up 32 percent; at 13 percent of total exports-roughly one-third
of agricultural exports-they were the single largest export commodity. The
steepest rise was in refined soybean oil. From 1979 through 1981 earnings from
that product expanded an astronomical 21 times. Between 1980 and 1981 the
export value of refined soybean oil grew by nearly 650 percent. Meat products'
contribution to export earnings grew by some 60 percent and frozen orange
juice concentrate by 95 percent. At least part of the strong performance by
processed agricultural products reflected the impact of incentives favoring
them over raw commodities. The government was, as well, aggressively seeking
export markets in an effort to meet the bill for oil imports and a worsening
debt repayment schedule.

     Projections in early 1982 for the rest of the year called for an increase
of roughly the equivalent of US$1.5 billion. Brazil was counting on a rise in
sales of frozen orange juice concentrate (because of a January 1982 freeze in
Florida) and better international coffee prices (because of a reduction in
Brazil's crop) to offset anticipated lower prices for soybeans, sugar, and
cocoa. In addition, broilers and other meat products, maintaining a trend of
recent years, were expected to earn well, although there was fear that poultry
prices might decline.