Brazil appetite. It holds a central role in feeding

Brazil is a developing nation and like India is a major supplier of agricultural products with huge appetite. It holds a central role in feeding a growing population. Since 1994 agribusiness GDP has been steadily increasing with an average growth of 2% per year. So long term sustainability is critical for Brazil and the other nations across the world. Among evolving tools to promote sustainable agricultural practices, Brazil has adopted Rural Credit to support sustainability. Example to support rural credit is ABC program created in 2010. (ABC is a multibillion Reais credit line specifically dedicated to finance agricultural practices in rural areas and low greenhouse gas emission. Other credit lines are now financing complementary activities such as technical assistance and technological enhancement in rural areas. Rural credit is an important tool for Brazil as the country faces tremendous challenges to ensure its economic and sustainable development.RURAL CREDIT IN BRAZILThe National Rural Credit System (SNCR) was established in 1965 with the purpose of providing rural credit at low interest rates thus helping producers finance agricultural outputs and machinery, as well as operating costs and product marketing. Major objectives of the rural credit policy created in 1965 remain in effect today:• Access to credit at below-market interest rates( lower then market) • The legal requirement that banks devote a portion of their checking deposits to rural credit lines • Small and family farmers benefit from even lower interest rates by targeted credit lines. These measures are aimed to reduce the resistance offered by the financial institutions to lend money to the rural sector and to create incentives for small farmers to begin credit borrowing. The amount of finance made available to the Brazilian farmers (producers and agribusinesses) under SNCR increases annually. Rural credit has primarily financed working capital thus helping producers to pay for various crop and livestock operations (land preparation, seedling planting, weeding, and harvesting) and also for agricultural inputs (fertilizers, seeds, herbicides, animal feed and vaccines). The recent increase in investment credit within total rural credit may reflect the Government’s desire to finance long term investments in improved and more productive agricultural system in addition to short term inputs.SOURCES OF FINANCE FOR NATIONAL RURAL CREDIT SYSTEMThe total rural credit made available every year comprises of Public and private sources of funding through the National Rural Credit System. The below mentioned credit provision are for medium and large producers. Rural credit sourced from BNDES funds and the Constitutional funds provide the lowest annual interest of 3.5 %. They are mostly available for durable goods. Constitutional funds provide credit for working capital and marketing at 3.5 %. Funcafe and PRONAMP (National Program for Support to Medium Rural producers) provide 4.5% interest. For financing small and family producers (at lower interest rates) in 1995 the government created the National Program for Strengthening Family Agriculture (PRONAF). It provides credit for working capital, investments for eligible individual producers, for capitalization of cooperatives formed by small and family producers. Annual interest rates varies from 0.5% to 3.5% (depending on the amount borrowed and the activities financed). To access PRONAF credit, producers must prove their eligibility through the Eligibility Declaration document. PRONAF also offers special credit lines targeted at women, youth, forest production, agroindustry systems, semi-arid lands, agrarian reform settlements, and sustainable agricultural practices all focused on family and small farmers. In 2013/2014, PRONAF disbursed USD 7.2 billion in rural credit, which is the largest amount ever disbursed through this program and represents more than 12% of the total rural credit under SNCR disbursed for that agricultural year. In the 2013/2014 agricultural year, approximately 82% of the credit disbursed under SNCR offered annual rates between 0.5 and 5.5%. These rates are much lower than annual interbank rates, which ranged from 8.4% to 10.9% between July 2013 and July 2014 (lower than direct bank credit rates which reached as much as 4% a month). The Brazilian government makes below-market interest rates possible through a subsid called “equalization” or matching of interest rates. As an incentive for financial institutions to operate rural credit that is attractive to producers, the Brazilian Treasury pays for the difference between the interest rates of SNCR credit lines and the market interest rates, as well as for administrative and tax costs incurred by banks.SOURCES FOR AGRICULTURAL FINANCE Although noticeably important, SNCR is not the only source of agricultural finance in Brazil. Of the amount borrowed by the agricultural sector in 2003, 72% came from sources other than SNCR. These sources include producers own resources, family loans, and finance from traders, processors, input manufacturers, and private banks. The government created various investment vehicles to attract urban investors to finance agriculture, so banks can use urban investor funds to finance rural producers. These vehicles include the Agricultural Certificate of Deposit (CDA) and the Agribusiness Credit Note (LCA). The producers then trade these certificates with private agents for funds to finance their production. Upon contract closing, producers deliver the output or pay back the amount received. LCA is debt paper linked to a rural promissory note issued by a bank and traded with urban investors. Producers take out a loan from a bank that (instead of keeping the promissory note) issues an LCA and trades it. Upon the note maturity, producers pay their loans to the bank who in turn pays the LCA to its holder. Compared to the subsidized low-interest-rate credit offered under SNCR, the non-SNCR sources of rural borrowing often have substantially higher interest rates and stricter repayment conditions. In many cases, producers rely heavily on these other expensive sources of credit to finance their agricultural activities because they lack good credit history, information, and/or familiarity with bank agencies, or because they face other challenges in fulfilling low-interest rate eligibility criteria.REDUCTION OF THE GOVERNMENT’S SHARE IN AGRIBUSINESSFINANCINGThe history of rural credit in Brazil has two main meanings: • The strongest participation of the government in financing activities.• A lot of cases of payment default. In fact, when the 1988 Constitution promoted an amnesty for the rural debtors, a phase of “moral risk” was born, that is, several farmers resisted payment of their bills at the banks. The following tables show the total value of loans and the decrease of financing granted to farmers and cooperatives, from public resources, in the last six years. Public funds and BNDES programs still remain granted resources to agricultural activity, but the current main source of financing is the compulsory deposit of commercial banks. Banks have to retain twenty five percent of the demand deposits in order to lend to the rural sector. Alternatively, they can deposit fifty percent of the compulsory funds at the Central Bank, without remuneration. Some Banks prefer to lend these resources to the interbank market, through the purchase of DIR (Rural Interbank Deposit), issued by the Bank of Brazil.For overcoming the reduction of government’s share in agribusiness, new tools were implemented. An important financing mean has been the direct deal between producers and suppliers. For instance, the producers buy machines, equipment and fertilizer with money from their crop, represented by a credit bond issued by them. Then, the supplier trades the credit bond in the agribusiness market. The difficulty here is to establish a just price for the production, given the low liquidity and absence of an open market. However, the amount negotiated in this category of trade is estimated over US$ 1 billion per year. In order to permit more liquidity and transparency for this market, the government has encouraged an increase in trading with financial bonds specialized in agribusiness. The CPR (Rural Producer Note) highlights as one of the main financing tools: First, the producer goes to the Bank and issues the CPR where the characteristics of the product, like kind, quantity, date of delivery and price are registered. The Bank gives a guarantee to the bond and sells it to an investor who usually pays less than the face value, thus obtaining a discount. The market, according to the demand for this investment, establishes the discount. In last July, CPR was being traded for 85% to 90% of the face value. The CPR can be registered in CETIP and negotiated in the secondary market through BM, giving more liquidity for trading. By being just financially liquidated, this kind of bond dispenses physical delivery. The expectation is the growth of this market, permitting a large amount of trading and long-term bonds, reducing the final cost to the farmer. On the other hand, this could be the result of the decrease in prices to the consumers in cities, improving thus, the efficiency of the economy and the welfare of people.