2nd Quarter 2006 • 21(2) A publication of the CHOICES American Agricultural The magazine of food, farm, and resource issues Economics Association The Evolution of Agricultural Policies and Agribusiness Development in Brazil Fabio R. Chaddad and Marcos S. Jank
JEL Classification: Q18, O54, O13, Q15
In the late 1980s, Brazil started to adopt liberal and mar- agriculture between 1948 and 2002 (Gasques et al., 2004). ket-oriented policies, which significantly impacted the Other factors also contributed to the competitiveness and performance of its food and agricultural (henceforth agri- growth of the agrifood sector in Brazil, such as relative food) sector. The agrifood sector is now among the most macroeconomic stability after 1994 and the significant dynamic in the Brazilian economy. Grain production dou- reductions in government intervention and trade barriers bled from 58 to 120 million metric tons (MT) and meat (Jank, Nassar, & Tachinardi, 2004). production surged from 7.5 to 20.7 million MT between Despite these favorable developments and the avail- 1990 and 2005. The agrifood economy generated R$534 ability of labor and natural resources, agrifood growth in billion (US$183 billion) in 2004, which is equivalent to Brazil faces significant internal and external constraints. In 30% of the country’s GDP. In addition, it represented the external environment, trade barriers and subsidies to 35% of total employment and 40% of total exports in domestic producers and exporters, especially in developed 2004. countries, significantly impact Brazilian agrifood exports. Agricultural production growth and agribusiness As a result, Brazil adopted a more aggressive position in development in Brazil are largely dependent on exports, international trade negotiations at the World Trade Orga- which account for 31% of agricultural production. Total nization (WTO), bringing three high-profile dispute cases agricultural exports more than doubled from US$13-32 against developed countries and taking leadership in the billion in the 1990-2005 period. Brazil is now the world’s formation of a coalition of developing countries known as third agrifood exporter – following the European Union the G-20. (EU) and the United States (US) – and surpassed the US In the domestic arena, agricultural producers in Brazil as the country with the largest surplus in agricultural face uncertainties related to exchange rate volatility, the trade, with US$29 billion in 2005. lack of clearly defined property rights to land, the regula- The growing competitiveness of the Brazilian agrifood tory framework concerning research and marketing of sector is attributed to a number of factors, including genetically modified organisms (GMOs), poor infrastruc- investments in tropical agricultural research and availabil- ture causing logistical bottlenecks, and the decline in gov- ity of agricultural credit, which caused significant produc- ernment spending in important areas such as food safety, tivity gains since the 1970s. The technologies that made animal and plant health inspection, agricultural extension, the expansion into the cerrado region in the Brazilian Cen- irrigation, and other traditional agricultural policy instru- tral-West – in soils that are distinctly inferior to those in ments. The recent reemergence of foot-and-mouth dis- Argentina, the US Corn Belt and Southern Brazil – ease, which led more than 50 countries to close their bor- resulted from public investments in agricultural research. ders to beef exports from Brazil, is one recent example of The average annual growth rate of total factor productivity the policy challenges to the development of the Brazilian in Brazilian agriculture was estimated at 3.3% for the agrifood economy. This article discusses the evolution of period 1975-2002 and at 5.7% between 1998 and 2002, agricultural policies in Brazil and how they impact the which are above the 1.8% growth rate achieved by US competitiveness of the agrifood sector.
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2nd Quarter 2006 • 21(2) CHOICES 85 Table 1. The evolution of agricultural policy in Brazil. 1965-1985 1985-1995 1995-2005 Proposed Agenda Macroeconomic - High inflation - Uncontrolled inflation and - Control of inflation - Low inflation conditions and policy - Controlled exchange rate low growth (stagflation) - Volatile exchange rate - Structural reforms and fiscal balance - High growth rate - Heterodox plans - High real interest rates - Less volatile exchange rate - Increased government - Debt crisis - Modest growth rate - Lower interest rates expenditures in farm policy - Land as real asset - Privatization - Sustained growth - Decreased government - Investments in infrastructure expenditures in farm policy Agricultural policy goals - Food security - Deregulation - Land reform programs - Competitiveness - Liberalization - Family farming and social - Sustainability (economic, social, and inclusion environmental) Price support and - Massive intervention: - Decreased intervention - Modest and selective intervention - Modest and selective intervention government storage public agencies, government - Agricultural commodity purchases and storage, price market deregulation controls - Commodity price support Rural credit - Government supply of - Decreased government - Credit lines targeted to family - Crop insurance credit financed by Treasury supply of credit farms (PRONAF) - Private instruments for agricultural (SNCR) - Interest rates less - Specific programs for investment finance - Negative real interest rates subsidized credit (BNDES) - Targeted credit lines to family farms - Agricultural credit crisis and debt - Credit cooperative development rescheduling Agricultural trade policy - Closed economy - Unilateral openness to - Aggressive policy against - Aggressive trade policies: negotiations, - High tariffs trade agricultural trade barriers litigations - Import Substitution model - International integration - WTO dispute panels - Increased emphasis on NTBs: technical, - Export taxes on primary (Mercosur) - Leadership in G-20 sanitary, and social barriers commodities - Elimination of export - Negotiation of regional - Conclusion of regional and bilateral taxes agreements (FTAA, EU-Mercosur) trade agreements Agricultural research and - High investment in public - Leveling-off of public - Crisis of public research and - Renewed public commitment to extension research (Embrapa, federal investment extension services agricultural R&D, including GMOs and state universities) - Increased role of public-private - Development of public partnerships extension service network - Intellectual property rights Social policies (family - Minimal - Initial stage - Ministry of Agrarian Development - Policy evaluation and monitoring farms and land reform) (Extraordinary Ministry of (MDA) - Retarget programs to different types of Land Reform) - Distributive programs: land family farms reform, “Bolsa Família,” rural - Farm cooperative development and retirement, PRONAF modernization
The Evolution of Agricultural agricultural sector in Brazil was in rity of an increasingly urban popula- Policies in Brazil general not competitive (except in tion, while compensating the agricul- tropical products such as coffee and tural sector for the anti-export bias of Agricultural policy goals and pro- sugar), and was characterized by the import substitution model that grams in Brazil have changed signifi- highly skewed distributions of farm was common in developing countries cantly (Table 1). The period between income and land ownership with at the time. the mid 1960s to early 1980s was large, unproductive landholdings The debt crisis of the late 1980s characterized by massive government known as “latifundios.” It was in the forced the Brazilian government to intervention in agricultural commod- 1960s and 1970s that the country decrease support to farmers and to ity markets primarily by means of started to urbanize as many rural review agricultural policy goals. subsidized rural credit and price sup- poor migrated to large cities. During Economy-wide structural reforms port mechanisms, including govern- this period, agricultural policy had introduced in the early 1990s further ment purchases and storage of excess the objective of promoting food secu- decreased the distortion of agricul- supply (Figure 1). At that time, the
86 CHOICES 2nd Quarter 2006 • 21(2) 50% $250 "Massive" "Debt crisis" and "Low inflation" 45% intervention liberalization effects scenario 40% $200
35%
30% $150
25%
20% $100
15%
10% $50
5%
0% $0 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Price support: % of grain production supported Preferential credit support: US$ per ton of grain production
Figure 1. Commodity price and preferential credit support in Brazil. Note: Before 1965, there was price support for coffee, sugar cane, milk, and grains. Source: Ministry of Agriculture, Livestock and Food Supply (MAPA), 2005. tural policy in Brazil by eliminating Government expenditures on 16 programs under the function export taxes and price controls, agriculture-related programs in Brazil “agrarian organization.”2 The perfor- deregulating and liberalizing com- have decreased over the last five presi- mance of many of these programs is modity markets, unilaterally reduc- dential administrations (Table 2). difficult to evaluate and, in general, ing trade barriers (today the average The annual average amount spent in expenses are quite variable or even applied tariff on agrifood products is the Sarney administration (1985- arbitrary and do not contribute to 12.5%), and introducing private 1989), in real values, was R$20.9 bil- intended goals. Additionally, some instruments for agricultural financ- lion (roughly US$9 billion), which programs are stretched to the limit ing. As a result of these changes, gov- represented 5.6% of total govern- and cannot survive with continued ernment support currently repre- ment expenses. The average amount budget reductions. Public services sents 3% of farm receipts in Brazil, spent on agricultural programs such as animal and plant health compared with 2% in New Zealand, decreased to R$10.7 billion (or about inspection, public research, and 4% in Australia, 8% in China, 18% US$5 billion) per year in the current infrastructure improvements have in the US, and 34% in the EU administration, representing 1.8% of been receiving fewer resources, (OECD, 2005).1 total government expenses in 2003- despite the strong private and public 2005. Not only have government 2. Brazilian government expenditures 1. These numbers refer to producer expenditures on farm policy are organized in functions and pro- support estimates (PSE) that mea- decreased by half in real terms since grams. A function represents the sure the value of supports from all the late 1980s, they were also used in higher level of aggregation of federal forms of public policies, including an increased number of programs by government expenses, including domestic support and border mea- the last two administrations. Accord- health, education, social security, sures relative to gross farm receipts ing to Gasques (2004), the number and the two agriculture-related between 2002 and 2004. The of agriculture-related programs functions (agriculture and agrarian highest percentage PSE levels in increased from 30 before the year organization). A program comprises Brazil are for rice (17%), cotton 2000 to 100 programs in 2003, 84 a group of government actions (13%), and wheat (6%). under the function “agriculture,” and towards a specific policy goal.
2nd Quarter 2006 • 21(2) CHOICES 87 Table 2. Brazilian government expenditures in farm programs by administration and function.a
Average Annual Expenditures with Agricultural Policies Agrarian (A+B)/Total Agriculture Agrarian Total Agriculture/ Organization/ Government Period (A) Organization (B) (C) Total (A/C) Total (B/C) Expenditures Sarney 19,549 1,330 20,879 94% 6% 5.6% 1985-1989
Collor-Itamar 17,510 1,229 18,739 93% 7% 2.8% 1990-1994 Cardoso 1 15,273 3,342 18,615 82% 18% 3.4% 1995-1998 Cardoso 2 8,712 3,290 12,002 73% 27% 2.0% 1999-2002 Lula 5,901 4,809 10,710 55% 45% 1.8% 2003-2005 a Expenditures are measured in R$ millions corrected for inflation by IGP-DI (base year is 2005). Agrarian Organization expenditures include family farm programs. Source: Ministry of Finance (2005). Elaboration: Gasques (2004) and ICONE. efforts that were made in the 1990s supposed duality of farming in the increased from 6% in the Sarney to include Brazil as one of the world’s country – related to the skewed dis- administration to 45% of total leading agrifood export countries. tribution of rural income and land expenditures on farm programs in Significant changes in agricul- ownership – and the misleading per- the Lula administration (Table 2). tural policy goals were introduced by ception that agribusiness develop- Not only did total government the first Cardoso administration in ment necessarily leads to small farmer expenditures on agricultural policy 1995, which shifted priority to land exclusion. According to the 1995 decrease both in relative and absolute reform and family farming in an Census of Agriculture, farms with terms, but traditional agricultural attempt to alleviate rural poverty. less than 10 hectares (24.7 acres) rep- policy functions were also sacrificed This shift in agricultural policy goals resent 49.7% of all farms in the to support agrarian organization pro- is reflected in government expendi- country and hold 2.2% of all land- grams. For instance, government tures in a new focus area called the holdings. With more than 500 hect- expenditures on land reform “agrarian organization” (Table 2). ares (1,235 acres), the largest farms increased from R$1.84 billion Agrarian organization programs are represent only 2.2% of all farms, but (US$836 million) in 2000 to R$2.4 primarily related to land reform. own 56.5% of all landholdings. billion (US$1.1 billion) in 2004, Under the Cardoso administration, More recently, MDA officials while expenditures on support of approximately 500,000 new family became more vocal about the coun- family farming (PRONAF) doubled farms were settled in expropriated try’s agricultural trade policy. In the from R$1.4 billion to R$2.8 billion. land. In addition to land reform, the Hong Kong Ministerial meeting of At the same time, expenditures on government adopted a set of policies the WTO, the Minister of Agrarian government purchases and storage of targeted to “family agriculture” in Development openly defended the agricultural commodities were sub- 1995 – known as PRONAF – right of “food sovereignty” for devel- stantially reduced from R$1.32 bil- including subsidized credit lines, oping countries by means of direct lion (US$600 million) to R$0.53 bil- capacity building, research, and subsidies and additional border pro- lion (US$241 million). Other extension services. tections. During the same meeting, traditional policy programs, such as Interestingly enough, the Brazil- the Brazilian Minister of Agricul- agricultural research, extension, and ian government created a new minis- ture, Livestock and Food Supply plant and animal health, also suffered try in 2000 to run programs targeted (MAPA) was asking for substantial budget cuts during the last five years. to family farms and land reform – the improvements in market access for Ministry of Agrarian Development both developed and developing (MDA). Brazil is probably the only countries. country in the world with two minis- Federal government expenditures tries of agriculture. This reflects a on agrarian organization programs
88 CHOICES 2nd Quarter 2006 • 21(2) The Modernization and became increasingly capital intensive quently, it experienced significant Globalization of the Brazilian and integrated with upstream and modernization and industrialization Agrifood Sector downstream supply chain partici- induced by private sector strategic pants. Tightly coordinated agrifood responses to these institutional and Concurrent with these significant supply chains have been developed policy changes. The development of institutional and policy changes, the by the private sector – in particular, a global agrifood model in Brazil Brazilian agrifood system transi- large multinational food processors, resulted in structural changes in all tioned from a traditional to an fast-food restaurant chains and retail- stages of the agrifood value chain, increasingly global and industrial ers – to cater to increasingly differen- significant export-led growth, and model. Fostered by rising incomes, tiated domestic and export markets. apparent small farmer exclusion. urbanization, economic liberaliza- Farmers in Brazil are increasingly Since the end of the military dic- tion, and access to competitive raw exposed to markets that are much tatorship in the late 1980s, there has materials, multinational food proces- more demanding in terms of food been significant political and social sors and retailers entered or increased quality and safety, more concentrated pressure for the government to tackle their investments in the Brazilian and vertically coordinated, and more the issue of the historical unjust land market during the 1990s. Increased open to international competition. distribution in the country. In foreign direct investment (FDI) by According to the last census of response to these pressures, the Sar- large, private agribusinesses in Brazil agriculture conducted in 1995, the ney administration created the displaced domestic competitors, total number of farms reached 4.8 Extraordinary Ministry of Land increased industry concentration, million (IBGE, 1995), but just a Reform, but it was not until the first and eliminated many medium and small share of the farms account for Cardoso administration in 1995 that small companies. As a result, the the majority of output and exports. the land reform program became a market share of multinational corpo- Many of the small farms involve sub- reality. The necessary impetus for the rations in the domestic food market sistence production and are resource agricultural policy goal of land increased. For instance, Brazilian poor. One of the structural changes reform and the associated shift in affiliates of multinational agrifood of recent agrifood development in government expenditures was the companies generated 137,000 jobs, Brazil is the growth of commercial result of continued pressure from the almost US$5 billion in exports, and agriculture characterized by econo- landless workers movement (MST) sales of US$17 billion in 2000. mies of scale and capital intensity. in the form of land invasions, the Given the total value of food indus- The spread of commercial agriculture Catholic Church, and many NGOs, try shipments in Brazil of US$58 bil- occurs even in sectors that have tradi- combined with persistent poverty, lion, the aggregate market share of tionally been dominated by small- income inequality, and small farmer foreign companies reached 30% in scale farmers such as dairy and corn. exclusion from the expansion of the 2000. Among the top ten food pro- The dairy sector is illustrative, as the agricultural sector.3 cessors in the country, eight are mul- number of dairy producers supplying tinational firms with foreign head- milk to the top 12 processors quarters. Recent official data show decreased from 175,000 in 1997 to 3. With the technological moderniza- that FDI inflow in the Brazilian agri- less than 70,000 in 2004. tion of agriculture, the end of food processing industry totaled investment in land just as a real US$8.2 billion between 2001 and asset to protect against high infla- 2004. The top-three food retailers in Taking Stock and Looking Ahead tion, and after hundreds of thou- the country are now controlled by The agrifood sector in Brazil under- sand of new settlements in expropri- two French supermarket chains went significant changes in the last ated land, the number of (Casino and Carrefour) and one US- decade. First, it was exposed to a dra- unproductive landholdings (“lati- based company (Wal-Mart), with a matic “competition shock” as a result fundios”) sharply declined in Bra- combined market share of 39%. of economic liberalization, industry zil. This is the main reason why the Concomitant to these structural deregulation, and dismantling of the new targets of MST today are the changes in the post-farm gate stages safety net provided by massive gov- “agribusiness sector” as whole and of the agrifood system, agricultural ernment expenditures in traditional “multinational companies,” more production also modernized and agricultural policy programs. Subse- specifically.
2nd Quarter 2006 • 21(2) CHOICES 89 Given the central role of the agri- heightened presence in markets also rural: O caso do Brasil. Research food sector in the Brazilian economy, behooves exporters to be increasingly report prepared for the Food and however, it is important that policies quality sensitive as market opportu- Agriculture Organization (FAO), aimed at poorer farmers do not hold nities increase and the global logistics Santiago, Chile, 75 pp. back further investments in public system becomes oriented to an active Gasques, J.G., Bastos, E.T., Bacchi, goods that will contribute to produc- South American supply network. M.P.R., & Conceição, J.C.P.R. tivity gains and market access of all In retrospect, farm policies in (2004). “Condicionantes da types of farms and the country’s agri- Brazil have evolved in the last three produtividade da agropecuária food competitiveness. The recent decades from a food security and self- Brasileira.” Revista de Política reemergence of the foot-and-mouth sufficiency emphasis before 1985, to Agrícola, 13(3), 73-90. disease and the logistical bottlenecks deregulation and openness to trade Hirschman, A.O. (1991). The Rheto- caused by underinvestment in rural between 1985 and 1995 and, since ric of Reaction: Perversity, Futility infrastructure in the Central-West then, in a reactionary bent focused and Jeopardy. Cambridge, MA: clearly show how lack of investment on the small family farm and land Belknap Press. by the government in critical services reform.4 Looking ahead, Brazilian Instituto Brasileiro de Geografia e can have broad impacts for an econ- policy makers should develop farm Estatística (IBGE), (The Brazil- omy increasingly dependent on policies to balance competitiveness ian Institute of Geography and exports. Brazilian efforts in interna- with social and environmental sus- Statistics). (1995). Brazilian Cen- tional trade negotiations will not tainability goals. The policy agenda sus of Agriculture. contribute to agrifood growth and which we outline in the last column Jank, M.S., Nassar, A.M., & Tachi- economic development if the country of Table 1 should comprise social nardi, M.H. (Dezembro 2004). does not continue to invest in impor- inclusion goals and programs tar- “Agronegócio e comércio exterior tant programs such as agricultural geted to different types of family Brasileiro.” Revista USP, 64, 14- research, public infrastructure, ani- farms, but also programs and services 27. mal and plant health inspection, and that are essential to agrifood compet- Ministry of Finance. (2005). measures to protect the environment. itiveness. The real challenge con- Relatório Resumido de Execução If Brazil continues to trade off eco- fronting policy makers in the future Orçamentária do Governo Fed- nomic development with support to is to provide agricultural producers of eral. Data available online: http:// small-scale farmers, it will suffer the any scale the necessary tools to assist www.fazenda.org.br. consequences of the “visibility curse.” them in integrating with the global Organisation for Economic Co-oper- As the country has progressed as a agrifood economy. ation and Development global economic force it has greater (OECD). (2005). OECD Review influence, but at the same time For More Information of Agricultural Policies: Brazil. comes under greater scrutiny. Gasques, J.G. (2004). Gasto público ISBN 92-64-01254. 226 pp. Increased market share and activity para o desenvolvimento agrícola e in global agrifood trade requires that Fabio R. Chaddad (FabioRC@isp. the country be increasingly vigilant as edu.br) is Assistant Professor, Ibmec to how it comports itself. Resorting 4. Albert Hirschman’s masterpiece Business School, and Marcos S. Jank back to subsidy programs and import “The Rhetoric of Reaction: Perver- ([email protected]) is Presi- barriers of a bygone era in order to sity, Futility and Jeopardy” is a per- dent of the Brazilian Institute for International Trade Negotiations help small farmers survive could fect conceptual text to understand (ICONE) and Associate Professor, affect the country’s ability to negoti- the dilemma of swinging policy pri- School of Economics, University of ate for freer markets and gain access orities confronting “patronal” vs. Sao Paulo (FEA-USP). to important foreign markets. A “family” agriculture in Brazil.
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