Agricultural Irrigation: Challenges and Growth Opportunities

Irrigation is a crucial component of modern agriculture, vital for ensuring food security and agricultural sustainability. By providing a reliable water supply, irrigation allows farmers to mitigate the risks associated with erratic rainfall patterns and prolonged periods of drought. This practice increases crop yields, improves product quality, and enables cultivating high-value crops that would otherwise be impossible to grow. In many regions, irrigation is the foundation of agricultural productivity, sustaining rural livelihoods and significantly contributing to the national economy.

Despite significant advancements, Brazil still faces challenges in fully realizing the potential of these technologies compared to other leading agricultural nations. Addressing these gaps through strategic investments is essential to maintaining the sector's competitiveness and promoting sustainable growth.

In a global context, Brazil's irrigation coverage remains modest compared to other major agricultural producers, as shown by the data in Table 1. According to the latest annual information from 2023, the irrigated area in Brazil constitutes 13.2% of its total arable land. This is significantly lower than the United States, which stands at 19.3%, and China, which leads with 21.2%. The European Union also surpasses Brazil, with 13.4% of its agricultural land under irrigation. Despite incremental growth over the years — from 12.3% in 2010 to the current 13.2% — the pace of expansion of irrigation infrastructure in Brazil lags behind these global competitors.

The development of irrigation in Brazil faces several significant challenges. The high cost of implementing and maintaining irrigation systems is a major barrier. Small farmers, in particular, struggle to access credit to finance these investments. Water scarcity is another critical issue. Regions like the Northeast and Center-West frequently experience droughts, making water a limited and competitive resource. For example, a large soybean producer in the Center-West has to buy water from tank trucks during the dry season, significantly increasing production costs. Inadequate infrastructure also hampers the development of irrigation. Many areas lack irrigation channels to transport water from reservoirs to farms, and water reservoirs are insufficient.

Additionally, irrigation systems often require electricity, which can be unreliable in rural areas. Bureaucratic obstacles further complicate the situation. Obtaining environmental permits for irrigation systems can be slow and complex, discouraging many farmers. Finally, the lack of skilled labor is a persistent challenge. Operating and maintaining irrigation systems require specialized skills, which are often difficult to find in rural areas. For instance, an irrigation company in the Northeast struggles to find qualified workers, resulting in long waiting times and higher installation and maintenance costs.

Despite these challenges, investing in irrigation in Brazil is highly beneficial, with significant returns justifying the initial outlay. Several factors influence the maturation period of an irrigation investment. Simpler irrigation systems, such as drip irrigation, typically mature faster than more complex systems, such as sprinkler irrigation, mainly due to their lower initial costs and easier installation and maintenance. The size of the irrigated area also plays a critical role. Larger areas require more significant initial investments, prolonging the maturation period due to the extensive equipment and labor costs involved. Additionally, the type of crop grown impacts the speed of return on investment. Crops with shorter production cycles, such as vegetables and fruits, offer faster returns than those with longer cycles, such as sugarcane and soybeans, due to the ability to harvest more frequently within a year.

According to estimates from the Brazilian Agricultural Research Corporation (Embrapa), the maturation period for irrigation investments in Brazil can vary from 2 to 5 years. Conversely, the National Water Resources Council (CNRH) offers a more optimistic forecast, estimating a maturation period of 1 to 3 years. Regarding returns on investment, Embrapa forecasts that the annual return on irrigation investments can range from 20% to 50%. The Brazilian Confederation of Agriculture and Livestock (CNA) provides slightly more conservative figures, with returns ranging from 15% to 30% per year. These returns are substantial, highlighting the profitability of investing in irrigation.

The productivity gains from irrigation can be immense. Depending on the crop and climatic conditions, irrigation can increase agricultural productivity by up to 300%. For example, an Embrapa study showed that drip irrigation in horticulture can increase productivity by up to 100%. This significant increase in productivity accelerates investment maturation and improves financial returns, making irrigation a highly attractive and profitable venture despite the initial challenges.

Despite the attractive returns on investment and strong producer interest, Brazil's irrigation project funding remains inadequate. Some studies provide different estimates of Brazil's annual investment needs for irrigation. Embrapa estimates that R$ 30 billion annually is needed until 2030 to expand the irrigated area to 30% of Brazil's total agricultural area. The National Water Resources Council (CNRH) suggests a slightly higher amount, estimating that R$ 40 billion annually is needed to achieve the same goal.

To help achieve this goal, the federal government launched the National Irrigation Plan (PNI) in 2017, aiming to invest R$ 50 billion in irrigation by 2030. Funds for the PNI come from various sources, including the public budget, partnerships with the private sector, and lines of credit. However, implementing the PNI has faced numerous challenges, such as bureaucracy, a shortage of qualified labor, and difficulty accessing credit, particularly for small farmers. It is the primary source of funding for irrigation investments in Brazil. In addition to the PNI, public and private banks offer specific credit lines for irrigation. The Agricultural Development Fund (FIDA) finances small and medium-sized irrigation projects. Meanwhile, development agencies such as BNDES and Banco do Nordeste also offer credit facilities for irrigation.

Despite these sources, there is still a significant gap in the investments needed to realize the full potential of irrigation in Brazil. In 2023, the federal government invested R$ 8 billion in irrigation, an increase from previous years, but still below the annual estimated needs to reach the 30% target, around R$ 30 to 40 billion per year.

Therefore, investment in irrigation presents a compelling case for adopting private credit in Brazil, aligning well with its characteristics, including expected returns and maturation periods. The potential returns on irrigation investments are notably high, with annual yields ranging from 15% to 50% and payback periods ranging between 1 and 5 years, depending on the system and scale of implementation. These factors make irrigation an attractive sector for private investors and financial institutions.

As is well known, private credit offers distinct advantages over traditional public financing methods. First, it can significantly reduce bureaucracy, allowing for faster fund disbursement and quicker project implementation. This agility is crucial in areas like agriculture, where the timing of investments can critically impact the success of a crop. Additionally, private credit can offer more flexible and innovative financing solutions tailored to the specific needs of farmers and agribusiness companies. This includes customizable repayment terms that better align with agricultural cycles and revenue streams of different crops. For example, loan terms can be adjusted to accommodate the extended maturation periods required by crops such as sugarcane or soybeans or the shorter cycles of vegetables and fruits. Another advantage of private credit is its potential to leverage additional expertise from the private sector in project management and technological innovation. This can lead to more efficient irrigation projects that maximize water use and crop yields, increasing sustainability and profitability.

The opportunity for private credit in the Brazilian irrigation sector is clear. By providing the necessary capital with less bureaucracy and more suitable financial products, private lenders stand to gain significant returns and contribute to the broader development of Brazil's agricultural capabilities. This investment in irrigation is not just a viable option but an attractive one for investors and producers, boosting a vital sector of the economy, promoting environmental sustainability, and improving food security.