BNews Agro: Understanding the Impact of Credit Expansion on Brazilian Agribusiness

A study conducted by Rivool Finance, a web3 fintech based in Florianópolis (SC), reveals the intricate relationship between various credit models and the expansion of Brazilian agribusiness. Covering 4,618 municipalities from 2013 to 2021, the study utilized a sophisticated methodology to investigate the connection between credit expansion and agricultural production growth.

Over three years, a 10% increase in total credit volume directly contributed to a 1.8% rise in agribusiness production. This equates to a 4.88% increase in production in response to a standard deviation in total credit, clearly demonstrating the stimulating effect of credit on the sector. The findings highlight the critical role of credit availability in driving agricultural production growth, underscoring the importance of financial support for the sector's sustainable development.

The study analyzed different types of credit (funding, investment, commercialization, and industrialization), highlighting that an increase in investment credit was responsible for approximately 0.7% of the observed growth in agricultural production. The other types of credit did not show statistically significant impacts. These results offer a unique perspective, revealing that credit expansion accompanies and precedes production increases in the analyzed municipalities.

The research is part of Rivool Finance's Market Review and was led by Cristiano Oliveira, head of research at Rivool Finance and professor at the Federal University of Rio Grande. “We are witnessing an important shift in the Brazilian agribusiness landscape. Traditionally, rural credit resources in Brazil came largely from the public budget, through constitutional funds and mainly from directed resources from demand deposits and rural savings. Public budget constraints and the limited resources available in traditional financial institutions have begun to pose serious challenges to the sector’s dynamics and expansion capacity,” Oliveira highlights.

In response to this challenge, Brazil has implemented fundamental legislative changes, enacting Law 13.986/2020 and Law 14.421/2022, known as Agro 1 and Agro 2, respectively. The information gathered in the survey makes it clear that these laws represent a milestone in the country's rural credit history, establishing a new paradigm in agribusiness financing. The impact of these laws on Brazilian agribusiness has been significant, allowing the sector to continue its expansion trajectory aligned with the growth of global demand.

These changes, coupled with the possibility of securitizing receivables in foreign currency brought by Law 13.986/2020 and the creation of Fiagro by Law 14.130/2021, effectively opened Brazilian agribusiness to national and international capital markets. The new reality is evident in the numbers. Since the enactment of Agro 1 Law in 2020, CPR volumes have more than doubled in just three years, while other assets, many of which are backed by CPRs, particularly financial assets, have also seen significant growth during this period.

Source: Agribusiness Bulletin – Private Finance (MAPA)

The data demonstrate that there has always been untapped potential in the Brazilian private rural credit market. Some producers needed credit to invest in a highly profitable sector, and investors were willing to offer that credit in exchange for a fair return. However, excessive government interference, legal uncertainty, and lack of transparency hindered the development of this market.

Development only occurred after legislative changes created a business environment that favored private sector participation. It is important to note that this happened without creating any new financial products, except for Fiagro. In other words, the products already existed but did not attract market participants' interest. According to the study's results, this expansion certainly contributed to the production growth observed in recent years.

"Finally, it is worth noting that despite this recent evolution, the private rural credit market is still far from reaching its potential. Agribusiness represents about a quarter of Brazil's GDP, approximately R$ 2.6 trillion. There is still a demand for substantial resources for all stages of production, as well as investments, for example, in storage and pasture recovery, which will allow, among other things, the expansion of the agricultural frontier without the need to use native forest areas. This contributes to the sustainable development of the activity and the country," Oliveira emphasizes.

He concludes: "In the short term, it is possible to envision a scenario where funds that pool resources from various investors to invest in agribusiness-related assets, whether in rural properties or sector activities, will take the lead due to their ability to attract national and international investors who are not deeply familiar with the functioning of Brazilian agribusiness. Additionally, fintechs can help reduce the existing information asymmetries, thus making this market increasingly democratic for rural producers and investors."