Irrigation is a crucial component of modern agriculture, vital in 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 dry spells. This practice enhances crop yields, improves produce quality, and enables cultivating high-value crops that would otherwise be impossible to grow. In many regions, irrigation is the cornerstone of agricultural productivity, supporting rural livelihoods and contributing significantly to the national economy.

Despite the 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 for maintaining the sector’s competitiveness and fostering sustainable growth.

In a global context, Brazil’s irrigation coverage remains modest compared to other major agricultural producers, as demonstrated by the data presented in Table 1. As of the most recent annual information in 2023, Brazil’s irrigated area constitutes 13.2% of its total arable land. This figure is significantly lower than that of 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% — Brazil’s pace of expansion in irrigation infrastructure lags behind these global counterparts.

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 must buy water from tank trucks during the dry season, significantly increasing production costs. Inadequate infrastructure also hampers irrigation development. Many areas lack irrigation canals to transport water from reservoirs to farms, and there are insufficient water reservoirs.

Additionally, irrigation systems often require electricity, which can be unreliable in rural areas. Bureaucratic hurdles further complicate the situation. Obtaining environmental licenses for irrigation systems can be slow and complex, discouraging many farmers. Lastly, the lack of qualified labor is a persistent challenge. Operating and maintaining irrigation systems require specialized skills, often hard to find in rural areas. For example, an irrigation company in the Northeast struggles to find qualified workers, leading to long wait times and higher installation and maintenance costs.

Despite the abovementioned challenges, investing in irrigation in Brazil is highly beneficial, with significant returns warranting the initial outlay. Various factors influence the maturation period of an irrigation investment. Simpler irrigation systems like drip irrigation typically mature quicker than more complex systems such as sprinkler irrigation, largely 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 greater initial investments, extending the maturation period because of the extensive equipment and labor costs involved. Besides, the type of crop cultivated impacts the speed of return on investment. Crops with shorter production cycles, such as vegetables and fruits, offer quicker returns than those with longer cycles, like 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 time for irrigation investments in Brazil can range from 2 to 5 years. On the other hand, the National Water Resources Council (CNRH) offers a more optimistic forecast, estimating a maturation period ranging from 1 to 3 years. Regarding investment returns, Embrapa estimates that the annual return on irrigation investments can vary from 20% to 50%. The National Confederation of Agriculture (CNA) provides slightly more conservative figures, with returns ranging from 15% to 30% annually. 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 boost agricultural productivity by up to 300%. For example, a study by Embrapa showed that drip irrigation in vegetable farming could increase productivity by up to 100%. This significant increase in productivity not only accelerates the maturation of the investment but also greatly enhances the financial returns, making irrigation a highly attractive and profitable venture despite the initial challenges.

Despite the attractive returns on investment and strong interest from producers, funding for irrigation projects in Brazil remains inadequate. Some studies provide different estimates for the annual investment needs in irrigation across Brazil. Embrapa estimates that BRL 30 billion is needed annually until 2030 to expand the irrigated area to 30% of the total Brazilian agricultural area. The National Water Resources Council (CNRH) suggests a slightly higher figure, estimating that BRL 40 billion per year is required to achieve the same goal.

To contribute to achieving this goal, the federal government launched the National Irrigation Plan (PNI) in 2017, aiming to invest BRL 50 billion in irrigation by 2030. The funds for the PNI come from various sources, including the public budget, partnerships with the private sector, and credit lines. 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 funding source 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) funds small and medium-scale irrigation projects. At the same time, development agencies like BNDES and the Bank of the Northeast also offer credit facilities for irrigation.

Despite these sources, there remains a significant shortfall in the necessary investments to realize the full potential of irrigation in Brazil. In 2023, the federal government invested BRL 8 billion in irrigation, which was an increase compared to previous years but still fell short of the estimated annual needs to achieve the 30% goal, which is estimated to be around BRL 30–40 billion per year.

So, 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 the payback period varying 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 and foremost, it can significantly reduce bureaucracy, allowing for quicker disbursement of funds and faster project implementation. This agility is crucial in areas like agriculture, where the timing of investments can critically impact the success of a planting season. Moreover, 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 the agricultural cycles and income flows of different crops. For instance, loan terms could be adjusted to accommodate the longer maturation periods required for crops like sugarcane or soy or the shorter cycles of vegetables and fruits. Another advantage of private credit is its potential to leverage additional private sector expertise in project management and technological innovation. This can lead to more efficient irrigation projects that maximize water usage and crop yields, enhancing sustainability and profitability.

The opportunity for private credit in the Brazilian irrigation sector is clear. By providing necessary capital with less red tape and more tailored 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 only a viable option but an attractive one for investors and producers, driving forward a key sector of the economy while promoting environmental sustainability and enhanced food security.

Authored by Cristiano Oliveira, Head of Research at Rivool Finance.