Brazilian agribusiness is essential in supplying domestic demand and the growing international food market. Currently, the country is the largest exporter of meat (beef and chicken), soybeans, sugar, orange juice, and coffee and one of the leading exporters of cotton, corn, fruits, pork, and forest products.

With natural resources and the potential to obtain productivity gains that allow it to expand its production, Brazil fulfills the requirements to be a protagonist in ensuring the world’s food security.

To continue expanding, Brazilian agribusiness needs resources to finance all stages of the production process: costing, commercialization, industrialization, and investments in mechanization and storage, among other financing needs

Legislative Milestones in Rural Credit

For a long time, these resources came predominantly from the public budget, such as constitutional funds or resources directed, such as a share of bank deposits and rural savings. However, the existing constraints in the public budget and the limitations of resources in financial institutions created obstacles to the dynamism and expansion of the sector.

In this context, for agribusiness to continue expanding its supply at the speed of its demand growth, it was necessaryto develop Brazil’s private rural credit market. To achieve this goal, it was essential to make relevant legislative changes. Law 13,986/2020 and Law 14,421/2022, known as the Agro 1 and Agro 2 laws, respectively, can be considered milestones that divide the rural credit market in Brazil into before and after these laws.

Legal frameworks for Brazilian agribusiness

Source: Prepared by the authors.

Rural Product Notes (CPRs): A Game Changer

The most relevant change was the new procedures and the possibility of expanding the Rural Product Notes (CPRs). The CPRs, created by Law 8,929/1994, aimed to formalize negotiations for the advance payment of production. Twomodalities were developed: i) the CPR-Physical, which is used when the issuer is interested in delivering the rural product sold and the buyer is interested in receiving the goods, and ii) the CPR-Financial, in which the issuer and the buyer intend to settle the debt financially assumed.

Although since the enactment of Law 11,076/2004, which created rural assets (CRAs, LCAs, and CDCAs), CPRs could be used as collateral, their registration in a notary’s office in the issuer’s place of residence and the absence of a monetary value in physical CPRs made their use for this proposal difficult. This situation changed with the imposition by the Agro Law 1 to register the CPR in an entity authorized by the Central Bank or the Securities and Exchange Commission (CVM) and by the expansion of the right to issue CPRs to the entire agribusiness production and distribution chain brought by the Agro Law 2. These changes provided a gain in agility to the registration process, which today is carried out 100% digitally and online while considerably increasing the number of issuers.

Capital Market Dynamics and Private Credit Supply

The main advantage of having a centralized system on an electronic platform was to bring greater transparency to the capital market, with standardization of information and ease of business data generation. This has enormouslycontributed to reducing information asymmetries in the market and, consequently, increasing the supply of private credit to participants throughout the agribusiness production chain.

These changes, together with the possibility of securitization of receivables in foreign currency brought about by Law 13,986/2020 and the creation of Fiagro by Law 14,130/2021, effectively opened Brazilian agribusiness to the national and international capital markets. The new reality is evident in the numbers. Since enacting the Agro 1 Law in 2020, CPRs have more than attempted to increase their volume in just three years, while other assets, with a reasonable volume of them backed by CPRs, especially financial assets, have also had significant growth in this short period.

Notes: Values in BRL billions
Source: Bulletin of Agribusiness — Private Finance (MAPA). Note: The reference is August of each year.

These figures demonstrate, among other things, that there has always been untapped potential in Brazil’s private rural credit market. Some producers needed credit to invest in a highly profitable sector, and investors were willing to offer this credit in exchange for a fair return. However, excessive government interference, legal uncertainty, and lack of transparency made the development of this market unfeasible. The developmentonly occurred after the legislative changes created a business environment that favored the participation of the private sector. Note that this happened without making any new financial products except Fiagro. That is, the products already existed but did not arouse the interest of market participants.

The Future of Rural Credit and Agribusiness Development

Finally, it should be noted that, despite this recent development, the private rural credit market is still far from reaching its potential. Agribusiness represents about a quarter of Brazil’s GDP, about BRL 2.6 trillion. There is still a demand for voluminous resources for all stages of production, as well as for investments, for example, in the storage and recovery of pasture areas, which will allow, among other things, to expand the agricultural frontier without the need to use areas of native forest or forests. Therefore, it contributes to the sustainable development of the activity and the country.

In the short term, it is possible to envision a scenario in which funds that pool resources from several investors to invest in assets related to agribusiness, whether in rural properties or activities in the sector, the Fiagros, will have a leading role due to their ability to attract national and international investors who are not deeply knowledgeable about the functioning of Brazilian agribusiness. In addition, fintechs can contribute to reducing the information asymmetries that still exist and, in this way, make this market increasingly democratic for rural producers and investors.

Authored by

Cristiano Oliveira, Associate Professor at the Federal University of Rio Grande — FURG andRivool collaborator.