April 21, 2011

Billions in Foreign Investments on Hold in Brazil

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Restrictions on foreign purchases of Brazilian farmland has sidelined R$ 25 billion in foreign investments planned for Brazil in just the last eight months. That is according to a study released by the Brazilian Association of Rural Marking during a meeting held in Sao Paulo on April 18th.

The original law that restricted foreign purchase of farmland was passed in 1971, but it had been largely ignored over the proceeding decades. Many of the foreign investors had skirted the law by having a Brazilian subsidiary purchase the farmland even though the subsidiary was wholly controlled by a foreign company or investor. In August of 2010, the rules were modified when President Lula signed an order that stipulate that a company under the control of a foreign entity can purchase a maximum of 5,000 hectares or less depending on the region of the country.

With an ever increasing demand for food worldwide, it was assumed that Brazil would be the country that could most readily bring new land into production to meet that demand, but the new rules may now put that assumption in doubt.

According to a study conducted by the Brazilian Rural Society, Brazil needs to invest R$ 93.5 billion in the production of soybeans, corn, cotton, sugarcane, and forestry over the next ten years if it wants to be a leader in new agricultural production.

Lawyers in Brazil who represent foreign investors are worried that Brazil's notorious inefficient judicial system could put some of these investments on indefinite hold. According to Eduardo Diamantino, a lawyer who represents a New Zealand company that wants to invest US$ 10 million in building a dairy in the state of Bahia, Brazil has a tradition of weak laws that were not always secure. He is concerned that appeals to these new regulations could be stuck in the Brazilian judicial system for ten or twelve years.

With that as a distinct possibility, he is concerned that foreign investors will simply look to invest their money in other more secure locations and Brazil will once again lose out on opportunities due to bureaucratic and judicial roadblocks.

Brazil was a food importer until the 1970s when the federal government started to give incentives for farmers to move to central Brail to open up new land. Over the proceeding four decades, millions of Brazilian farmers moved north in the search of new land and as a result vaulted Brazil into the position of being one of the leading agricultural exporters in the world.