June 24, 2020

Brazil's Harvest Plan 2020/21 - More Money, Lower Interest Rates

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

Last week, the Brazilian government released the details of their Agricultural and Livestock Plan 2020/21, which is commonly known as the Harvest Plan 2020/21. According to the Brazilian Minister of Agriculture, Tereza Cristina, the Harvest Plan 2020/21 calls for R$ 235.6 billion in resources to be made available for Brazilian farmers in the form of low interest subsidized loans, which is an increase of 5.8% compared to last year. Interest rates on the loans have been lowered 1-2% compared to last year.

Brazil's Harvest Plan is their equivalent of the 5-year Farm Program in the United States, but on an annual basis. The plan will take effect on July 1, 2020 and extend through June 30, 2021.

Reaction to the Harvest Plan 2020/21 has generally been very positive. Brazilian farmers are satisfied that more financing will be made available at lower interest rates and they are already expecting another very good year for Brazilian agriculture in 2020/21.

The Agriculture Minister stated that the goal of the Harvest Plan 2020/21 was to make more resources available at lower interest rates especially for small and medium size producers. Harvest Plan 2020/21 will make available R$ 179.3 billion for production and marketing loans and R$ 56.2 billion for investment loans.

Medium size producers will receive the largest percentage increase in resources in the 2020/21 program compared to last year. The amount of resources available for production and marketing loans for medium size producers will total R$ 32.9 billion, which is an increase of 24.2% compared to last year. The resources for small family farmers will increase 5.7% to R$ 33 billion. For the rest of Brazilian producers and cooperatives, the government will make available R$ 169.7 billion, or 2.9% more than last year.

Interest rates on the loans are down due to the lower prime rate which is expected to fall to a record low of 2.25% in 2020. That would be 12% lower than what the prime rate was in 2016. The interest rate on production loans varies from 2.75% to 6.0% depending on the producer. The interest rate on investment loans varies from 4.5% to 7.5%.

The government increased the amount of resources available for subsided crop insurance by 30% to R$ 1.3 billion compared to R$ 1.0 billion in 2019/20. Three years ago, the amount of resources dedicated to crop insurance as low as R$ 200 million. The government is expecting 298,000 farmers to apply for crop insurance which is expected to cover 21 million hectares.

The amount of money available for storage construction also increased to R$ 2.2 billion compared to R$ 1.8 billion last year. Interest rates on the storage loans was reduced to 5%, which is down 1% from last year. The storage construction program is of particular importance for producers in Mato Grosso which has a chronic shortage of storage space. Mato Grosso has the largest average farm size of any state in Brazil, but less than 45% of the available storage capacity in the state is on-farm.

On-farm storage offers many advantages to farmers including: the ability to hold grain for higher prices, not being forced to sell at harvest lows, ability to harvest at a faster pace by avoiding long lines at the local grain elevator, and lower transportation costs which peak at the time of harvest. In a state such as Mato Grosso, increased on-farm storage should pay for itself in a very short period of time.

The one program that will have reduced funding compared to last year is the Moderfrota program, which is the principal governmental program for the financing of machinery purchases. The amount of resources will decline to R$ 6.5 billion, which is 14.4% lower than last year's R$ 7.5 billion. To compensate for the reduction, the Bank of Brazil will make available R$ 2.5 billion for equipment purchases with similar requirements to the Moderfrota program.

Bottom Line - Most Brazilians seem pleased with the 2020/21 Harvest Plan and they credit the Minister of Agriculture for listening to what farmers wanted and delivering on their requests. There are always some folks who complain that more resources should have directed to one program or another and that the interest rates could have been lowered even more, but most people feel the program is very realistic given the economic situation in Brazil. Brazil's GDP had been projected to grow 3% in 2020 before the Covid-19 pandemic, but now it is expected to decline 5% to 7% in 2020.

If the currency exchange rates stays favorable and the weather during the upcoming growing season cooperates, Brazilian farmers are expected to increase their soybean and corn acreage and set new production records in 2020/21.

Word of Caution - You always have to be cautious in Brazil because what looks good on paper may end up being less than what was promised. The Brazilian economy may be headed for a steep recession, which could increase pressure to spend money in areas other than agriculture, which is coming off of a very good year with high profits.