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June 3, 2015

New Agricultural and Livestock Plan in Brazil Mixed Bag

The delayed 2015/16 Agricultural and Livestock Plan (PAP - or more commonly known as the Harvest Plan) was released by the Brazilian President Dilma Rousseff on Tuesday. At first blush, the 20% increase in funding for the 2015/16 plan to R$ 187.7 billion compared to R$ 156.1 billion for the 2014/15 plan seemed quite generous on the part of the government, but as they say, the devil is in the details.

The details revealed that the percent of the funding, which carried with it subsidized interest rates, is down compared to last year and the percent of the funding, which carried with it market interest rates, is up compared to last year. The subsidized interest rates for medium size producers will be 7.75% for production loans and 7.5% for investment loans, which are used to purchase equipment. For larger producers, which is where the bulk of the funding will go, the interest rates will be 8.75% for production loans and in the range of 7% to 8.75% for investment loans. Last year, the interest rate was approximately 6.5%.

What has many farmers concerned is that a higher percentage of the funding will be available at market interest rates of 17% to 23%, which is much higher than last year.

The 2014/15 plan calls for R$ 94.5 billion to be loaned out for production loans with subsidized interest rates or an increase of 7.5% compared to last year. For investment loans with subsidized interest rates, the plan calls of R$ 33 billion to be loaned out, or a reduction of 24% compared to last year.

In other words, nearly all the increase in funding compared to last year will be available at market interest rates and not the subsidized interest rates. The majority of the subsidized loans will carry an interest rate of 8.75% while the market loans will have interest rates from 17% to 23%.

If you combine the subsidized interest rates and the market interest rates and take into account inflation, the funding level for the 2015/16 plan might actually be lower than in 2014/15.

The group that is the most disappointed with the new plan is the machinery sector. The new plan calls for an increase in funding for machinery purchases from 8 billion to 10 billion reals, but the increase comes with much higher interest rates. The interest rate on investment loans to purchase machinery increased from 4.5% to 7.5% for producers will a gross income of up to R$ 90 million. For producers with incomes higher than that, the interest rates increased from 6% to 9%.

Representatives from the machinery sector had been hoping for the plan that would stimulate machinery purchased, but they did not get it. Instead, many in the sector believe the new plan could actually hurt already weak sales. If a farmer believes that the government will be able to rein in inflation over the next few years, they would be very hesitant to borrow money and pay high interest rates for the next ten years. Prior to the release of the plan, machinery sales were down 15% to 20% year-on-year and that is not expected to change.