March 14, 2011

Restrictions on Foreign Ownership of Land Cools Investments

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

New laws restricting how much land foreigners can purchase in Brazil has temporarily taken some of the steam out of the Brazilian land market. The new legislation passed in August of 2010 and approved by President Lula, restricts the amount of land that a foreigner or a Brazilian company controlled by a foreign interest may purchase to 5,000 hectares. Additionally, land controlled by foreigners cannot account for more than 25% of any given municipality.

The impenitence behind the legislation gained momentum when it was reveled in early 2010 that the Chinese government had purchased huge tracks of Brazilian farmland to produce soybeans destined for the Chinese market. The goal of the legislation is not to restrict individual farmers wishing to immigrate to Brazil to establish farming operations. Rather, the goal of the legislation is to restrict the purchase of land by individuals, investment funds or governments that are more interested in land speculation rather than production agriculture. According to the Minister of Agriculture, Wagner Rossi, farmland is an essential asset for the country and they do not want it to become just another commodity to be traded in the financial market.

Since the new restrictions have been put in place, there has been considerable confusion about how exactly it will impact investors wishing to purchase land in Brazil. The government is in the process of developing guidelines that more clearly lay out what can or cannot be purchased and by whom. The government's primary interest is to restrict the purchase of land by investment funds or investors who do not have a primary focus on production agriculture. The new guidelines may still allow foreign investments if they are focused on producing crops, generating jobs and exports. They want to encourage investors whose primary interest is to help develop the agricultural sector in Brazil.

The highest concentration of foreign investors in Brazilian farmland is probably in western Bahia where farmers from the United States, Holland, Germany and other countries have purchased land to grow soybeans and cotton. About half of the foreigners in the region opt to rent land instead of purchasing it to avoid some of the legal issues connected with ownership. Interest in Brazilian farmland is expected to remain high as long as the demand for food continues to increase and commodity prices stay strong.