Finance for Sustainable Agriculture in the Brazilian Amazon

Brazil has reserved an important role for sustainable agriculture in its Nationally Determined Contributions under the Paris Agreement. Recovery of pastureland and integrated forestry systems are expected to help to curb deforestation. The productivity gains associated with these practices can lower the need for land expansion, which often occurs through forest clearings. However, implementation of these measures requires large amounts of capital.

A research from CPI/PUC-Rio found that an increment in investments and expending in Brazilian agriculture sector can increase crop output by 105% and beef output by 27%, without additional deforestation.[1] A 2020 report from CPI also found that an increase in access to rural credit for small producers resulted in greater land productivity and led to a decrease in land expansion, therefore reducing the pressure for deforestation.^[2]

Rural practices such as slash-and-burn, which rely on low investment and are associated with continued land expansion and low productivity, have long been embedded in the North of Brazil. This is where most of the Amazon forest is located.  The burnings to open new arable lots cause substantial economic downturns. The continued risk of damages created by widespread fires discourages landowners to invest in their properties. Low investments perpetuate extensive ranching and slash-and-burn agriculture in the region, in detriment of more productive and sustainable practices that demand greater capital. In this sense, burnings generate a vicious cycle that keeps the region into a “poverty trap"[3].

In order to pull farmers and ranchers away from cheap traditional practices that are harmful to the economy and to the climate, market-based mechanisms to promote investment in productivity and sustainability are critical. There are opportunities for improvements in this direction in Brazil.

In the North of Brazil, only 9.39% of producers have access to credit. This is the lowest percentage among all five Brazilian regions.[4] Rural insurance, which is essential to enhance access to credit that can unlock investment in productivity, is also extremely deficient in the Brazilian Amazon. In 2019-2020, producers in the region accounted for only 0.9% of the total number of producers attended nationally by the PSR Program for rural insurance.[5]

Under the PSR program, financial subventions are granted by the federal government to facilitate producers’ access to private rural insurances. At least in concept, the PSR Program is aligned with a risk underwriting approach for blended finance structures recommended by the IDFC. [6] Under this approach, the public sector is not expected to act as the main finance provider, but rather to deploy capital in pivotal doses in high leverage points that can reduce investment risk and induce growth of private finance for sustainable practices. This lowers the need for concessional public capital, which is suitable to Brazil’s limited availability of public budget resources.

Thus, the PSR Program can be a good strategy to mobilize additional private capital to achieve Sustainable Development Goals. Rural insurance subventions can reduce costs for producers to contract rural insurance in the private market. On its turn, rural insurance can provide the confidence required for producers to hire loans to invest, while also enhancing producers’ credit profile to ease access to private financial institutions. Yet, to turn this into reality, the PSR program for rural insurance should be strengthened in the Amazon region, where its dissemination is still astonishingly low.

Considering the materiality of deforestation for Brazilian agriculture, the public sector must act in close collaboration with private investors and financial institutions to implement sustainable finance solutions that can drive productivity and prevent illegal clearings in the Amazon. This is an opportunity for Brazil to consolidate its key role to ensure food security in the world, while also moving forward in the path of sustainable agriculture and of climate change mitigation efforts.

Guilherme Sá Cavalcanti

Guilherme works with M&A, Private Equity and Project Finance, including assistance in corporate, transactional, regulatory and ESG matters. Master of Laws (LLM) in Stanford University (USA); Bachelor of Laws (JD) in Universidade Federal de Pernambuco, partially attended at Universidad de Santiago de Compostela (Spain). Guilherme is a partner at Da Fonte Advogados, Brazil.