International
Brazil would gain from freer agricultural trade but small farms need to adjust, says OECD
By Finfacts Team
Oct 31, 2005, 14:08

The Irish Farmers Association campaigns for the banning of Brazilian beef imports to the EU

In its first ever Review of Agricultural Policies in Brazil the OECD says that if the US, the European Union and other OECD countries were to cut import tariffs and export subsidies on agricultural products, farmers in Brazil would gain from the resulting rise in international prices, with the larger commercial producers benefiting most.

The report estimates that a 50% cut in tariffs and export subsidies globally, together with a 50% reduction in domestic support to agriculture in OECD countries, would benefit the Brazilian economy – through higher incomes for consumers and producers - by some 1.7 billion US dollars, the equivalent of around 0.3% of GDP.

Brazil provides relatively little support to its farmers. Producer support, accounted for 3% of the gross value of farm receipts in 2002-04 – a rate comparable with that of New Zealand (2%) and Australia (4%), and far below the OECD average (30%). The highest support levels are for import-competing staples (wheat, maize and rice) and cotton, ranging between 6% and 17% for these products.

Brazil’s reforms over the past 15 years have helped to reduce poverty overall, yet more than 60% of the rural population still has an income below the absolute poverty line of half the minimum wage, the report notes. A range of policies are needed for small-scale farmers to raise their incomes and benefit from the expected growth in Brazil’s share of world agriculture trade, for example programmes to upgrade farming skills and technologies.

Brazil is not a member of the OECD but it participates in OECD work in a number of areas, as an Observer on OECD committees. The OECD’s review of Brazilian agriculture is part of an ongoing co-operation programme launched in 1999, which has already resulted in a number of other studies, including reviews of the Brazilian economy, competition policy, tax reform and insurance and private pension funds. 

Commercial agriculture in Brazil has grown rapidly in recent years, including in areas that have traditionally been important to small-scale farmers such as diary products and maize, the OECD report notes. This creates pressures on less competitive semi-subsistence farmers, for whom the long-term future mostly lies outside agriculture. Measures are required to encourage diversification and help identify other sources of income and business opportunities in rural areas. Such an adjustment will need to be accompanied by effective social safety nets. 

However, given the role of agriculture in the Brazilian economy, it is important that policies aimed at poorer farmers do not hold back further improvements in productivity of more competitive farms. There is scope for a range of policies that would boost the overall competitiveness of Brazilian agriculture and benefit commercial and non-commercial farmers alike. These include long term investments in infrastructure (notably improvements to transport networks) and reform of rural credit and tax systems.

The report also shows that:

• Government support represents 3% of farm receipts in Brazil, compared with 2% in New Zealand, 4% in Australia, 17% in the US, 34% in the European Union and an average of 30% in OECD countries. A growing share of support in Brazil is in the form of credit subsidies to farmers.
• The European Union accounts for 41% of Brazil’s agro-food exports although China, Russia and other rapidly growing markets are becoming increasingly important destinations. Brazilian exports of soybeans to China surged from 15 000 tonnes to 6 million tonnes between 1996 and 2003.
• Export shares of soybean products, sugar and alcohol have increased over recent years while shares of orange juice and coffee have declined. Overall, soybean products, sugar, meat, coffee and tobacco account for three-quarters of export earnings.
• Exports accounted for 31% of agricultural production in 2004 compared with shares of 41% in Canada , 74% in Australia and 22% in the US.
• Brazil has vast reserves of potential cropland that could be exploited without encroaching on the Amazon rainforest, although policy changes are needed to eliminate existing incentives for deforestation.

The OECD review measures the level and composition of support to Brazilian agriculture, and evaluates the effectiveness of current measures in attaining their objectives. The study finds that Brazil provides much lower support to its agricultural sector than most OECD countries. However, a large and increasing share of that support is provided in the form of credit subsidies; support which could be more productively oriented to areas such as research and extension, training, and the development of rural infrastructure. A greater focus on such long-term investments could help Brazil to address the two major challenges confronting its agricultural sector: the need to sustain improvements in international competitiveness, and at the same time draw poor smallholders into the development process.
The report finds that, having substantially reformed its own agricultural policies, the main source of future benefits to Brazil will be reforms in other countries, where access to OECD country markets is the most important issue. Yet while trade liberalisation offers important benefits for the majority of households, those gains need to be placed in the context of the broader opportunities and adjustment pressures confronting both commercial farmers and smallholders.

This study provides a valuable reference for policy-makers, businesses and researchers with an interest in understanding Brazil's agricultural policy concerns at the domestic and international level.

Highlights and Policy Recommendations

Brazil provides relatively little support to its farmers. Producer support, as measured by the PSE, accounted for 3% of the gross value of farm receipts in 2002-04 – a rate comparable with that of New Zealand (2%) and Australia (4%), and far below the OECD average (30%).

The highest support levels are for import-competing staples (wheat, maize and rice) and cotton, ranging between 6% and 17% for these products.

Support to farmers accounts for about three-quarters of all support to agriculture, with the remaining quarter delivered as general services to the sector, such as research and extension, training, and the development of rural infrastructure. These general services include important long term investments, but have been declining in relative terms at the expense of credit subsidies, about half of which stem from the restructuring of farm debt accumulated over the period of macroeconomic instability in the late-1980s to mid-1990s.

The low level of producer support reflects the radical transformation of the Brazilian
economy that has occurred over the last 15 years. The abandonment of import substitution policies has enabled agriculture to grow rapidly. Livestock output rose particularly quickly in the 1990s, while more recently there has been a boom in the production of soybeans, driven by high prices and a low exchange rate. These effects have since dissipated, so it is unrealistic to extrapolate current growth rates. Agricultural growth has been mostly attributable to improved productivity and lower prices for imported inputs, with increases in agricultural area a more recent factor.

The recent boom in Brazil’s agricultural exports has been associated with a change in the composition and direction of trade. There has been a shift away from traditional tropical products, such as coffee and orange juice, towards soybeans, sugar, and meats, notably poultry and pigmeat. Although OECD country markets are still very important, with more than 40% of agricultural exports destined for the European Union, the fastest export growth is with countries outside the OECD area, notably China and Russia. Even so, the majority of agricultural production in Brazil serves the domestic market.

The share of agricultural production exported has typically averaged around 25%, although that share climbed to 30% in 2004. Having substantially liberalised its own agricultural policies, the main source of future benefits to Brazil is reforms in other countries, where access to OECD country markets is the most important issue. Brazilian exporters are impeded by high tariffs in key markets, tariff escalation according to the degree of processing for several important commodities, unfavourable treatment under trade preference schemes and tariff-rate quota systems, and significant non-tariff measures (notably for livestock products).

At the domestic level, sectoral growth could be further supported through improvements in infrastructure, changes in the credit system (notably on the treatment of outstanding debt), and a simplification of tax policies.

At the same time, there is a strong need for effective social policies. Although rural poverty has fallen significantly in Brazil, the situation for the poorest of the rural poor has actually deteriorated, and poverty has become increasingly concentrated in the North and North East regions. This calls for targeted measures to upgrade the farming skills of smallholders, and to facilitate income diversification and the exploitation of non-farm opportunities. Investments at the individual level, for example through education and health expenditures, are important, as are policies that foster rural development, such as infrastructure development.

Table of Contents

Chapter 1 - The Policy Context

This chapter describes the main changes in the macroeconomic and policy environment since Brazil switched from import substitution to open market policies at the end of the 1980s, and assesses their impact on the agricultural sector. As such, it provides context for an evaluation of agricultural policies in Brazil (Chapter 2), and an examination of the impacts that multilateral trade policy reforms will have on the level and distribution of incomes (Chapter 3). Section 1.1 describes the agricultural sector’s strategic importance to the Brazilian economy, while Section 1.2 considers the ways in which macroeconomic, structural and policy reforms have influenced the economy, including their effects on the allocation of resources between sectors. Section 1.3 then focuses more specifically on the impacts that policy reforms and structural change have had on the agricultural sector. In the light of this analysis, Section 1.4 sets out the main challenges confronting Brazilian policy makers. Essentially these relate to the need to sustain agricultural growth, while simultaneously making faster progress on reducing poverty and curbing inequality.

Chapter 2 - Policy Evaluation

This chapter provides an overview and evaluation of agricultural policies in Brazil. Section 2.1 describes the basic objectives that underpin agricultural policies and how those objectives have changed since the abandonment of import substitution policies. It also documents the institutional mechanisms through which policies are implemented. Section 2.2 chronicles the evolution of domestic policies, including credit policies and market interventions, the main elements within the current policy framework; while Section 2.3 examines how Brazil’s trade policies have evolved. This section considers changes in import protection, taking account of the opening up of trade under Mercosur, and the use of policies to promote exports. In the light of this information, Section 2.4 quantifies the extent of support provided to agriculture, and the cost that this support imposes on Brazilian consumers and taxpayers. Section 2.5 concludes with the policy implications from this analysis.

Chapter 3 - Policy Effects

This chapter focuses on two agricultural policy issues of importance to Brazil. One is the market access barriers confronted by Brazilian exporters, including tariffs and non-tariff barriers applied by both OECD countries and in other markets; the other issue is the size and distribution of the prospective gains from the removal of those barriers in the context of multilateral trade reform. Section 3.1 quantifies and describes the main market access impediments facing Brazil. Section 3.2 investigates the origins and size of the sectoral and economy-wide gains to Brazil from agricultural trade liberalisation more generally, i.e. including multilateral reforms in the areas of market access, export subsidies and domestic support, while Section 3.3 explores how those gains are likely to be distributed among different types of farm and non-farm household. Finally, Section 3.4 provides a wider examination of what happened to poverty and inequality in the 1990s. The aim here is to place agricultural policy issues in the context of broader adjustment pressures that exist in rural Brazil.