Mar 26, 2015

Interest Rates on Agricultural Production Loans to Increase in Brazil

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

Brazilian farmers are already planning ahead for the 2015/16 growing season and they know one thing for sure - the costs of production for their next crops are going to increase. Two of the main driving factors for their costs are the prices of imports such as fertilizers and the interest rates charged on their production loans from the government.

The recent weakening of the Brazilian currency compared to the U.S. dollar is going to increase the price of imported inputs such as fertilizers and chemicals. There has been a lot of volatility recently in the exchange rate, but generally the Brazilian currency is now at the weakest point in over a decade. While a weak currency is good news for Brazilian farmers when they are selling their grain production, it is bad news for farmers when they must purchase imported fertilizers. Brazil imports approximately 70% of its fertilizer needs and the weaker currency is going to drive up the domestic price of fertilizers for the 2015/16 growing season.

Adding to their cost of production will also be higher interest rates charged on the production loans available from the Brazilian government. Production loans from the government is the mainstay of the "farm program" in Brazil. The interest rates on these loans are always below what is available from Brazilian banks and medium and small scale farmers rely heavily on these subsidized loans for their farming operations.

Loans obtained through the 2014 Agriculture and Livestock Plan (PAP) carried an interest rate of 6.5%, which represented a significant saving for farmers compared to the prime rate of 12% and the traditional bank rates of approximately 16%.

The Brazilian Minister of Agriculture has already indicated that the interest rates on the new 2015 PAP production loans will increase, but she has not indicated by how much. Speculation is that they might increase by 2-3% to maybe as high as 9.5%. Even with these potential increases, these loans still represent a significant savings for Brazilian farmers compared to traditional bank loans.

Due to the higher costs of production, the Agricultural Federation of Parana (Faep) and the Organization of Cooperatives in Parana (Ocepar) have petitioned the Minister of Agriculture to increase the total funding for the 2015 PAP plan to R$ 207 billion reals (R$ 180 billion for commercial agriculture and R$ 27 billion for small family farmers). They say the increase is needed just to keep pace with the increased cost of production. The 2014 PAP plan was R$ 180 billion.

The Minister of Agriculture usually releases each new PAP plan in June, but last year it was released early during May. She has not indicated if the total funding for the program will be increased or when the new plan will be released.