Washington, D.C. - USAMarch 14, 2008

CHAPTER ON BRAZIL(preliminary version)

IFPRI-Coordinated Research Project“Improving WTO Transparency: Shadow

Domestic Support Notifications”

Andre M. NassarDiego Ures

Outline

1. Methodology2. Notification Structure3. Overview of Brazilian Agricultural Policy

• Working Capital and Investment Credit Subsidies;• Income support programs;• Rural Development and Family Farming Support;• Debt rescheduling.

4. Assessment and Updated Notifications• Analyze of policies in the context of WTO notifications;• Current notifications: 1995 to 2004;• Shadow notifications: 2005, 2006, 2007 and 2008;• Product specific analysis (cotton, maize, rice, wheat, soybeans,

coffee, sugar cane, and beans);• Investment;• Debt rescheduling.

4. National Ethanol Policies• Ethanol and Sugarcane (Policy history and timeline).

Methodology

Period coveredBrazilian notifications: 1995 to 2004;Estimative made from 2005 to 2007;Forecast for 2008.

Credit subsidies(market based interest rate – preferential rate) * borrowed amount

Market base interest rate: short term reference interest rate (SELIC);Preferential interest rate: depends on the program (family and commercial farming).

Income support programsInformation gathered from Government reports.

Value of productionUp to 2006 data was collected from Government reports (IBGE, Brazilian Institute of Geography and Statistics);2007 and 2008, estimates were made using production and market prices trends.

Brazil’s Notification: How it is structured

Policy Objective Program/Policy instrument Where is notified

How is calculated the amount of subsidy

I. Working Capital and Investment Credit Subsidies(for commercial farmers)

Production & Marketing Credit (product specific)

DS 7 Interest rates differential (market cost versus controlled interest rate)

Production & Marketing Credit (non product specific)

DS 9 Interest rates differential (market cost versus controlled interest rate)

Investment credit DS 2 Interest rates differential

II. Income support programs

Contract option acquisition and Federal Government Acquisition

DS 5 Government expenditures with purchases with minimum prices

Minimum support program DS 5 MPS (price differential)

Equalization Premium Programs (PEP/PEPRO/PROP)

DS 7 Government covering price differential between reference price and market price

III. Rural Development and Family Farming Support

PRODUCTION and INVESTMENT CREDIT to family farmers

DS 2 Interest rates differential

Debt rescheduling programs (family farmers)

DS 2 Interest rate differential (debit market cost versus cost supported by the

government)

Agrarian reform programs DS 1 Government expenditures

IV. Debt rescheduling and management

Debt rescheduling programs (commercial farmers)

DS 9 Interest rate differential (debit market cost versus cost supported by the

government)

V. Rural InsuranceOld insurance program DS 1 Government expenditures

New insurance program (from 2005)

DS 7 Government expenditures to equalize premium costs

Working Capital and Investment Programs (Commercial Farming)

Production and Marketing CreditProduction and marketing credit in Brazil are possible since the federal government requires that banks keep a total of 25% bank deposits available for farming credit. Moreover, rural savings, the BNDES and the Workers Support Fund (FAT) complement the remaining source of funding for agricultural credit. In addition, these funding channels provide preferential loan rates to commercial and family farming which in turn receive the support of the federal government.

Investment CreditMODERFROTA – Modernization Programme aimed at updating tractors and other agricultural machinery.MODERINFRA - Incentives Programme for Irrigation and StoragePRODECOOP - Cooperative Development Programme for the Enhancement of Agricultural Value AddedMODERAGRO - Programme for the Modernization of Agriculture and the Conservation of Natural Resources PRODEAGRO - Agri-business Development ProgrammePRODEFRUTA - Fruit Industry Development Programme PROLEITE - Milk Production Mechanization and Transportation Incentive ProgrammePROPFLORA -The Programme of Commercial Planting and Recovery Forest

Working Capital, Marketing and Investment Credit: Amount of Funds Available

(US$ billion)

Balance of Credit Operations and Total Value of Production

Note: Planted area of the top 10 crops (cotton, rice, coffee, sugar cane, dry beans, orange, cassava, maize, wheat and soybean). Balance of credit on December 31 of each year.Source: IBGE and Brazilian Central Bank.

Planted Area and Balance of Credit(million ha and billion US$)

Beginning of debit rescheduling program

Income Support ProgramsMinimum Price Guarantee Policy

Government purchase based on guaranteed prices• Prices could or not be higher than world prices.

Stocks for food aid distribution• Federal Government Acquisitions

Direct income support for farmers through marketing instruments• Contract option acquisition• Stocks are sold by market prices in the future

Instruments to facilitated distribution through market channels (how it works)

Based on a price equalization premium.PEP

• Subsidy (price equalization premium) granted to the wholesale buyer as long as he pays for the producer a reference price (guaranteed price or higher);

• Subsidy is obtained in an public auction and the maximum value is fixed by the government.

PROP• Same structure of PEP but the producer only deliver the product in the future once

it is harvested.PEPRO

• Subsidy is granted to the producer through public auction of price equalization premium;

• Producer receives the premium for the government plus the market price.• Premium is based on a reference price.

Income Support Program as a Share of Total Production (million tones)

COTTON MAIZE

Production

Note: FGA (Federal Government Acquisition). COA (Contract Option Acquisition).

RICE WHEAT

Income Support Program as a Share of Total Production (million tones)

COFFEE SOYBEAN

CASSAVA

Production

Note: FGA (Federal Government Acquisition). COA (Contract Option Acquisition).

EDIBLE BEANS

Rural Development: PRONAF(Family Farming Program)

Two important trendsThe amount of available credit is up and growing;The share of funds available to family farmers is increasing as the per cent share of credit to commercial farmers is shrinking.

PRONAF is offers both production and investment credit to familyfarmers, and it is divided into FIVE groups to better assist each particular class

Group A: agrarian reform settlers (investment and working capital);Group B: small subsistence farmer who are eligible to micro credit (income support program);Group C: increasing degree of commercial production, however, intensive use of family labor (60% of income has to come from agriculture);Group D: also signs of commercial production with use of family labor plus some additions contracted help (70% of income has to come from agriculture);Group E: same as for Group D, however, at least 80% of income has to come from agriculture.

Debt Rescheduling ProgramPrograms covered

Securitization: debts bellow R$ 200.000;PESA (Financial Assets Rehabilitation Program): debts above R$ 200.000;Rehabilitation of Cooperatives (Recoop);Family farming programs (Pronaf, Prodecer, Procera);Coffee and cocoa producers.

Debts are rescheduled in a longer period of time subjected to subsidized interest rates

Interest rates lower than the original rates when the loan was given.Subsidy is either the foregone interest rates and the current market rate or the renegotiated interest rate and the original rate.Brazilian government calculate the equivalent subsidy using the current market rate.

Overview of Brazilian Notifications and Updated Notifications

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

PRODUCT-SPECIFIC AMS 409,064 230,446 235,768 211,831 249,548 278,689 551,749 989,378 977,914 n.a.1) Market Price Support 0 0 0 0 9,863 16,040 14,333 12,120 83,5092) Non-exempt Direct payments 15,517 45,108 45,221 47,460 0 0 0 0 03) Other Non-exempt Product Specific Support 393,546 185,338 190,547 164,371 239,685 262,649 537,415 977,258 894,405 - Production and Marketing Credit 378,063 146,205 138,321 155,335 239,685 217,286 316,300 206,986 154,275 - Equalization Premium 4,282 31,240 52,226 9,036 0 45,363 222,200 771,000 740,700 - Contract Option Reacquisition 11,201.8 7,893.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0

NON-PRODUCT-SPECIFIC AMS 837,926 822,554 739,896 803,487 1,069,079 850,661 1,139,632 1,206,769 1,289,477 1,563,215

S & D (Art. 6.2) 155,985 309,668 331,546 392,763 494,511 394,312 462,303 442,234 428,066 428,600

AMS + S & D 1,402,975 1,362,669 1,307,210 1,408,081 1,813,138 1,523,662 2,153,683 2,638,382 2,695,457 1,991,815

TOTAL (AMS + S&D) 2,649,964 2,415,669 2,282,873 2,423,399 3,131,765 2,653,011 3,845,064 4,834,530 4,962,849 3,555,030

Total Production Value 39,724,830 42,909,741 38,409,231 37,276,617 44,940,270 54,419,430 59,350,698 65,361,282 86,997,051 99,697,070

TOTAL (AMS + S&D)/TPV 7% 6% 6% 7% 7% 5% 6% 7% 6% 4%

to be estimated

Measure typeMonetary value of the measure (US$ 1,000)

Notified Period: 1999-2004 Estimated Period: 2005-2008

GENERAL SUMMARY OF DOMESTIC SUPPORT

Total Support (US$ million)

Total Applied AMS (US$ million)

Production and Marketing Credit Subsidies and Interest Rates

Credit Subsidies Interest Rates

Non Product-Specific Subsidies and “De Minimis”

De Minimis 10%

De Minimis 6%

S&D Development Programs (Article 6.2.)

Pronaf and Investment Credit Subsidies

Pronaf Investment

Commercial farming

Familyfarming

NPS Subsidies Including Article 6.2 Subsidies and the “De Minimis”

De Minimis 10%

De Minimis 6%

Total Trade-Distorting Domestic Support by Product(million US$ and percentage VOP)

COTTON: AMS

RICE: AMS

COTTON: AMS/VOP

RICE: AMS/VOP

Note: 2008 data include only production and marketing credit subsidies.

Total Trade-Distorting Domestic Support by Product(million US$ and percentage VOP)

MAIZE: AMS

WHEAT: AMS

MAIZE: AMS/VOP

WHEAT: AMS/VOP

Note: 2008 data include only production and marketing credit subsidies.

Total Trade-Distorting Domestic Support by Product(million US$ and percentage VOP)

SOYBEANS: AMS

SUGAR CANE: AMS

Note: 2008 data does not include subsidies in income support programs.

SOYBEANS: AMS/VOP

SUGAR CANE: AMS/VOP

Total Trade-Distorting Domestic Support by Product(million US$ and percentage VOP)

EDIBLE BEANS: AMS

Note: 2008 data does not include subsidies in income support programs.

COFFEE: AMS COFFEE: AMS/VOP

EDIBLE BEANS: AMS/VOP

OTDS, AMS and De MinimisOTDS

(AMS + 20% De Minimis + 5% BB)

Note: DR Final Commitment (higher): 40% cut in AMS and de minimis reduced to 6% VOP. DR Final Commitment (lower): 30% cut in AMS and de minimis reduced to 6.7%)

CONCLUSIONSSubsidies on investment credit for commercial farmers: why Article 6.2?“De minimis” is binding Brazilian agricultural policy;Debt rescheduling program, although non-specific, is capable to influence farmers decision in medium-long run: risk aversion reduction effect

Transparency issues? Data are not public because level of indebtedness is measured in the household level.2006 Agricultural Census, recently released, will help us to measure that hypothesis.

Is or is not included on the notifications the Government directexpenditures with preferential credit programs?

Resources transferred to the banks to cover operational costs;Interest rate equalization when the resources are funded by the government.

Projections and economic implications: two concernsIncome support programs;Debt rescheduling program.

1973 Oil crisis & low sugar prices.

1975 PROÁLCOOLFIRST PHASE

Mandatory blend and subsidies.

1978-1979 PROÁLCOOL – SECOND PHASEFiscal incentives and tax exemptions for ethanol

production and E-100 fueled cars. All gas stations must obligatorily sell ethanol. Low ethanol prices

(65% of gasoline’s) guaranteed at the pump.

2003 FLEX FUELFlex fuel vehicles begin to be sold.

Brazilian Fuel Ethanol History

Source: Datagro, 2006 (dados). Elaboration: ICONE.

Anhydrous

Hydrous

Incentives, mandatory blends, new technologies

Deregulation, Sugar Exports

Flex Fuel

GlobalMarket?

ETHANOL CRISIS at the end of the 80sOil prices down. Brazilian government cuts support.Higher sugar prices affect ethanol production and

sales of E-100 cars went down rapidly

Ethanol Current Policies in Brazil

20-25% mandatory blend of anhydrous ethanol in gasoline A (pure gasoline), making the gasoline C;Tax exemption of CIDE (0,28 R$/liter ~0.165 U$/liter): only hydrous;Differential levy on the State Tax (ICMS).Subsidized credit for ethanol storage (preferential rates).Vehicles: partial exemption of the IPI (tax on industrialized products) on flex-fuel cars

1 liter cars: 7% gas/hydrous/flex;>1-2 liter cars: 13% gas and 11% hydrous/flex>2 liter cars: 25% gas and 18% hydrous/flex

Ethanol Current Policies in Brazil

(R$/liter) Price Taxes (A) Taxes/price

Tax value assuming the

same proportion of tax charged

(45,3%) (B)

Absolute value of the tax exemption (B-A)

Gasoline C 2,391 1,083 45,3% 1,083 -

Hydrous ethanol 1,196 0,263 22,0% 0,542 0,279

Hydrous Anhydrous Gasoline

Federal tax

MillsPIS/Cofins 3.65% (sales) 3.65% (sales) n.a.

CIDE zero zero n.a.

Blender/Distributor

PIS/Cofins 8.2% (sales) 8.2% (sales) 8.2% (sales)

CIDE n.a. 0.28 R$/liter 0.28 R$/liter

State tax ICMS 12%-30% (at the pump) 25% (at the pump) 25% (at the pump)

Ethanol Current Policies in Brazil

Debt Rescheduling (to be concluded)

AMS/VP (%)

8,2 8,3 10,1 1,5 1,1 2,8 2,8 4,1 7,6 25,5 8,72,6 1,2 1,0 2,9 1,2 1,0 1,1 1,0 0,8 2,5 3,5 1,2

AMS/VP (%)

1,9 2,5 1,0 3,3 1,1 2,1 1,3 1,5 1,9 3,4 5,7 2,1 0,9

AMS/VP (%)

Total Trade-Distorting Domestic Support by Product(AMS, million US$)

COTTON MAIZE

11,3

66,8 2,218,1

8,5

AMS/VP (%) 2,9 2,3 11,5 7,1 7,9 6,6 5,0 2,1 1,6 4,6 10,314,40,8

1,0 1,3

Note: 2008 data does not include subsidies in income support programs.

WHEATRICE

Total Trade-Distorting Domestic Support by Productas a Share of Value of Production

COTTON

Note: 2008 data include only production and marketing credit subsidies.

MAIZE

RICEWHEAT

Total Trade-Distorting Domestic Support by Productas a Share of Value of Production

SOYBEANS

Note: 2008 data include only production and marketing credit subsidies.

COFFEE

CASSAVA EDIBLE BEANS

0,0 0,1 0,1 0,1 0,3 0,1 0,2 0,1 0,1 0,2 0,5 0,3 0,1

AMS/VP (%) 0,2

5,3 1,3 0,6 1,1 3,3 0,8 0,5 0,8 0,8 0,6 1,2 5,5 2,2

AMS/VP (%) 0,6

AMS/VP (%) 0,2 0,7 0,3 0,3 1,3 0,4 0,3 0,3 0,4 0,4 0,6 0,4 0,9 0,3

Total Trade-Distorting Domestic Support by Product(AMS, million US$)

SOYBEANS COFFEE

CASSAVA EDIBLE BEANS

0,1 0,4 0,3 0,7 1,3 0,6 1,0 0,5 0,8 0,3 0,8 0,5 2,8

AMS/VP (%) 0,4

Note: 2008 data does not include subsidies in income support programs.