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Agribusiness: how to preserve and maximize its strategic role

In the last fifty years, the Brazilian society has not depended on its agriculture and agribusiness as much as nowadays. With weakened industrial, construction and services sectors, only agribusiness is able to help the country to develop in economic terms, except, obviously, when it passes through extreme weather conditions, as observed in 2016. In 2015, agribusiness has stood out, which will probably repeat in 2017, according to specialized organs forecasts.
The fiscal and political crisis damaged sharply the Brazilian economy. After having grown very little in 2014, the economy dropped sharply in 2015 (-3.8%), with a negative performance forecast for 2016 and a slight recovery in 2017. While inflation and international Brazilian balance start to signal positively, the worst problems are in the labor market.

On the upside, inflation, which is strongly influenced by food prices and the dollar exchange rate, has been lower, raising expectations for achieving the Central Bank goals in the next 12 to 18 months. In the international market, the scenario has become more favorable as well. The strong domestic recession has been pressing down imports, originating significant surpluses, mainly in 2016, although total exports revenues have been decreasing since 2011 (and that of agribusiness since 2013).

In mid-2016, unemployment was at 11.3%, or almost 12 million people. Labor earnings are not growing anymore; actually, they started to drop (-3.3% in 2015). Perspectives are not heartening in light of the gross capital formation falls, which, in 2015, reached levels lower than 20% of the GDP.

Regarding growth, the Brazilian economy has not been faring well for over thirty years, when the industrialization process – based on subsidies and protectionism – exhausted. The results were the creation of an important but noncompetitive industrial sector, hyperinflation and out of control indebtedness, plus large income inequality and poverty. These two social parameters started to improve with the inflation control by Plano Real, which paved the way for workers’ wage increases and the income transfer programs in the last 20 years.

The macroeconomic rules (flexible exchange rate, fiscal responsibility and inflation targeting) established in sequence, while followed, brought about price stability and fiscal control, creating the basis for a faster growth process. However, a staggering growth (4.5% per year) was observed from 2004 to 2011, which resulted from the so-called commodity boom. In that period, strong improvements were observed in labor earnings and poverty and income disparity reduction, plus an impressive external reserves accumulation. What is unknown by many is the strategic role of agribusiness in that period.

While international dollar prices increased 105%, in real terms, for Brazilian farmers real prices dropped 8%, due to the sharp dollar valuation in the domestic market, which occurred because of the entry of dollar through commerce, direct investments and high interests. Still, the sector continued to grow at 3.2% per year, and, despite of losing   its share in the economy, it increased exports by 53%, generating dollar surpluses from 20 billion to 80 billion per year. However, what happened in Brazil during the commodity boom, more than exports increase, was a staggering imports increase (164% from 2003 to 2011), involving both capital goods and consumer goods. If imports had not been so cheap, those years would have been more difficult, despite the great incentives for consumption from the government and which led to the current crisis. 

Those golden years are over since 2011, but the strategic role of agribusiness continues. From 2011/2012 onward, the commodities boom ends, and cheap dollar machine stops working. Agribusiness exports prices in dollar dropped 29% from 2012 to 2015; still, exported volume increased 36%. Agribusiness, thanks to continuous productivity increases, is resilient to prices and exchange rate volatility, which does not happen in the remaining sectors. It is important to highlight this aspect because the future behavior of dollar will be decisive for the Brazilian economy.

A sharper devaluation, for instance, tends to compromise inflation, wage rate and income by precluding cheap imports without necessarily promoting industrial exports. The efficiency of the income transfer policies may reduce if inflation does not fall. On the other hand, a strong valuation would worsen the situation of the industry, which represented 21% of the GDP in 2011 and dropped to 16% in 2015, despite the incentives from the government.
In light of the current difficult scenario, agribusiness is strategic to keep growing and competitive in the international market, despite weaker demand, if the necessary conditions for its continued productivity and efficiency growth are assured. Adequate agricultural policies must be implemented.

For that, it is crucial to keep investments in (a) science, technology and extension, (b) credit and rural insurance and (c) strong response to logistics infrastructure needs. The first two tools ensure a sustainable productivity advance. As professor Steve Helfand, from the University of California, demonstrated, agriculture and livestock production increased between 1985 and 2006 at an average rate of 4% per year, with an average productivity growth of 1.7%.

That was due, mainly, to the 5.6% increase in the use of technological inputs, including agrochemicals, seeds, feed and vaccine, while explored area had only a slight variation. The author also shows the technological gap that tends to increase between the small group of top technology farmers and much larger group of low income ones. Eliseu Alves, from EMBRAPA, clearly showed this issue by studying the income concentration in the Brazilian agriculture, where poverty reaches around 80% of rural farmers. Regarding credit, Joseph Schumpeter already demonstrated in 1911 its crucial role in the economic growth process. The innovating entrepreneur demands credit for the development of new projects and the maintenance of the already reached technological level. Obviously, credit must always come along with efficient instruments for risk management, especially in face of the increase in economic, financial and climate uncertainties.

Finally, regarding the infrastructure priority, to be developed in partnership with the private sector, it suffices to say that the agribusiness growth, as professor Helfand indicates, proceeded in a regionally decentralized pattern, increasing proportionally more in the central-western region (234%), in the northern region (115%) and in the northeastern region (91%) from 1985 to 2006. In the traditional area, in the South (65%) and in the Southeast (55%), the advance was slower. This border expansion raised logistics costs of products and inputs, resulting in products with lower prices and inputs with higher prices in the new regions. 

Agribusiness has a great potential to be explored to support once more the Brazilian economy at these difficult times. A good quality agricultural policy may help a lot. In the economy at large, several reforms must be implemented, from the political and institutional aspects to economic-financial questions, so that the economy can recover in the upcoming years and, maybe, in the long-term, is able to lead Brazil to the group of developed countries.

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