Executive Summary

Increasing global demand for food and the need to address climate change risk make it ever more urgent to both protect ecosystems and use land more productively and efficiently. Brazil is a key player in this context and has made significant gains in recent decades. Between 1970 and 2006, its average national cattle farm productivity doubled and its average national crop farm productivity quadrupled. More recently, the country’s conservation efforts have been successful in reducing the rate of Amazon forest clearings to its lowest level in 30 years.

This report shows that not only is there significant further potential for simultaneously promoting economic growth and improving ecosystem protection within Brazil’s rural landscape but also that substantial improvements are already underway. Well-functioning markets and policies can boost the pace at which these changes are happening and help the country to realize latent land use efficiency  gains. Such measures provide  an opportunity to embed mitigation of climate change risk and increased food production in an overall strategy for developing the Brazilian rural economy.

This report is organized in three parts.

1. Misallocation in Brazilian land use: Land abundance shaped institutions and technological decisions, creating inefficient resource allocation

The intensification of agricultural production is feasible in Brazil without increasing deforestation, and with positive climate mitigation benefits in terms of greenhouse gas (GHG) emission reductions. Considering Brazil’s large land area and the extensive portion of this area occupied by pastures, there is substantial physical potential for increasing production and reducing emission by converting degraded pasturelands into crops. For example, Brazil has over 40 million hectares of degraded pastureland outside the Amazon suitable for the production of sugarcane. This represented more than 65% of total Brazilian cropland in 2006. Converting this land to sugarcane production would raise its agricultural value and lower GHG emissions.

Since the colonial period, the use of natural resources in Brazil has been the outcome of a set of policies, institutions and technological choices based on the abundance of land. In the early stages, the country’s agriculture saw the emergence of rentier landowners and was primarily based on access to slave labor used to farm large tracts of land. More recently, the modernization of agriculture has also been based on a model that is land-intensive. In addition, there are non-agricultural incentives for holding land, mainly associated with tax shelter or protection against macroeconomic risks.

Together these processes have created a massive misallocation problem in Brazilian land use. The large variation in agricultural productivity both within and across Brazilian regions is proof of this. Within-region differences in productivity imply there is room for boosting economic growth of the rural economy without compromising the protection of natural resources. In other words, growth in agricultural production can be achieved via increases in productivity, at no cost to environmental preservation.

2. Learning from the past: Policies, R&D and private investments are levers to change land use at scale

The second part of the report focuses on three major examples of land use change at scale, showing that the country is already in a process of addressing the inefficiency in land use. These examples illustrate that (i) it is possible to change land use patterns at scale based on technology innovation and dissemination, private investment and better policies; and (ii) this is a process that reconciles natural protection with economic growth.

• Example 1: the Brazilian soybean revolution. R&D efforts undertaken in the 1970s and 1980s in the soybean sector created business opportunities for the development of the Brazilian Cerrado, increasing income and attracting skilled labour. The adaptation of soy to suit Central Brazil’s growing conditions in the early 1970s was a major technological change that reshaped agriculture in the region and integrated it with international markets. The municipalities more suitable to soy production received larger inflows of immigrants with higher educational levels. Moreover, these immigrants were disproportionately drawn from states with more mechanized agriculture and more cooperatives. The combination of technological change and skilled migration increased yields and agricultural output and reduced the demand for land, decreasing the rate in which forests were cleared in Central Brazil.

• Example 2: the entry of sugarcane mills in the state of Mato Grosso do Sul (MS) in 2000s. Substantial private investment in the sugarcane business brought large-scale changes as land use moved from low productivity pastures to high productivity crops. Between 2005 and 2012, the number of sugarcane mills in the MS state increased from 8 to 22. Data suggest that GDP in a typical municipality increased substantially after plant construction and there are a number of explanations for this. For example, evidence on the economic effects of yield gains in soybean production suggest that the new sugarcane businesses are likely to have increased farmers’ access to capital and boosted investments more broadly. In addition, the industry and the services sectors also benefited from these new investments.

• Example 3: the adoption of a set of strategic conservation measures, with emphasis on monitoring and law enforcement, to contain deforestation in the Brazilian Amazon. The Action Plan for the Prevention and Control of Deforestation in the Legal Amazon (Plano de Prevenção e Controle do Desmatamento na Amazônia Legal, PPCDAm), the pivotal conservation policy effort of the mid-2000s, marked the beginning of a novel approach towards combating deforestation in the Brazilian Amazon. Launched in 2004 and implemented at reasonably low cost, it integrated actions across different government institutions and proposed innovative procedures for monitoring, environmental control, and territorial management. The main driving force behind stricter monitoring and law enforcement, the Real-Time Detection of Deforestation (Detecção de Desmatamento em Tempo Real, DETER) system captures and processes georeferenced imagery on Amazon forest cover in 15-day intervals. These images are used to identify deforestation hot spots and target law enforcement efforts. As a result, the deforestation rate decreased from 2.7 million hectares in 2004 to about 460 thousand hectares in 2012.

3. Looking ahead: Possible pathways to improving economic and environmental returns from land use

Agricultural production in Brazil is undertaken in a relatively small portion of its national territory. Agricultural lands account for roughly 26% of Brazil’s total surface area, divided between (low productive) pastures (75%) and croplands (25%). Levels of productivity vary substantially, particularly among cattle ranchers and small farmers. This is the case even within areas with very similar geographical characteristics.  Such variation points to a pervasive and substantial misallocation problem. In-depth knowledge about rural technology adoption behavior and market failures affecting agricultural production is therefore essential to steer agricultural policy towards setting effective incentives for high-productivity agricultural production.

CHALLENGES AND OPPORTUNITIES IN AGRICULTURE

To help the design of policy actions that can improve  land use, this report identifies and enhances understanding of the mechanisms driving the key socioeconomic issues that affect agricultural production in the country. Evidence suggests that improving agricultural productivity depends on a number of factors, namely improving technology dissemination, well- functioning financial instruments and land rental markets, and better quality infrastructure.

Disseminating information on new practices and their associated technologies is key

Innovation is a main driver of productivity gains and land use changes. The Brazilian soybean revolution is a key example on that front. Another example is the development of the biofuels and the ethanol industry. In both cases, there were substantial changes in farming and land use.

However, the realization of these gains depends upon the process through which the technology and new practices are disseminated to farmers. Barriers to their adoption can have serious consequences for the efficient use of natural resources. These barriers should be considered in the policy design. An interesting example for Brazil is the spread of a no-till farming method called the Direct Planting System (DPS) where learning from peers, especially from those whose land shares similar characteristics,  has been shown to catalyze technological adoption. Environmental characteristics, such as soil dissimilarity, affect the adoption of a new technology. These findings suggest that, in order to increase agricultural productivity, it is not sufficient to invest in innovation, develop business models, and marginally subsidize adoption. Achieving technology diffusion requires the dissemination of information on new techniques and their associated technologies. Agricultural extension efforts that aim to educate farmers on new practices should complement innovation efforts.

More efficient land markets for sales or rentals can attract skilled operators to otherwise unused or unproductive land

Deregulation of land rental markets, more secure land rights, and more effective means of resolving legal conflicts around land could contribute to more effective land use.

Given the country’s long history of macroeconomic instability, land ownership in Brazil yields non-agricultural benefits, such as hedging against inflation. In this context, an active land rental market offers means to improve land use efficiently by placing more skilled operators on otherwise unused or unproductive available land. However, when compared with other countries, Brazil’s land rental markets fall short.

The insecurity of property rights and the lack of effective dispute resolution mechanisms are both parts of the problem, particularly in a Latin American context. An additional explanation is the imperfection of the legal system. Restrictions on rental contracts, imposed by land and labor legislation, excessive guarantees provided to renters, and the insecurity generated by land reform have created disincentives to the growth of rental markets.

Well-designed public provision  of credit  and agricultural risk management can increase investment and reduce deforestation

The economic literature provides empirical evidence that the availability of credit and insurance leads to significantly larger agricultural investment and innovation in agriculture. About 20% of the regional variation in Brazilian agricultural productivity is associated with credit availability, suggesting that greater access to credit could improve productivity. On the other hand, policies that increase the availability of financial resources should be aware of potentially adverse rebound effects. For instance, there is evidence that the reduction in the availability of credit caused by Resolution 3,545, which conditioned the concession of rural credit upon proof of compliance with legal and environmental regulations, helped contain deforestation in the Amazon biome. This suggests that policies that increase the availability of financial resources may lead to higher deforestation rates. Instruments will need to be designed carefully to achieve economic and environmental goals.

In addition, the current instruments available for price risk management are inefficient. Instead of having the government buying farmers’ output as a way of guaranteeing a minimum price, the development of market-based instruments could improve farmers’ ability to deal with risk.

Improved infrastructure can increase agricultural productivity if the incentives are right

Providing infrastructure is key to enhancing the competitiveness of economies and increasing agricultural productivity. Despite being one of the most prominent agricultural producers in the world and an important exporter of agricultural commodities, Brazil suffers from poor transport infrastructure. The World Economic Forum (WEF) ranks it at 77th out of 148 countries (WEF, 2014), lagging behind other emerging and developed economies in roads, railways and port infrastructure. A lack of road infrastructure keeps production from being exported through more cost-effective ports – in some cases increasing costs by almost twenty times, with an adverse impact on productivity.

However, Brazil faces important challenges in the design of the regulatory framework. Since the late 1990s, the regulatory environment of Brazil’s infrastructure has been in continuous flux, creating uncertainty in the marketplace. While the regulations have changed in different ways, the general trend of these changes has been to prevent existing infrastructure concessionaires from making long-term profits from their investments, with regulation becoming more complex as the regulator gradually takes the role of the market as a provider of incentives. These actions have often led to taxpayer-funded subsidies to motivate the concessionaires in place of marketplace incentives, to inefficient use of the infrastructure, and to the promotion of inefficient firms. This shifting mix of incentives has diminished the viability of infrastructure investments and led to the erosion of the infrastructure’s overall quality. Addressing inefficiencies in infrastructure regulation could yield large gains in infrastructure improvements and agriculture productivity.

CHALLENGES AND OPPORTUNITIES IN FOREST PROTECTION

Meeting increasing global demand for agricultural commodities will create huge opportunities for business. However, agricultural expansion is a major driver of land use change, and forest degradation and deforestation are particular concerns. Brazil has a vast territory (852 million hectares), most of which is still covered by native vegetation. Through the past decade, Brazilian conservation policy efforts focused mostly on combating deforestation in the Amazon biome. Amazon forest clearings have slowed significantly in recent years thanks to these policies, combined to declining agricultural output prices.

The main driving force behind stricter monitoring and law enforcement, the Real-Time Detection of Deforestation (Detecção de Desmatamento em Tempo Real, DETER) system captures and processes georeferenced imagery on Amazon forest cover in 15-day intervals. These images are used to identify deforestation hot spots and target law enforcement efforts. Prior to the activation of the satellite-based system, Amazon monitoring depended on voluntary reports of threatened areas, making it very difficult for law enforcers to identify and access deforestation hot spots in a timely manner. Further progress will require additional policy adjustments.

Shifts in Amazon deforestation to smaller clearings  require adapted policies

Recent changes in patterns of deforestation present new challenges for further reducing Amazon forest clearings. In the early 2000s, Amazon deforestation was mainly due to the clearing of large contiguous areas of forest. In recent years, however, deforestation has been driven mostly by the cutting down of forest in small increments, possibly to elude Brazil’s Amazon monitoring capacity, since deforestation of areas smaller than 25 hectares are not detected by DETER satellite imagery (Assunção J. , Gandour, Hemsley, Rocha, & Szerman, 2013). An increased focus on small deforestation will be critical. Given differences in how regions and individuals have responded to past policy, it will be important to tailor policies to address regional differences and landholder behavior in clearing patterns.

Combating deforestation beyond the Amazon remains a challenge

The creation of protected areas is another important conservation policy as the Ministry of the Environment’s uses this designation to prevent deforestation, particularly in the central region of the Amazon biome. This and other conservation policies mean that currently, there is typically very limited deforestation occurring inside Amazon protected areas. However, increasingly substantial deforestation takes place in their immediate surroundings. Indeed, clearings within protected territories account for less than 10% of total annual Amazon deforestation. In contrast, from 2002 through 2011, the share of total annual Amazon deforestation occurring within 10 kilometers of protected areas rose from 15% to 24% (Assunção J., Gandour,

Hemsley, Rocha, & Szerman, 2013). Combating deforestation in Brazil’s ecosystems beyond the Amazon remains an important challenge. In order to achieve this, Brazil needs to extend effective monitoring and law enforcement policies over its five major biomes: Cerrado  (savannah), Caatinga (xeric shrubland  and thorn forest), Atlantic Forest, Pantanal (wetlands) and Campos Sulinos (grasslands), which are also very rich in biodiversity and carbon stocks, and provide a number of ecosystem goods and services. This is particularly important for the Cerrado biome, where native vegetation  has been cleared to make way for increasing agricultural development.

Improving enforcement of environmental regulation within private landholdings is essential

The protection of natural vegetation falls under different legal regimes according to whether land is in the public or private domains. On public lands the main instrument for the protection of vegetation is the establishment of a network of protected areas. On the private lands, Brazilian legislation imposes some land use limitations in order to preserve native vegetation. Improving enforcement of environmental regulation within private rural landholdings is essential since forests occupy about a third of the area of rural private land in Brazil, totaling 100 million hectares of native vegetation within private properties.

The Brazilian Forest Code establishes the regulatory framework for environmental conservation in private lands. It requires that a percentage of the area in a property be left in forest or its native vegetation as a Legal Forest  Reserve. It also imposes that the native vegetation in sensitive  areas such as on steep slopes and along the margins of rivers and streams be conserved as Areas of Permanent Protection.

Although the first Brazilian Forest Code dates from 1934 and a more modern version was enacted in 1965, the lack of law enforcement has led many landholders to fully exploit all of their land. However, in the last two decades, the Brazilian government has improved the enforcement of the law, leading to an intense reaction from the agro-industrial sector, which intensified the pressure to weaken the requirements of the Forest Code.

After over a decade of debate and concessions by both parties, the Brazilian Congress finally approved the Federal Law nº 12,651, on July 25, 2012. Although the new Forest Code retained the same structure and basic concepts as the old one, it established new rules, parameters and penalties, and provided amnesty for landholders who had illegally cleared forest prior to In addition, it established the Rural Environmental Registry (CAR), the key instrument for enforcing this framework.

Although both framework and instrument are in place, effectively implementing the Forest Code remains a challenge. In particular, uncertainties regarding the enforcement of the Forest Code compromise land owners’ efforts, increasing their perception of risk and insecurity.