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Land Rental Markets in Brazil: A Missed Opportunity

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Published: June, 2014

Executive Summary

Brazil’s decisions around land use are some of the most important in the world. With a growing agricultural sector and abundant natural resources valuable for their biodiversity, fresh water, and carbon stock, Brazil’s challenge is to use available land as efficiently as possible to promote economic growth, while simultaneously protecting important conservation areas.

Land markets are a vital part of the efficient land use picture. When land markets work, either through sales or rentals, they attract skilled operators to otherwise unused or unproductive land, bringing increased agricultural productivity without compromising environmental protection. However, land purchase decisions are sometimes made for non-agricultural reasons, making it harder for farmers to purchase land and put it to its most productive use.

This non-agricultural component of land demand is prevalent in Brazil. The country has a long history of macroeconomic instability and today there is still an impressive amount of land whose owners’ main return is associated with nonagricultural benefits such as hedging against inflation. In such circumstances – where land sales are scarce – better land rental markets can play an important role in improving land use efficiency.

However, when compared with other countries, Brazil’s land rental markets fall short. Only 3.3% of Brazilian agricultural land was under lease or sharecropping contracts in the latest World Census of Agriculture. In contrast, this figure is about 33% in Europe and almost 38% in the United States. Considering Brazil’s large land area and the extensive portion of this area occupied by agriculture and pastures, the potential of land rentals to improve agricultural productivity is huge. For example, estimations from Assad (2014, forthcoming) show that Brazil accounts for over 40 million hectares of degraded pastureland outside the Amazon suitable for the production of sugarcane. This represents more than 65% of total Brazilian cropland in 2006. Converting this land to sugarcane production can result in higher agricultural value and lower greenhouse gas emissions.

So why are land rental markets in Brazil underperforming, and what can be done about it?

We find that, particularly in a Latin American context, the insecurity of property rights and the lack of effective dispute resolution mechanisms are one part of the problem (De Janvry and Sadoulet, 2002; Conning and Robinson, 2007; Alston and Mueller, 2010). An additional explanation, which seems to be very relevant for Brazil, regards the imperfection of the legal system.

Our analysis further explores these challenges. Brazilian legislation imposes several binding and non-renounceable clauses for land rental contracts, always assuming the need to protect renters from the exploitation on the part of the landowner, such as establishing ceilings on rents, determining forms of payments, fixing minimum limits on the duration of contracts, granting preemptive rights to renters to renew the contract or purchase the land, among others (Appendix 1). 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.

These laws may no longer make sense for Brazil’s reality, which today is a more complex and varied agricultural system, with more capitalized, educated, and experienced renters participating in the market. This seems to be especially relevant for sugarcane.  We find that leasing and sharecropping arrangements are more widely adopted in larger farms, and renters are better off and more educated in the regions where sugarcane is concentrated. We also find better functioning land rental markets correlate with higher sugarcane productivity in these regions.

Recommendations

Taking into account this scoping analysis, we find that the deregulation of land rental markets can contribute to efficient land use. The current regulation is out dated and could be updated to meet Brazil’s current reality.

Overall, there is a clear role for public policy in incorporating land rental market improvements into a national set of policies that target agricultural development and environmental protection.