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The impact of Rural Credit on Brazilian agriculture and the environment

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Throughout the world, nations use agricultural policy as a key tool to boost their agricultural sector and increase food supply for their rising populations. In Brazil, rural credit plays an exceptionally large role: it is the nation’s central agricultural policy. It accounts for approximately 40% of the total agricultural production, which represented roughly R$225 billion (US$61 billion) in the 2018-2019 agricultural year.

Despite this sizable expenditure, there is little empirical evidence on the impact of Brazil’s rural credit lending on local producers and agricultural land use. Policymakers and stakeholders need a deeper understanding of the how rural credit affects farmers’ decisions in order to justify, leverage, or alter current government subsidies. Moreover, tightening budgets across Brazil heighten the importance of making effective public investments.

This brief summarizes findings from an emerging portfolio of research by Climate Policy Initiative (CPI/PUC-Rio) on the role rural credit plays in Brazil. CPI analysts, under INPUT, determined that rural credit makes a significant difference in raising agricultural productivity and improving land use. They show that an increase in rural credit lending leads to improvements across a number of agricultural indicators, including municipal crop production, agricultural GDP, total municipal GDP, cropland productivity, and rural worker crop productivity. The analysts conclude that lack of financial resources often limits farmers’ production possibilities in Brazil. Improved credit access allows producers to make new decisions that lead to higher productivity.

The research also finds that rural credit has a positive impact on Brazil’s agricultural land use. After increases in municipal credit supply, rural producers shift their land use from less to more productive alternatives – specifically, pastures to croplands –, and also result in an increase in forest areas. Rural credit’s central role in increasing productivity highlights the opportunity policymakers have to leverage it as a means to balance Brazil’s agricultural and economic growth with greater protection of its natural resources.