Brazil’s Mapa meets with companies to discuss legal framework adjustments, expand private financing for agriculture

Date:10-11-2022

Representatives of the Ministry of Agriculture, Livestock and Supply (Mapa) and a group of capital market agribusiness specialists met to discuss adjustments to decrees that regulate private financing for agriculture, with the aim of expanding the scope of the Rural Product C e dula (CPR) in the commercialization of the agricultural products sector, as well as to further expand the traded balance of securities linked to the sector.

The meeting took place at the Federal Superintendence of Agriculture in São Paulo (SFA-SP), on September 30.

According to Jos é Angelo Mazzillo (Assistant Secretary of Agricultural Policy at Mapa), the volume traded in CPR until August 2020 was BRL17 billion.

″Two years later in August 2022, this balance rose to R$178 billion,″ said Mazzillo , who coordinated the meeting.

From the discussion, what caused this surge in agricultural securities? According to Mazzillo, it was the first upgrade in related legislation. The CPR was established by Law 8,929 for 1994, and there was a major update through Law 13,986 for April, 2020. In July 2021, there was another update of this legislation with Law 14,421. ″We are making CPR a very attractive security, both for lenders and borrowers. They both aim to create a well-designed financial market, so we ‘closed the loop’ between those who need money and those who wish to invest in agriculture,″ Mazzillo explained.

″The volume of funds traded via CPR is expected to soon reach R$200 billion, as well as hit the trillion mark between five and ten years. Brazilian agribusiness currently generates more than R$2.5 trillion, which corresponds to little more than a quarter of the country's GDP, which is approximately R$9 trillion,″ he added.

″Over the last few years, we have been boosting private agricultural finance to make agriculture more robust in terms of resources and financing. The Safra Plan is important, but our agriculture is growing like a rocket,″ Mazzillo stressed, adding that this growth justifies the need to expand the supply of working capital and investment capital, a work that Mapa has been developing.

Ensuring the adequacy of the legal framework is one of the strategies that has been adopted. In recent years, CPR has expanded from within the agro industry, and then to industry, the input sector, machines and installation, and more recently to storage equipment. The idea is to encompass the entire agribusiness chain.

Players

The participation of market players in updating the legal framework is strategic. ″As the law aims to boost the market, all of us need to involve as much as we can in terms of discussions, both those who issue the CPR and need the money, and also those who are going to buy the CPR and make investments,″ Mazzillo said.

When clients go to their banks and intend to invest in agribusiness, they find receivables ″packaged″ in sophisticated capital market instruments, such as the CRA, the Fiagro, the LCA (Letra de Cr is said to do Agronegócio). Individuals can purchase shares of these products.

Structuring and securitizing companies that structure operations between city-based investors and rural producers participated in the meeting, as well as banks, agricultural cooperatives, credit unions and law firms. ″The structures and securitizers are the companies that developed the model to calculate the credit risk of rural producers and, therefore, offer this service to creditors,″ Mazzilo said, adding that these companies have considered the possibility of default among rural producers to establish the appropriate interest rate for this risk.

Profitability

Is investing in CPR a good deal? According to Mazzilo, profitability is calculated by the CDI, which, in general, expresses the variation of the Selic rate defined by the Central Bank. ″Profitability is normally measured by the CDI plus a fixed value, which can vary from 4% to 5% and can reach up to 10 % per year depending on the type of risk and the type of operation. The most common method is to find these structured instruments in the market with the CDI rate plus interest of 6% to 8% per annum,″ he noted.

Mazzillo added he believed that, with the current legal changes, Brazil could have one of the best credit markets for agribusiness in the world. ″If we manage to implement these changes, it is unlikely that there will be a better credit market for agribusiness than the Brazilian market,″ he stated.

Green CPR

Updating the decrees will involve timely improvements, especially in the regulation of CPR for sustainability purposes. Mazzillo explained that the Rural Product Certificate can be used to finance conventional activities or sustainable activities, regulated by Decree 10,828 for 2021, stating, ″Decree and law have to walk together, they have to talk. Since Law 14,421 changed CPRs considerably, allowing the expansion of their use, we have to update the decree.″

One of the points scheduled for change is related to the nomenclature. In the case of CPR Verde, there a nomenclature used internationally that foreign investors are used to but large Brazilian investors are only beginning to understand. ″We have to make this explicit in the decree so everyone speaks the same language. When we talk about CPR of that kind, everyone should understand what that CPR means,″ Mazzillo affirmed.

Today, when talking about CPR Verde, investors associate it with environmental and socio - environmental issues, conservation, the provision of environmental services, and sustainable production, which can lead to conceptual confusion. ″The term, Green CPR, is used interchangeably for all types of sustainable title. The international market is already doing this and the national market is starting to. I am operating with a specific nomenclature. We want to bring this nomenclature to CPR and, therefore, favor operations in this security in Brazil,″ Mazzillo said in conclusion.