South America Calling

Brazil's Crop Insurance Paralyzed

Brazil's massive second corn crop has gone in the ground with very little insurance coverage, while the upcoming wheat crop will also be sparsely protected, if funds don't appear over the next month. (DTN file photo)

One big difference between producing grains in Brazil and producing in the U.S. is the lack of a safety net.

Farmers across large parts of Brazil's soy belt simply never use crop insurance and are potentially one bad year away from ruin.

Over the last decade, the government has sought to change that with a new insurance plan, which subsidizes premiums on crop cost insurance at between 40% to 60%. As a result, approximately 16% of all Brazilian crops were covered last season.

But broken promises and a lack of funding threaten to sink the project.

Brazil's government has only paid R$10 million ($3.2 million) of promised subsidies for 2014 crops out of an announced budget of R$700 million ($225.5 million). The government is already in default on R$330 million ($106.3 million) of those payments.

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Moving on to 2015, the government announced a budget of R$660 million ($212.7 million) to subsidize insurance premiums for the current winter crop and the next summer crop but, unsure of whether they will receive the money, insurers are only offering insurance at the full price this year

That makes insurance expensive and, as a result, Brazil's massive second corn crop has gone in the ground with very little coverage, while the upcoming wheat crop will also be sparsely protected, if funds don't appear over the next month.

"The government promised insurers that it would subsidize premiums, but that hasn't yet happened," said Luiz Foz, a member of the insurance commission at the Brazilian Association of Private Insurance Companies (Fenaseg).

Agriculture Minister Katia Abreu has pledged to pay in April, but she has first to convince Finance Minister Joaquim Levy to release the funds amid a brutal cost-cutting drive as he tries to bring Brazilian government accounts back under control.

If the government doesn't pay up on R$300 million ($96.7 million) of the 2014 debt, then insurers will recoup the premium subsidy from farmers. Such a charge would certainly rock the confidence of farmers in the system.

The lack of government support for crop insurance may also make insurers think twice about the Brazilian market, warns Foz.

"Insurers are private companies that have to justify their actions to shareholders," he said.

At present, grain crop coverage is very much concentrated in the south of Brazil -- in Parana, about half of the second-crop corn and 70% of the wheat is covered. Attempts to expand its reach into the top-producing center-west will certainly be damaged by this situation if the government doesn't pay up soon.

Expect a shortage of credit for Brazilian farmers to be a recurring theme of this blog over the next couple of months. The dire state of the Brazilian economy and the need for austerity measures means operating credit will be far more limited than in recent years.

Alastair Stewart can be reached at alastair.stewart@dtn.com

(AG)

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