Farm sector no savior for Brazil's economy as credit tightens

By Reese Ewing

GUAXUPE, Brazil, May 6 (Reuters) - When Brazil's economy faltered in the past, the farm sector often helped break the fall with steady growth. But that trend may not hold up this year under tougher credit conditions and weaker commodities prices.

The government's decision to pare back subsidies on agricultural loans as part of a fiscal austerity push is already weighing on industries that support the farm sector, which makes up a quarter of the economy.

Loan rates for big-ticket items like tractors or harvesters under the credit line known as Finame that originates from the BNDES national development bank have already risen sharply and are expected to nearly double by July from earlier in 2015.

Equipment suppliers say demand for work-arounds to the tightening credit market are on the rise, such as barter or lottery pools known locally as "consorcios." For a sector that has relied heavily on government-subsidized lending in recent years, the slowdown could be painful.

"This will have a big impact," Jose Eduardo Santos Jr, head of development at Brazil's largest coffee cooperative Cooxupe, said at a recent agricultural fair in Guaxupe. "Everything depends on credit in farming."

National sales of farm machinery are down 20 percent in the first quarter of 2015, according to industry association Anfavea.

Already reeling from the drop in global grain prices, major farm equipment makers Case, John Deere, Massy Ferguson and others expect sales to drop as much as 40 percent this year, with the best case being a repeat of last year's anemic performance, a recent survey conducted by Anfavea, cooperatives and the Sao Paulo industry federation Fiesp showed.

"Machinery and equipment makers will be hit most (by tighter credit) this year," said Amaryllis Romano, an economist at local consulting group Tendencias.

Sales of farm inputs such as agrichemicals and fertilizers are also weakening.

Local executives at Brazil's biggest fertilizer supplier, Norway's Yara, said sales are well behind last year and they expect barter to be more attractive than credit, especially to grain farmers.

"CONSORCIOS"

There are no indices that track barter across the sector, but Brazil's largest coffee cooperative Cooxupe expects farmers to exchange more beans for fertilizer and equipment in 2015.

Gabriel Pires Gonçalves, financial director at local farm equipment maker Jacto, said, "The signs of costlier credit are already appearing. We see more interest in consorcios."

Consorcios came about in the 1960s here as a way for consumers of cars, apartments or tractors to pool monthly lay-away payments and hold a regular lottery. One of the pool's lucky participants receives delivery early each drawing period.

"Those kinds of financing are useful but can't make up for the more difficult credit environment," said Jose Carlos Hausknecht, an agricultural economist at consultants MB Agro.

For now, production of the main export crops such as soybeans, sugar and coffee are unlikely to be affected, but farmers' profits and sales across the support industries are in for a rough year.

Sharp credit contractions in the past, however, have led to losses in yields and output. (http://link.reuters.com/qex64w)

Government officials are still hashing out the final numbers of the annual farm budget, but higher rates are already in place and likely to rise again in July.

The Agriculture Ministry said 66 percent of the 156 billion reais ($52 billion) in farm credit allocated for the sector has been tapped so far in the July-June crop year, which it considers within expectations.

Both the broader economy and the farm sector struggled last year, growing only 0.1 percent and 0.4 percent, respectively. The country is expected to slip into recession in 2015, which typically prompts governments to lower interest rates.

But President Dilma Rousseff has tasked her finance minister with curbing the government's profligate ways, and credit subsidies are on the list of cuts to balance public accounts.

CURRENCY ADVANTAGE

Agricultural exports will nevertheless benefit from recent gains in the dollar, which is 39 percent stronger against the real over the past year. But weakening commodities prices have eroded most of these gains for local producers.

"Commodities prices have fallen more than expected," Hausknecht said. "Planted area for some crops could contract next season."

Sugar futures prices remain near six-year lows, while soybeans are just above five-year lows reached in late 2014.

The weaker Brazilian real raises operating costs for producers as imported goods priced in the now stronger dollar turn more costly in local terms. Brazil imports 70 percent of its fertilizer and is the world's largest pesticide importer.

Fertilizer imports dropped 24 percent in the first quarter of 2015 due principally to the rise in the dollar against the real, the fertilizer association Anda said.

"Brazilian farmers have a 'love-hate' relationship with the exchange rate," said Eduardo Daher, head of Brazil's agrichemicals association. "They love more reais for their exports but hate to pay more reais" for inputs.

($1 = 3.07 reais) (Editing by Josephine Mason, Todd Benson and Ted Botha)