Effects of a Fertilizer Subsidy on Brazilian Crop Production and Exports

Abstract

Wheat is one of Brazil's principal imports, exceeded in value in recent years only by petroleum. On the other hand, soybeans have become a major export, increasing from 1.3% of total exports in 1968 to 17.6% in 1977 (Banco do Brasil 1972 and 1977). Increased domestic production of either commodity could have salutary effects on the Brazilian economy. Any such increases would be the aggregate result of independent choices made by individual farmers, presumably acting in their own self-interest within the context of government price policy. Roughly half of Brazil's soybeans and wheat are produced in the southernmost state, Rio Grande do Sul. Rio Grande do Sul's share has fallen recently as production by its neighboring state, Parana, expanded. Between 1966 and 1978, soybean production in Rio Grande do Sul increased 10.5 times, wheat production 2.5 times (Fundacao IBGE 1969 and 1979). Most of these increases came from increases in planted area, although yields also increased. The area of soybeans increased by 620%, the area of wheat by 144%; soybean yields increased by 46%, wheat yields by 2%. These increases in domestic production occurred despite an overvalued cruzeiro during much of the period.' Wheat and soybean yields can be increased, in the short run mainly by heavier fertilization, but the area planted can be expanded only at the expense of other crops or livestock. This paper examines the effects of alternative fertilizer prices on the production of soybeans and wheat in two counties of RioGrande do Sul. The alternative fertilizer prices are presumed to arise from a subsidy-taxation scheme administered by the Brazilian government. Soybean and wheat production at the various fertilizer prices are estimated for each of several representative farms assuming that Brazilian farmers are risk averse. These representative-farm results are expanded to aggregate production estimates for the two counties. The aggregate production estimates were the original goal of this study, but they appear to have implications both for Brazil's domestic agricultural policy and for its foreign exchange position, and some of these implications are discussed later.