Development of large scale farming in South America: The role of policies and institutions
17 October 2019
In South American countries, agriculture has traditionally been represented by small and medium family farms operating their own land and capital. However, in recent decades, a trend toward farm consolidation and the rise of large corporate farming structures has been observed in countries such as Argentina and Brazil. The present article describes the recent process of agricultural transformation and highlights the main institutional drivers behind farmland consolidation in these countries.
Unstable socio-political environment in Argentina in the second half of the twentieth century resulted in low economic growth, weak trade relations, high levels of inflation and countrywide unemployment. The period of 1990s was marked by the implementation of liberalization policies in the farming sector. Privatization, convertibility law, launch of the loan market, and reduction of state intervention in agricultural markets created favorable environment for the development of national agriculture and stimulated cooperation activities among farmers, land owners, input and service suppliers, processors etc.
Triggered by cost- and resource-saving incentives, a shift toward farm consolidation took place. At this point, the farms with a scale of up to 350,000 hectares emerged in the forms of corporate farms, which gained scale mainly through land acquisitions, and networks, which mostly leased land and based their activities on formal and informal contract arrangements with local partners. Meanwhile, advances in technologies, in particular introduction of no-till practices, GE crops and increased use of fertilizers, as well as active investments in modern processing facilities on behalf of commodity processors, triggered intensification of agriculture even more.
In early 2000s, severe economic crisis accompanied by political chaos and a range of restrictive policy measures resulted in currency devaluation and collapse of national tax and financial systems. Paradoxically, agroholdings managed to benefit from instable institutional environment evolving into agricultural trust funds and investor-oriented hybrid forms which involved outside investors. Organizational transformation into more complex forms upon request of private investors is an example of how informal institutional environment reduced transactional uncertainty and helped to build trust among agents. Also, further development of precision agricultural practices helped large-scale farms to overcome financial difficulties.
Between 2008 and 2015, restrictive institutional changes continued, bringing new challenges to agricultural sector. In this period, the share of farmland operated by agroholdings decreased due to lower commodity prices and higher production transaction and agency costs. The marginal farmland areas were taken by smaller agricultural structures, which in general remained more stable due to better reputation and trust relations that helped them to better govern transactions and enforce contracts.
Brazil has significantly boosted its agricultural production over the past decades, entering the list of the world’s top five agricultural producers by 2008. Economic growth was accompanied by intensification of farming practices, though the share of large farms still remains rather low as compared to small subsistence farms. In 2006, the farms with over 500 hectares under operation, which are considered large-scale in Brazil, accounted for only 2% of the total number of farm enterprises countrywide. Brazil’s production growth in combination with farmland consolidation is associated with the development of the cerrado region, where most of large-scale operations have developed. Here, poor acidic soils with low weed and pest resistance constrained local agricultural development for years. However, between 1970 and 1995, about 40% of the cerrado area was converted into farmland. Together with technology improvements, this helped to transform cerrado into the country’s main agricultural region.
Public policies played an important role in the rise of large scale farming in cerrado as well. The number of agricultural enterprises in the region rose significantly in 1970 – 1985 due to the government’s strategy aimed at the economic development of Legal Amazon, which was implemented by the military government and included state-led resettlement of poor farmers and landless peasants, development of agricultural cooperatives and large-scale livestock farming as well as improvement of infrastructure. At the same time, these developments were accompanied by loose monetary and fiscal policies, resulting in high levels of inflation by mid-1980s.
The advent of democracy in 1985 shifted the focus toward nature protection and limiting agricultural expansion. The new government implemented a number of macroeconomic reforms and support policies, which boosted the country’s agricultural growth and fostered expansion of large-scale farming. As land clearing slowed down, production volumes were raised mainly through productivity growth. At this point, large farms started emerging in the form of family groups while most of the agricultural cooperatives turned out to be less resilient and went bankrupt, being not able to cope with the effects of economic liberalization followed by currency devaluation in 1998.
From 1990 to 2006, land-intensive farms of over 500 hectares in size received support through a combination of state and private investment. They accounted for 36% of agricultural output value in 2006. At the same time, the government introduced a number of support programs for small farms, too, to stimulate their productivity growth. However, increasing competitive pressures on behalf of larger farms alongside market instability triggered further farm consolidation. In early 2000s, large corporate farms started attracting financing from private or public equity funds. Currently, there are about 4,000 large farms with an average farmland area of 8,000 hectares in the state of Mato Grosso, the epicenter of crop production in Brazilian cerrado. Of those, 38 largest farms are operating over 30,000 hectares each.
Proliferation of agroholdings in Argentina over the past decades was based on the development of contractual relations along the entire food value chain, though horizontal and vertical integration took place as well. Several studies outline the role of informal institutions, in particular the culture of trust, in building cooperation among contractors. Notably, large-scale structures in Argentina proved to be flexible and able to adjust to constantly changing institutional environment.
Unlike Argentina, farm consolidation in Brazil is represented mainly by horizontally and vertically integrated farming structures. However, their expansion is also closely related to formal and informal institutional frameworks. Unstable political environment followed by currency fluctuations, inadequately functioning markets and public policies, created prerequisites for farmland consolidation, enabling larger farms to gain economies of scale. Additionally, studies point out that introducing GMO and no-till farming practices as well as intense use of agrochemicals and fertilizers were among the key drivers behind consolidation processes in both countries.