The Brazilian economy, by mid 70’s, started to suffer inflationary pressure and imbalances in external payments (Mendonça de Barros, 1979). As a consequence, the government could no longer supply the usual financial resources to the farmers and the formal credit system created in 1965 started to shrink. The reduction of resources for the rural credit system is strong evidence that this model is obsolete.
Additionally, inappropriate legislation and bureaucracy biased the process of credit distribution in favor of larger farmers. In the macroeconomic context, the old process of agricultural financing was not an efficient means to an end. The interest rates prevailing in the Brazilian economy have been extremely high, thereby increasing the cost of credit to the farmers.
Unfortunately, the short-to-medium perspectives for a considerable interest rate reduction are not promising. The lack of rural banking facilities (almost all credit lines are in the banking system) and the high producers’ risks (no protection system existed to dilute the risk for the whole system) are also great constraints for the development of a new financing system (Gasques et al., 2000) despite a series of proposals discussed in academia and in Congress, a new and noteworthy solution was created, the credit instrument known as the CPR (Certificate of Rural Product), described below.
To reduce the pricing and risk in agriculture, the producers can make hedge; in other words, make use of forward contracts or options to minimize risks caused by price volatility. Forward markets, futures & options are relevant instruments for producers, investors and traders to reduce the risks inherent in agricultural production.
Forward contracts obligate buyer to buy or sell a certain amount of product at a future date. Usually, forward contracts are settled between agents who expect to receive or make payments by units of product; the amount of product and the delivery dates are set by the agreement.
Early experiences with CPR began in 1994 by Banco do Brasil. It was a financial asset that was issued by farmers and their cooperatives with the following characteristics:
Since several economic crises forced the public sector to reduce its budget, and the lack of alternative funding caused the bankruptcy of the traditional system, a new instrument was developed to fill the gap: CPR (certificate of rural product). The evolution of the CPR market in the last decade shows the potential of this instrument that is an alternative system for financing Brazilian agriculture activity.