South American Real Estate News

Brazil registers the first legal actions against foreign farmland acquisition ban

Gateway to South America on 14/06/2011 - 12:26 in Brasil-general en

Post available in: English

The change in the rules for farmland acquisition by foreigners is causing a commotion in Brazil agriculture industry. Vendors and buyers in rural areas are starting to litigate to see who will pay for the restriction prejudices derived from a new inter pretation of law by the Union´s Attorney-General (AGU).


The ban – which took the form of a reinterpretation of a 1971 law – was a response to reports that Middle Eastern sovereign funds and Chinese state-owned companies were attempting to buy large tracts of Brazilian farmland. But it was a blunt tool that also inhibited foreign investment in storage, processing and sale of Brazilian soft commodities, which has been so important to the industry’s development.


South America has benefited greatly from the commodities boom. Its grains, oils, and minerals are helping fuel China’s rapid growth. Just five commodities accounted for 43 percent of Brazil’s exports last year. Argentina’s commodities exports doubled between 2005 and 2008. Yet the fear that rich countries that don’t have their own supplies of food or raw materials will buy up land in poorer, more productive nations is growing, with the World Bank last year citing South American and African countries among those most vulnerable.


The potential for expanding the agricultural frontier is vast. Brazil has one of the lowest planted-acres-to-total-area ratios of all major producers—with just 7% of total potential arable crop land in use, compared to around 18% in the US. Environmental pressures, high costs and poor logistics in frontier areas are also among the factors constraining expansion.


The first lawsuit will come to court in the coming days with an annulment action proposed by two rural producers, which will try to undo R$ 300 million sales of 40,000 hectares in Bahia and Mato Grosso.


Brazilian vendors claim that some foreign buyers have suspended their part payments on the grounds of not being able to access funding or conduct transactions because of the rules change. Buyers complain that they are not allowed to register land under their names. Nor can do simple operations such as buying inputs or close contracts without the vendors´ consent in cases where mortgages are required.


The names of the parties involved are still confidential. However, lawyer Luther de Paiva Pereira, in charge of the first actions, said the situation benefits foreigners. “They’re comfortable. They bought land and are not paying. They require that vendors warrant, with their personal assets, funding and transactions that they can´t do by themselves because of the AGU prohibitions” he says. The Brazilians are afraid of losing money and personal assets “so they want to go to court and annul these deals.” said Pereira. Meanwhile, he said, “buyers’ profit from the land´s production at no charge.”


In August last year, Brazil’s Attorney-General’s Office reinterpreted a 1971 law restricting land purchases by foreigners to small lots. However, the government is assessing proposals to allow foreigners to buy land for strategic projects or to farm under concession. The Union Attorney-General Louis Adams confirmed they had received “several proposals” for foreign investors to modify the interpretation of the law. “But so far no decision has been taken. ”


Agriculture Minister Wagner Rossi explained that the idea is not to ban all foreign farmers, but to separate the investments that are in Brazil’s strategic interest from the speculative and those that threaten Brazilian sovereignty.


From 2002 to 2008, there was a rush of foreign farmland investment in South America. Brazil´s Central Bank data shows a contribution of usd 2.43 billion in this period. If every agribusiness activities are considered, such as agro-industries and agri-services, the bill comes to a total of usd 46.91 billion over seven years.


Unpublished data from INCRA shows that by 2008 there were 4.04 million hectares registered by foreigners, these account for 34,218 properties, concentrated in Mato Grosso, Mato Grosso do Sul, Sao Paulo, Bahia and Minas Gerais.


Sustainability is a sensitive topic in a country where commodities, which depend on natural resources, are the main export. While Brazil still has millions of acres of untouched pristine savanna, there is tremendous global pressure to slow development, especially in the rainforest. Lopes argues that increasing use of crop technology, especially minimum till and genetic engineering, has lessened the need to expand agriculture in to more sensitive lands.


Any changes to the current law would have to be voted and regulated by Congress and the nature of the ownership restrictions could change dramatically during that process.


It could also take a while before the discussion reaches Congress, as the administration of President Dilma Rousseff has not even started wider consultations about what the final rules may look like, said the industry source.


Contact the Gateway to South America team  to learn about the best investment opportunities in the region. The company is a benchmark for foreign investors wishing to invest in Argentina, Brazil, Uruguay and Chile, providing expert advice on property acquisition and investment tours.

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Post available in: English


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