This document discusses Brazil's capital market instruments for agriculture, specifically the Cédula de Produto Rural (CPR) rural bond program. It provides the following information: - CPRs were introduced in 1994 to strengthen private sector financing for agriculture after the government reduced its role. CPRs allow farmers to pledge future crops or cattle in exchange for upfront financing. - CPRs have become popular due to their strong legal protections and can be used physically or electronically. Various other financial instruments have been introduced building on CPRs. - Once registered, CPRs can be traded on commodity exchanges, used for delivery on futures contracts, or underlying for other financial products, providing flexibility

1. Capital market instruments for agriculture
– what can we learn from Brazil?
Lamon Rutten
CTA Revolutionising finance for
agri-value chains
Nairobi, 14-18 July 2014

2. www.fin4ag.org
Start of the Brazilian programme
• Up to the early 1990s, Brazil’s agri-finance was government driven: Banco
do Brasil was a large financier, and since 1965, all banks in the country
were obliged to allocate 25 per cent of their demand deposits to the
agricultural sector, mostly to be lent at a fixed, low interest rate
• But the State had to reduce its involvement in agricultural finance and
marketing; at the same time, agriculture continued growing
• In the early 1990s, the private sector developed prepaid forward contracts
as a financing tool, but these carried high transaction costs and were
difficult to enforce.
• In 1994, the government strengthened the regulatory framework for such
new financing mechanisms by introducing the Cédula de Produto Rural
(CPR, literally “rural product note”)

3. CPRs are bonds that can only be issued by farmers
and farmers’ associations, including cooperatives,
in which they pledge an
agreed amount of crops
(including in semi-
processed form, such as
ethanol) or cattle, in
return for financing.
CPRs have since
become the underlying
for many other forms of
agri-financing.

4. An important reason for CPRs’ popularity is their
strong legal status:
•rights are enforceable through out-of-court
arbitration procedures;
•The seller is barred from using force majeure or
“Acts of God” as an excuse for defaulting on his
obligations;
•they benefit of priority rights – the commodities
mentioned in the bonds cannot be seized by third
party creditors, even in the case of bankruptcy of
the issuer.

5. CPRs can also be issued electronically

6. The basic form of CPR - 1994
Farmer
Buyer/
investor Farmer
Buyer/
investor
Ware-
house
Physical CPR
Initial date Harvest/delivery time
Delivery of crop
or cattle into pre-
agreed warehouse/
stock yard
Delivery of
warehouse/
stock yard
receipt
Payment
Sale of a bond
committing delivery of a set amount of
crops, processed products or cattle of
a stipulated quality at an agreed
delivery location. Set
discount/premium if delivery quality
differs from the agreed one.

7. CPR forms introduced in 2001
Farmer
Investor/
input cy. Farmer
Investor/
input cy.
Farmer
Buyer/
investor Farmer
Buyer/
investor
Financial CPR
CPR indexed to
futures market
Farmer issues
a Financial
CPR, based on the expected
value of his future production
Payment
Payment
Market
Sale
Payment of
the CPR, at
issue value plus
interest
Farmer issues
an indexed
CPR, specifying a quantity and a
reference price
Payment
of quantity multiplied by
the reference price at the
eve of settlement

8. Physical CPRs are mostly used between buyers and
sellers.
Financial CPRs can be issued to a bank or other
credit provider which has already promised to finance
the farmer (for example, an input supplier wiling to
sell on credit);
or it can be auctioned off to the highest bidder
through the electronic network of the commodity
exchange (the latter would generally require the farmer
having received an aval/guarantee from a reputable bank or
cover from an insurance company on his CPR).

9. In order to be publicly negotiated (i.e., to be considered as
financial assets), CPRs must be registered in the System of
Registration and Financial Settlement of Assets, as managed
by the Central Bank of Brazil.
Currently, two registries are approved by the Central Bank,
the Bolsa Brasileira de Mercadorias (BBM, part of the
country’s futures exchange, BM&F), and CETIP (the
Settlement and Custody Chamber) – CETIP is by far the
largest registry for rural bonds. Once issued, CPRs must be
held in custody in one of the 50+ financial institutions
authorized by the regulatory authority for capital markets to
provide custody services for securities.

10. Once CPRs are in a Central Bank- approved registry they can
be used for many purposes:
• They can be traded on the commodity exchange;
•they can be used to meet delivery obligations on a futures
position;
•they can be traded over-the-counter;
•they can be auctioned off through Banco do Brasil’s e-
auctioning system (cost: 0.75%);
•they can be used to meet margin requirements on BM&F;
•and they can be used as underlying for more complex
financial instrument.

11. The standard form of using CPRs in a
financing transaction
The cattle have to be
identified by numbered
rings, with “SISBOV”
numbers registered in
the Ministry of
Agriculture and the
vaccination control
services. All of the
animals’ SISBOV
numbers are
specifically mentioned
in the CPR.

12. Building on CPRs – the post-2004
alphabet soup
Acronym Name Underlying collateral Issuers
Pre-harvest
CPR Cédula de produto
rural
Crops, cattle, to be
produced in future
Farmers, cooperatives
LCA Letra de crédito do
agronegócio
Loans backed by
agribusiness credit
rights
Banks
CDCA Certificado de direitos
creditórios do
agronegócio
CPRs Agri-businesses
Certificado de
recebíveis do
agronegócio
Receivables (linked to
CPRs and CDCAs)
Securitization
companies
EPA Export prepayment
agreement
Commodities (agri or
non-agri)
Commodity producers
Post-
harvest
Certificado do depósito
agropecuário
Goods in warehouse Warehouses
WA Warrant agropecuário Goods in warehouse Warehouses

13. Using CDCAs to finance a sugar milling
operation

14. Using CRAs to finance multiple suppliers

15. Use for post-harvest finance

16. There is a strong secondary market for CPRs

17. But copying the Brazilian system is not easy:
you need a strong support system

18. Questions?
www.fin4ag.org
Thank you for joining
us in Nairobi!