Capital surpluses in the farming sector and agricultural expansion in Brazil

In recent decades, soybean production has expanded rapidly across areas of South America. This expansion has been broadly credited to rising soybean returns, and the technical innovations and demand side growth that have raised farm prices or farmers' profit margins. In this letter we argue that recent agricultural expansions in South America would be better framed as responses to periodic, short term shocks and incremental increases in the supply of investment capital available to the farm sector. More specifically, we suggest that soybean expansion in Brazil has been heavily driven not by the expectation of future profits, but by the need and desire to invest profits accrued during previous growing seasons. Similarly, we argue that future agricultural growth in Brazil, and likely in many other tropical areas, is primarily constrained by access to capital rather than the spatial extent of profit margins.