Af­ter years of binge bor­row­ing, Brazil’s big farms are in a deep hole

A credit crunch, cur­rency de­clines, and a rash of bank­rupt­cies have hit Brazil’s big farms “Dur­ing the com­mod­ity boom years, there was this eu­pho­ria sur­round­ing ris­ing demand for food”

Bloomberg Businessweek (Asia) - - CONTENTS - −Ger­son Fre­itas Jr. and Fabi­ana Batista

Like many of Brazil’s soy­bean farm­ers, Nel­son Ví­golo has learned first­hand just how fast booms can go bust. Dur­ing Brazil’s go-go days, the soy­bean farmer borrowed big to buy and lease land, boost­ing the acreage of his farm in the state of Mato Grosso fif­teen­fold, to 150,000 hectares (370,658 acres), or al­most twice the land area of New York City. Now his com­pany, Grupo Bom Je­sus, is suf­fo­cat­ing un­der the weight of that debt, un­able to come up with enough cash to cul­ti­vate the huge spread. “Dur­ing the com­mod­ity boom years, there was this eu­pho­ria sur­round­ing ris­ing demand for food— we needed to pro­duce more to feed the world,” says Ví­golo, who paid for half his com­pany’s ex­pan­sion with borrowed cash. “It felt like it would last.”

It didn’t. Ví­golo’s com­pany filed for bank­ruptcy in May, say­ing it owed about 2 bil­lion reais ($590 mil­lion) it can’t pay. At least 10 ma­jor Brazilian soy­bean pro­duc­ers have de­faulted or sought to re­struc­ture debt in the past year, and more prob­a­bly will fal­ter.

Over the past two decades, grow­ers in the coun­try’s agri­cul­tural heart­land have borrowed bil­lions of dol­lars to turn rain for­est into farm­land, part of Brazil’s trans­for­ma­tion into a crop-ex­port­ing jug­ger­naut. As prices rose, the coun­try be­came the world’s largest ex­porter of soy­beans for an­i­mal feed and cook­ing oil. But the soy­bean

in­dus­try has been crip­pled by a mountain of debt, a global soy­bean sur­plus, and Brazil’s long­est re­ces­sion in a cen­tury. Brazilian banks, fac­ing ris­ing delin­quen­cies from con­sumers and com­pa­nies, have tight­ened lend­ing stan­dards. One re­sult: Some grow­ers don’t have enough cash to plant or are ditch­ing plans to ex­pand.

Farm­ing fell into the same trap as other in­dus­tries in Latin Amer­ica’s largest econ­omy, from air­lines to phone car­ri­ers. They tapped credit lines in dol­lars be­cause in­ter­est rates were lower and they were get­ting paid in dol­lars, as so much of their out­put was ex­ported. When the Brazilian real plunged 33 per­cent against the dol­lar last year, the cost of re­pay­ing those loans bal­looned even as the prices the farm­ers could get for their crops were fall­ing.

As much as 10 bil­lion reais in farm debt may need to be re­struc­tured, ac­cord­ing to a fi­nancier who asked not to be iden­ti­fied dis­cussing his bank’s pri­vate fore­casts.

The credit crunch may do even more to slow the ex­pan­sion of Brazil’s soy­bean farms than the drop in prices. Pro­duc­tion next sea­son, which be­gins with plant­ing in Oc­to­ber, may in­crease by the small­est amount in eight years, with farm­ers adding only 500,000 hectares, ac­cord­ing to Brazilian crop con­sul­tant Agro­con­sult. That’s less than half the 1.1 mil­lion hectares added last year, when 33.3 mil­lion hectares were sown, ac­cord­ing to the U.S. De­part­ment of Agri­cul­ture.

Any debt-trig­gered slow­down will be a missed op­por­tu­nity for Brazilian grow­ers, since prices and demand have ral­lied re­cently. The USDA es­ti­mates global con­sump­tion will ex­ceed pro­duc­tion for a sec­ond straight year, af­ter three years of glut. Soy­bean farm­ers in the U.S., the top grower and No. 2 ex­porter, are in­creas­ing acreage in 2016.

Prices on the Chicago Board of Trade are up 31 per­cent since touching a six-year low in late Novem­ber. The rally was sparked partly by crop dam­age from a drought in Brazil and ex­cess rain in Ar­gentina. “The slow­down in plant­ing ex­pan­sion could be bullish for soy­bean prices, es­pe­cially if there are any prob­lems with this year’s har­vest in the U.S.,” says Natália Orlovicin, an an­a­lyst at INTL FCS­tone in Camp­inas, Brazil.

For 2016-2017, Ví­golo says Bom Je­sus may plant 10 per­cent less farm­land than the pre­vi­ous crop year, adding to a sim­i­lar re­duc­tion by

Van­guarda Agro, an­other big pro­ducer that’s scrap­ping less pro­duc­tive ar­eas in Bahia as it seeks to re­struc­ture 842 mil­lion reais in bank loans. Two other pro­duc­ers, Grupo J. Pupin and Grupo Pi­nesso, de­faulted on 900 mil­lion reais and 600 mil­lion reais of debt, re­spec­tively, in the past year.

“As the cost of money rises, mar­gins on ex­pan­sion projects need to be very high,” says Aurélio Pav­inato, chief ex­ec­u­tive of­fi­cer of SLC Agrí­cola, Brazil’s top pub­licly traded farm­ing com­pany, which halted its in­vest­ment in new acreage af­ter in­ter­est rates climbed: “Brazil’s soy­bean area won’t grow this year.”

On a re­cent af­ter­noon, as a cold wave slammed into south­ern Brazil and added to con­cerns about crop losses, about 400 farm­ers, bankers, and traders gath­ered in São Paulo for an agri­cul­ture con­fer­ence to dis­cuss the out­look for the com­ing crop year. Ex­ec­u­tives swapped sto­ries about the boom years, when lenders reg­u­larly served up un­so­licited loans to grow­ers, and fret­ted over to­day’s debt bur­den. The con­sen­sus among the in­dus­try play­ers in at­ten­dance was that the prob­lem is con­cen­trated among Brazil’s largest farm­ing groups—those cul­ti­vat­ing more than 10,000 acres—be­cause they rely more on pri­vate and for­eign fi­nanc­ing rather than govern­ment aid.

To help ease the fund­ing short­age, chem­i­cal, fer­til­izer, and trad­ing com­pa­nies are step­ping in to team up with banks and pro­vide a big­ger share of fi­nanc­ing, say three ex­ec­u­tives with di­rect knowl­edge of the mat­ter who asked not to be iden­ti­fied talk­ing about pri­vate loan ac­cords. Those com­pa­nies sell more sup­plies and ser­vices to farm­ers as out­put grows, so they have an in­cen­tive to help keep farm­ers afloat. One of the peo­ple said the share of fund­ing from such sources may rise to 40 per­cent this year, up from 25 per­cent last year.

For Ví­golo, owner of Grupo Bom Je­sus, such help comes too late. In the months lead­ing up to its May 31 bank­ruptcy fil­ing, the 53-year-old farmer says cred­i­tors reg­u­larly showed up with court of­fi­cers to seize crop

in­ven­to­ries. “It was very sad to see that some of the doors that used to be al­ways open for us are now closed,” he says. “Ev­ery­one in the mar­ket wanted to do busi­ness with us, and now we have to go af­ter them.”

The bot­tom line Af­ter years of binge bor­row­ing, about 10 of Brazil’s largest farms have de­faulted or sought to re­struc­ture debt in the past 12 months.

Soy­beans be­ing har­vested at a mas­sive farm in Brazil’s Mato Grosso

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