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”
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.