The maturity test of the Brazilian agribusiness
For a long time, agribusiness seemed immune to setbacks. However, this may have come to an end, writes Nilson Exel
For a long time, agribusiness, a sector that has been driving the Brazilian economy for years, seemed immune to setbacks. But this period which can be compared to adolescence — a time of discoveries and learning, when risks always seem much smaller than opportunities — may be coming to an end.
The combination of high-interest rates, fluctuations in grain prices, shocks in supply chains, and uncertainties in global markets seems to be the beginning of the financial maturity of the sector, and this can be particularly painful for some companies.
In recent years, Brazilian agribusiness has explored all the possibilities of the financial market. It expanded the use of private credit and gained access to new instruments, such as CRAs and Fiagros. This was a fundamentally positive move, revealing the sector’s growing sophistication.
The problem is that the financial market has always demanded that its participants have strong hearts, especially in challenging cycles for the macro economy. That is precisely what is happening in the current scenario.
The combination of post-pandemic high inflation with the remedy of rising interest rates — coupled with uncertainties in some of the largest global markets — has led some companies in the sector to struggle to meet their commitments to creditors and investors. How will these companies behave from now on? In the coming months, we will witness a challenging maturity test for a portion of the market.
You can argue that this test of resilience applies to all sectors. Yes and no. Yes, because the sharp rise in interest rates from 2021 hurt businesses very non-selectively. No, because agriculture is an atypical sector that operates mainly based on ‘agronomic windows.’ The producer needs to have capital available when these windows open. Delays often result in significant production losses and impacts throughout the supply chain.
With loans and financing becoming more difficult or expensive, achieving synchronicity between managing debt and operating with positive margins has become more complicated.
Recent data released by the Central Bank indicates that the balance of financial loans to the rural sector in arrears or default increased by 49% in September 2023 compared to last year. The percentage of overdue loans is one of the highest in the previous three years.
The good news is that there’s a way to deal with this moment — and emerge stronger when the financial market’s winter passes. The solution essentially involves two strategies. The first is the professionalization of the producer, incorporating new technologies and sustainable practices aimed at increasing productivity. Second, more careful and innovative financial management, including direct negotiation of debt with creditors and refinancing using new guarantees, and the exploration and rational use of financial instruments available in the market.
Neither of these strategies is trivial. Both involve cultural changes and a shift in how entrepreneurs in the sector perceive the financial market. These are the growing pains. The only way for these companies to face the moment’s difficulties and come out of it more mature, efficient, and resilient to risks, which will always exist.
Brazilian agribusiness is a powerhouse, but that doesn’t mean it’s immune to the consequences of market uncertainties. Uncertainties that may become more frequent going forward. Just look at the number of unforeseen events we have been witnessing or experiencing in the last three years: from a pandemic to regional wars, from a global inflationary wave to extreme weather events.
Being adequately prepared will only make the sector stronger and more competitive. That’s how true adults act.
Published on November 24, 2023, at 2:31 PM by Nilson Exel.