2008/2009 Soybean Crop in Brazil: Scarce Credit 9/26/2008
Brazilian soybean production is currently facing a paradox. While strong demand growth suggest an increasing planted area, the finance turbulence and the risky environment have forced trading companies to change their operations in Brazil and credit is subsequently scarcer for farmers planting 2008/09 crops.
As variable costs rise based mainly on fertilizer price increases, which are responsible for up to 73% of the jump in costs, the cost of planting 1 ha of soybeans in the next crop season will be between 30% and 50% higher than in 2007/08. Therefore, the funding needed to finance soybeans farming will jump from R$19.9 billion to R$29.9 billion (+ 50.2%). According to the Central Bank, as stated in its publication "Rural Credit Statistics Annual", R$5.2 billion were used to finance the 2007/08 soybeans crop. This means that only 26% of Brazilian soybean financing cost requirements were covered by Federal rural credit at an interest rate of 6.75% per year.
For the 2008/09 season, the government has authorized a 12% increase in funding available to cover farming costs. Rural credit funds used to cover these costs will jump from R$49.1 billion to R$55 billion alongside a higher credit limit for each farmer. Therefore, if the banks maintain the distribution of credit among different crops unchanged, an extra R$5.9 billion is needed to cover the costs of the 2008/09 soybeans crop which will begin planting at the end of September in southwestern Paraná and in the central region of the BR-163 in Mato Grosso.
Even with the increased resources of financing announced in July by the government in the new Crop Plan (“Brazilian Farm Bill”), banks’ overall participation in financing the new crop is almost sure to fall, given higher input costs. According to Agroconsult simulations, the funding from official credit agencies in 2008/09 will only be sufficient to finance 31% of the soybean crop in Paraná and 8% of the crop in Mato Grosso. The Trading companies provided an estimated R$5.3 billion available, equivalent to 27% of total soybean farming costs. In order to maintain the same level of funding, R$8.1 billion would be needed in the 2008/09 crop season. In absolute terms, we can expect a slight increase to R$5.4 billion, but trading company participation in crop financing will fall to around 18%, based on the fact that these players are unwilling to increase their risk exposure.
In light of the trade-off between credit and costs, and expecting increasing crop volume, farmers will have to finance a large part of their production from their own capital and/or third party funding at higher market interest rates. Although farmer willingness to invest it’s own capital varies by farmer and by state. In Paraná state profits obtained from winter corn and soybeans crops in which returns of R$636 per hectare and R$565 per hectare respectively will enable farmers to provide this self-financing, while still producing a net profit equivalent to R$524 per hectare.
Clearly, Mato Grosso state presents the biggest problem for farmers using their own capital. This State will suffer the most from the cutbacks implemented by trading companies because of the farmers dependence in crop financing. If we take into account the fact that the farmer will use funds from the profits made in the 2007/08 soybean crop season and winter corn in order to cover increased funding requirements for the new crop, only R$85 per hectare net profit will remain from the balance left over from the 2007/08 season, a much lower value given the high level of indebtedness among the region's farmers. This situation can generate two major repercussions. A significant proportion of farmers in the Cerrado region of Brazil will face difficulties obtaining sufficient funding to fully finance the future crop and at the same time meet the financial commitments generated by defaults in previous crops.
Within this environment, there is an increasing possibility of further concentration of land in the hands of farmers who are still able to count on access to credit from banks, trading companies and input suppliers.
Agroconsult is a consulting firm specialized in agricultural market analysis and projects for agribusiness companies. It was founded in 2000 by the agriculture economist André Pessôa, and has a reputation of excellence in Brazil and overseas. Today, Agroconsult has clients of various segments in the agribusiness chain. Agroconsult’s clients consist of, cooperatives, input related businesses (crop defense, fertilizers, and seeds) machinery and infrastructure businesses (storage, tractors and implements), hedging and trading businesses, commodity exchanges and financial institutions. On a yearly basis, Agroconsult organizes the main private sector “Crop Tour” in Brazil across the main grain-producing regions, with the purpose of evaluating harvest conditions and yields. It is known as “Rally da Safra”www.rallydasafra.com.br . Agroconsult’s studies and analyses are produced by a multidisciplinary professional team working jointly with your company to design custom-made solutions and provide support to strategic decisions in a fast and flexible way. Our main activities are: Consultancy on commodity markets; Strategic planning; Agricultural industry chain analysis; and Projects on agsector.
