The number of requests for bankruptcy protection among farmers in Brazil’s major agro-powerhouse state of Mato Grosso has spiked. At the same time, unfavorable climate conditions are expected to significantly reduce crop yields this year.
These are two ominous signs for a sector that has propped up Brazil’s economic growth in recent years — and makes up an increasing share of the country’s exports. But how bad is the situation? Is the sector headed for a crisis? Or is this much ado about nothing?
According to The Agribiz, an independent website that covers the Brazilian agricultural sector, the debts of farmers who have or are about to file for bankruptcy protection have topped BRL 2 billion (USD 500 million).
Meanwhile, climate conditions have hurt grain producers in the Center-West region, also known as Brazil’s soy belt.
A February 5 report by Mato Grosso agricultural economics institute IMEA estimated that the state’s soy crop yields will be down by about 15 percent this year, compared to the last cycle.
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In this episode:
- Luiz Henrique Mendes is co-founder of The Agribiz, an independent website that covers the Brazilian agricultural sector.
Background reading on Brazilian agro:
- Brazil’s trade balance ended 2023 with a record surplus, 60.6 percent higher than the previous year, largely due to the trading of record volumes of agricultural commodities.
- The government reduced forecasts for this year’s grain harvest. The harvest of corn, the country’s second-most important crop, is expected to decline by over 10 percent.
- A 2023 study showed that access to rural credit is vastly unequal in Brazil, granted largely to bigger properties located in the South and dedicated to producing grains. Family farmers are overlooked, despite making up the majority of rural properties in Brazil, and producing most of the food consumed in the country.
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Transcript of this episode (by Cockatoo)
Euan Marshall: The number of requests for bankruptcy protection among farmers in Brazil’s major agricultural state of Mato Grosso has spiked, and at the same time, unfavorable climate conditions are expected to significantly reduce crop yields this year. These are two ominous signs for a sector that has propped up Brazil’s economic growth in recent years and makes up an increasing share of the country’s export, but how bad is the situation. My name is Euan Marshall, Deputy Editor of The Brazilian Report, and this is Explaining Brazil.
According to The Agribiz, an independent website that covers the Brazilian agricultural sector, the debts of farmers who have or are about to file for bankruptcy protection have topped 2 billion reais, or half a billion dollars. Meanwhile, climate conditions have hurt grain producers in the Center-West region, also known as Brazil’s soy belt. A February 5th report by Mato Grosso Agricultural Economics Institute, EMEA, estimated that the state’s soy crop yields will be down by about 15% this year compared to the last cycle. Luiz Henrique Mendes wrote about the credit struggles affecting Brazilian agro, and he’s a co-founder at the Agribiz. And he’s also our guest on the podcast this week. Luiz, thanks for joining us.
Luiz Henrique Mendes: Thanks, Euan. It’s a pleasure to be here with you today.
Euan Marshall: And Luiz, before we delve into the specific subject of today’s episode, can we just take a step backward and maybe try and contextualize the significance of Brazil’s agribusiness for the country’s economy as a whole?
Luiz Henrique Mendes: Agribusiness accounts for almost a third of Brazil’s GDP, considering all the supply chain, and it’s responsible for the national trade surplus. Without agriculture, Brazil would have a deficit of about $50 billion on the trade balance. So it’s very important to Brazil.
Euan Marshall: Yeah, and in the first quarter of 2023, agribusiness made headlines by, you know, posting huge growth of 21.6%, and that actually was able to push overall Brazilian GDP growth in the first quarter up to 1.9%. But how has it fared in the quarters since then?
Luiz Henrique Mendes: Since then, we’ve been doing well. The latest data available shows agriculture growing almost 9% in the third quarter of last year due to a record corn and sugarcane harvest. By the way, last year Brazil surpassed the US for the first time ever as the world’s largest corn sporter. We are already the biggest sporter of soybeans, coffee, sugar, beef and chicken. So Brazil is definitely a food powerhouse.
Euan Marshall: And what’s the outlook looking like for this year?
Luiz Henrique Mendes: The outlook for this year is not as promising as it was last year because a severe drought has affected the most important producing regions, including Mato Grosso, the biggest one. So we should see a drop in the nation’s grain production, which will certainly impact the sector’s GDP.
Euan Marshall: Right, but I mean, Agriculture Minister Carlos Favaro said this week that, quote, agro is in crisis. Is the situation bad enough to call it a crisis?
Luiz Henrique Mendes: Agriculture in Brazil is so huge that we don’t have a short answer for that. The agriculture minister fixed his remark in the days following this interview that you mentioned. He said the entire sector is still far from the crisis. The farmers who struggle at Rulph and Mato Grosso may be in a crisis because they may see their production falling by 20%, 30%. It’s a big one. But in other regions, like in the south of Brazil, production will increase compared to last year. And when we look at other commodities, like sugar and coffee, their producers have due times amid rising crops and prices.
Euan Marshall: And yet, some commodity prices have dropped recently. And as we’ve shown at The Brazilian Report, Brazil’s record trade surplus came from massive volumes sold rather than actual high prices. So how much are the post-pandemic drops in soybean and corn prices affecting the margins for Brazilian farmers?
Luiz Henrique Mendes: Margins certainly have fallen a lot. For soybean farmers, margins should halve on the current crop, which is even worse for corn producers. But we may see margins recovering this year, especially in the second half, as fertilizer and agrochemical prices have dropped over the past year.
Euan Marshall: And it’s also forced the price of land for farming down, right? How does that work?
Luiz Henrique Mendes: Yes, for sure. In grain-producing regions, a piece of land is negotiated in bags of soybeans, so that’s a direct correlation between grain and land prices. However, land prices usually fall or increase slower than commodity prices. Liquidity in this market is lower, so prices don’t move so fast.
Euan Marshall: And Luiz, what about the impact of El Nino? I think throughout 2023, we heard this weather phenomenon was affecting conditions, but how did it affect agriculture? And is it still affecting agriculture?
Luiz Henrique Mendes: Yes, a lot. But this El Nino and on the other hand El Nino has been good for South producers and Argentinians. So climate issues are the most important thing to define how big the Brazilian crop will be this year. And so what was the difference then between how it affected Mato Grosso and the center-west of Brazil and then, as you mentioned, how it affected farming in the south of Brazil? El Nino has impacted Brazil in different ways. In Mato Grosso, for example, which is our biggest producer of soybeans and corn, it caused less rain, which was bad for crops. On the other hand, in Rio Grande do Sul, which is also a big producer of grains, the rain was more frequent than in the past, and it helped the productivity of grains.
Euan Marshall: Just moving on a bit, in 2021, Brazil’s Congress approved the so-called FIAGROS, which are investment funds in agro-industrial productive chains. It’s like an investment vehicle that works like a real estate investment fund and has quickly become an important instrument for raising capital. How are investors reacting to these issues that farmers are facing?
Luiz Henrique Mendes: They are very worried. We can see these concerns looking at those food prices as they are listed in the Brazilian stock exchange. There’s a relevant portion of investors that are leaving these funds. At some point, it’s natural because it’s the first big production drop in the FIAGRO era.
Euan Marshall: And Luiz, you wrote an article about this spike in farmers requesting bankruptcy protection. Can you just explain what’s going on there? What’s the situation?
Luiz Henrique Mendes: Some farmers, especially in Mato Grosso, have filed for bankruptcy. It’s not a common thing, but it has increased last year. It’s not a big issue when it comes to bankruptcy on the farmer field. Of course, we’ve seen last year more and more, especially in Mato Grosso. Because these farmers have more debt, and when prices dropped last year, they have been struggling with how to pay this debt. But it’s a problem affecting some agricultures, not all of them. We’ve seen an increase. The last data shows 80 agricultural farmers filing for bankruptcy. It’s very big. But it’s not very big when we compare it with the Brazilian agriculture we have at least 400,000 farmers in the competitive agriculture in Brazil. So, 80 is not so big.
Euan Marshall: And so how bad are the solvency and liquidity risks at the moment in Brazil? I mean is there a systemic problem in Brazilian agribusiness or I mean maybe is that something like a drop in the ocean as you’re saying?
Luiz Henrique Mendes: Oh yeah, it’s not a systemic problem it’s important to say. People are worried, which is natural, but it’s not a massive problem. Brazilian Ministry and Central Bank have been chasing the situation closely. As far as we can see, it’s not a big issue, but unfortunately, we may see some farmers leaving the activity, none of them, and Brazilian agribusiness is healthy to deal with this crisis.
Euan Marshall: Luiz Henrique Mendes is the co-founder of The Agribiz, an independent website that covers the Brazilian agricultural sector. If you like Explaining Brazil, please give us a five-star rating wherever you get your podcasts. And if you’re listening on YouTube, don’t forget to like the video and subscribe to our channel.
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