Grain companies in Brazil, who are members of the Brazilian Association of Vegetable Oil Industries (Abiove), have indicated that they intend to reduce the amount of credit offered to farmers for producing crops during the 2019/20 growing season. The grain companies provide about one third of the credit that Brazilian farmers use to produce their grain crops.
The grain companies offer credit to large farmers in the form of barter by providing seed, fertilizers, and chemicals in exchange for the farmers contracting to deliver a predetermined quaintly of soybeans or corn after harvest. This barter system has been in place in Brazil for many years because the Brazilian government offers only a limited amount of subsidized low interest production loans to large producers. The government believes that they should use their limited resources to assists small and medium size producers.
Over the last two years, a number of the large producers in Brazil have defaulted on their agreement to deliver the quantity of soybeans they had promised, electing instead to declare bankruptcy and asking courts for protection from creditors, which are the grain companies. The judicial process allows farmers to hold onto their grain while their claim slowly winds its way through the Brazilian courts. Grain companies have become increasingly frustrated with the slow judicial process and the lack of delivery of the promised grain.
The increase in bankruptcy protection claims by producers seem to be the result of very low grain prices and increased cost of production. Additionally, Brazilian producers are very upset over the higher mandatory freight rates that have been implemented in Brazil. These higher freight rates drive up their cost of production, squeezing their profits even more. It also means that grain companies must offer less to the producers for their grain in order to cover the cost of freight while still remaining competitive in the global market.
The head of the legal department at Abiove cited this “break in confidence” between producers and grain companies as the reason for grain companies pulling back on the amount of credit they will extend to Brazilian farmers in 2019/20. Abiove member companies may reduce the amount of credit up to 50% for the 2019/20 growing season.
For their part, the grain companies also want to be very cautious in extending credit because of their much higher transportation costs resulting from the higher freight rates. The president of Abiove indicated that producers will have to rely more on traditional financing from banks or their own resources to finance their 2019/20 crops.
He feels this may limit the expansion of soybean production in Brazil in 2019/20, but he also indicated that the market could change dramatically over the next few months due to ongoing problems in the U.S.
The 2019 crops in the U.S. are being planted at a historically slow pace which will result in lower acreage, lower yields, and higher prices. If these problems persist and prices move significantly higher, Brazilian farmers may be more inclined to increase their soybean acreage in 2019/20.
Source: Agropages
Image source: “Brasil” by ruifo is marked with CC BY-NC-SA 2.0.
