Fertilizer barter rates — the ratio between a price of a 60kg bag of soybean or corn traded toward a tonne of fertilizer — are becoming a more attractive way to fund crops in Brazil as the default risk on such transactions is lower than other forms of crop financing.
Trading companies are the most common source for financing agriculture in Brazil compared to other countries, where banks are largely responsible for financing harvests. One reason is in Brazil farmers typically grow two different crops per year on the same parcel. This means a bank would need to finance two crops at the same time, increasing costs and risks associated with two different growing and harvesting scenarios. Typically the financing is for whole crop-year, a long-period to calculate and anticipate those risks.
Fertilizer consumption is growing in Brazil, boosted not only by higher acreage but also by more investments to enhance productivity. This has helped increase the attractiveness of using barter rates.
Cash financing also carries more default risks than financing a crop with fertilizer, since trading companies have more confidence the input — the fertilizer — will be used and result in actual production.
In 2019 a number of major trading companies threatened to stop funding Brazilian crop production because of possible changes in the judicial recovery plan for farmers, a process that is similar to bankruptcy protection. The new rules currently under discussion in the courts may facilitate the recovery plan for individual farmers, instead of the current structure that allows only companies to file for recovery.
If the change goes through, it has the potential to increase the number of recovery plans, which means greater default risk.
Trading companies finance 30-35pc of the national soybean and corn crop, mainly through barter operations with chemicals, seeds and fertilizer, which incorporate interest rates of 20-25pc per year. A market participant said the default rate for one trading company that uses mostly fertilizer barter operations to finance agriculture in Brazil has less than 1pc of default rate. The chemicals industry faces a default risk of around 10pc when financing crops with pesticides.
Another factor behind the growth of fertilizer barter rates in Brazil is the corn ethanol industry, which is growing in the central-west region of the country. The industry pays farmers more to guarantee reasonable volumes of corn. Trading companies can disrupt this market with barter rates and guarantee the volumes required in take-or-pay contracts with railways.
This scenario may change, though, if rural insurance becomes more popular among Brazilian farmers. Currently insurance companies have limited participation as they still do not not know how to calculate the risks involved in the system of planting two crops in the same year.
By Kauanna Navarro
