Brazilian farmers face crop financing challenges
The Covid-19 pandemic is creating financing challenges for Brazilian farmers, delaying fertilizer purchases for the remainder of the 2020-21 soybean season and for the 2020-21 winter corn crop (safrinha).
The Brazilian Central Bank reduced the benchmark interest rate to 3pc — the lowest level on record — to address the economic effects of the inevitable recession. But many farmers say lenders and other financial intermediaries are going in the opposite direction, increasing interest rates and restricting access to capital for all but the absolute lowest-risk customers.
Proposed rules for farmer recovery plans in top grain producing state Mato Grosso, which are similar to bankruptcy protection, may also increase default risk. The rules currently under discussion in the courts may facilitate recovery plans for individual farmers, instead of the current structure that allows just companies to file for recovery. This means crop financiers, including major trading firms, face greater risk of individual farmers seeking the judicial recovery mechanism, where as much as 80pc of their debts could be eliminated.
This possible change led several major trading companies to threaten to stop funding Brazilian crop production last year. Trading firms are still financing crops, but they are more cautious, and credit is tighter.
Banks, which are not the main source for crop financing in Brazil, are also more cautious this crop. Many notaries, which are needed to close financial transactions,are closed as part of measures to contain the Covid-19 pandemic. The Brazilian real depreciation against the US dollar also increases the risk of financing the input purchases — pesticides, seeds, and fertilizers — as most are imported and are now more expensive to farmers. A major Brazilian grain company said that even the most largest farmers are having difficulties receiving new credit lines for financing crops.
For farmers buying inputs like fertilizer without financing can be particularly risky, especially if the Brazilian real grows stronger when its time for them to sell their crops.
Barter operations — where farmers buy inputs like fertilizer and pay with crop production — is an alternative. But not all trading firms are willing to do such transactions this late in the season. The fertilizer purchases for 2020-21 soybean planting, which begins in September, is almost over, and it is too early to set prices for 2021-22. Producers have reported over the past few weeks that inquiries for deliveries in 2021 are increasing, but it is risky to set prices now that some cfr Brazil fertilizer quotes are close to historic lows.
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