Rich pickings

Brazil is primed to become a global agricultural superpower as trade flows to china and other Asian countries increase. Trade banks are eager to capitilise on this trend, writes Rebecca Spong.


Given its favourable climate, innovations in farming technology and size, Brazil is well-positioned to become the leading agricultural producer helping to meet the growing demand for food across the globe.

Overall exports in agribusiness have reportedly grown by approximately 14% a year for the past 10 years. In the last 30 years, the country has been transformed from a food importer to one of the largest exporters of foodstuffs. Brazil is even beginning to export its agricultural expertise. In mid-2011, the first group of Brazilian farmers were sent out to Mozambique under the terms of a Pro-Savana deal signed in mid-2010.

This deal involves the Brazilian, Mozambican and Japanese governments working together to develop and farm Mozambique’s land. The African nation is hoping it can replicate the success Brazil has had with cultivating swathes of Cerrado, an area of tropical savanna.

Downturn on horizon

However, there has been some speculation that global demand for Brazil’s commodities in general will wane in 2012 due to weakening economies worldwide.
The Brazilian Exporters Association or the AEB stated in late December last year that it is expecting a severe reduction in the country’s trade surplus due to a fall-off in global demand for commodities.

The AEB stated that Brazil’s trade surplus for 2012 will be US$3.04bn, falling from the US$26.82bn expected for 2011.

With this prospect in mind, Brazil’s dependence on Chinese demand for its commodities is set to grow ever stronger. Despite declining economies elsewhere, China’s thirst from Brazil’s agri-goods has not yet abated.

Shipments of soy beans to China reportedly surged towards the end of 2011, while the country has already surpassed the US as Brazil’s biggest trading partner.

China interest

As volumes of soft commodity exports continue to grow, there will be plenty of opportunities for trade banks, particularly the Chinese banks, to step in to finance these flows.

The state-run Export-Import Bank of China (China Exim) is already in talks to provide US$200mn in financing to Amaggi Exportacao e Importacao, the trading arm of the agricultural conglomerate André Maggi Group. Amaggi is primarily focused on the purchase and sale of foodstuffs such as soybean and corn.

Sources close to the deal report that Standard Chartered is also involved in arranging this transaction.

The deal was set to be completed before the end of 2011, but as GTR went to press the transaction had not yet closed. If successful, the deal will represent the Chinese bank’s first investment in Brazil’s agriculture sector.

The transaction marks a change of course for the Chinese bank which previously had prioritised the natural resources sector in Brazil. Yet, China’s growing interest in Brazil’s agri-sector has provoked some concerns that the Chinese, as well as other investors such as sovereign wealth funds, would seek to buy up Brazilian farmland to secure its supply of corn, soybean and other such commodities.

The Brazilian government stepped in in the second half of 2011 and through reinterpreting an existing piece of legislation, it was able to impose restrictions on foreign direct investment.

But, interest from Asian entities in securing their supply of agri-goods from Brazil is far from a new phenomenon. Back in 2007 Japan’s Mitsui acquired a stake in the Brazilian agricultural firm Multigrain, with the bank taking full control of Multigrain in May 2011.

Trade finance implications

In terms of trade and commodity finance opportunities, the growing agricultural sector holds much potential.

Although the large natural resources conglomerates such as oil company Petrobras and mining firm Vale absorb large volumes of trade finance, they tend to be more focused on traditional trade finance and developing new supply chain finance programmes. Unlike their counterparts in other countries such as Russia, they don’t tend to require commodity financing such as pre-export loans.

As one São Paulo-based banker remarked to GTR: “If you want to focus on commodities you need to focus on softs.”

Angela Martins, director, international department at Banco Pine adds: “We know the agri-business very well, it is very important to us. 25% of our credit portfolio is agri-business.”

According to Dealogic data (page 96), out of the top 10 borrowers of trade finance in 2011 in Brazil, there are four active in soft commodities: Tereos, the agri-industrial group specialising in processing of sugar beets, sugar cane and grains; Multigrain; trading company Louis Dreyfus Commodities Agroindustrial, and Caramuru Alimentos.

Lessons learnt

Amid this developing success story, the Brazilian softs market has had its reputation tarnished in recent years, causing some banks to be cautious in its approach to financing the sector.

Back in 2008, the use of a financing tool known as a cedula de produto rural or CPR was a popular way to finance crops in their pre-crop phase. The tool had been created in the mid-1990s and enabled farmers to receive cash in exchange for promises that they would deliver their crop upon harvest to an investor, usually via a third-party controlled warehouse system.

However, by 2008 and the start of the global financial crisis, there were a number of incidents where investors were not receiving payments under CPRs.
Although CPRs had been considered a tried and tested way of financing agri-commodities and a useful way to provide farmers with liquidity, some banks are now wary of moving back into this business.

Martin Schmitz, executive director, structured finance, Latin America, at WestLB in São Paulo comments to GTR: ”In a lesson-learnt process after the crisis of 2008/09, banks have reviewed their perception of CPRs, which, during some legal enforcements, turned out not to be a reliable collateral feature in the hands of international banks as expected. We look at doing financings with top-tier borrowers, mainly larger traders that have a strong credit risk where you don’t need such collateral. We focus mainly on ACC transactions (up to 360 days) and fully fledged PXF structures with additional enhancements such as warrants.”

ACCs (advance on the exchange contract) are what is referred to as short-term trade loans in Brazil and is now considered the most popular product in Brazil.

Technological innovation

Despite the hurdles of recent years, there is a clear sense of optimism about the continued development of the soft commodities sector in Brazil.

As Maximiliano Herrera, head of structured and international funding, Santander Brazil, remarks: “I’m amazed by the soft commodities sector in Brazil and the role Brazil will play in the future. When it comes to softs, Brazil’s competitiveness compared to the rest of the world is enormous.”

Furthermore, if Brazil’s failing infrastructure can be rebuilt and expanded, then the country’s position as a leading exporter of agri-goods further increases.
There is also a feeling that this time Brazil’s commodity-based fortune will not automatically follow the typical boom-bust cycle, due in part to the level of investment into technological developments.

Herrera comments: “In the past, everyone tended to talk about growing economies needing to produce value-added projects, and commentators have looked down at commodity-based economies. But today the situation is not the same. Technology, innovation and the international importance of Brazilian softs will ensure that this sector will rapidly grow.”