Brazilian cotton and soybean farmers, beset by falling prices and surging costs, are beginning to default on international banks and trading companies, warns Domicio dos Santos Neto at law firm Santos Neto Advogados in So Paulo.

Producers are neither paying back loans nor delivering commodities, he says.

“Just days before they are due to deliver the merchandise they start creating a host of problems,” says Neto, adding that producers are well acquainted with the local judges, which gives them unfair influence.

Low prices for soybeans and cotton, in conjunction with a smaller harvest, a weaker dollar and greater costs for fertilisers and chemicals are adding to producers’ hardships, Neto says. When problems are unbearable, farmers and cooperatives renege on debt owed to international banks and trading companies in the first place, he says.

As a result, lenders are resorting to collateral management companies such as Swiss-based Cotecna and SGS, and Control Union of the Netherlands to prevent producers from selling goods already pledged under loan agreements.

“None of this happened years ago when soy prices were booming,” Neto remarks.

In a normal transaction, the best alternative is to demand that the debtor pledge his inventory, leading to lower risk provided the crop has already been harvested and is therefore free from plagues and potential droughts. Pledge over crops is also utilised.

The likelihood of arresting ‘stray” merchandise is at 90% when it is backed by Cdulas de Produto Rural (CPRs), a security sold by Brazilian farmers to raise cash, according to him.

Santos Neto is presently studying how to structure transactions from new legislation allowing exporters to keep 30% of their dollar revenue outside Brazil.