Fiat subsidiary expands in LatAm
Case New Holland offers agricultural and construction equipment, as well as financial services in Brazil, where it has four plants and a bank. After years of decline, a strong recovery is finally taking place in 2007 and is forecast for 2008. Milton Rego, External Relations Director at Case New Holland in Brazil, explains more.
GTR: Please elaborate on Case New Holland’s Brazil operations.
MR: CNH is a company formed by the acquisition by Case at the end of 1999 of New Holland, which was a holding of Fiat that acted in the agricultural and construction equipment sectors.
With this acquisition, Case New Holland was formed. CNH in Brazil operates on two fronts: construction equipment and agricultural equipment. And there is also the bank which finances the equipment, Banco CNH Capital.
These are the three areas: agricultural, construction and financial. The agricultural part has a plant in the Brazilian city of Curitiba, which produces tractors and combines, and a plant in Piracicaba which manufactures products such as sugarcane and coffee-specific combines and sprayers.
On the construction front, we have a plant in the state of Minas Gerais which produces construction equipment. In addition, we have a logistics and distribution centre for spare parts in Itu, So Paulo, close to Viracopos airport. These are our four plants.
And Banco CNH Capital is headquartered in Curitiba, Paran.
GTR: Is demand in Brazil picking up
MR: Well, 2007 must be seen within a perspective of market recovery. A profound crisis was set off at the end of 2004 in the Brazilian agricultural sector which stretched to 2006. This crisis had many roots, but the main one was the appreciation of the Brazilian real versus the US dollar, and the fall in commodity prices in international markets.
This led rural producers, especially those export-oriented, to have their income severely shrunk as they bought dollar-pegged inputs such as fertilisers at an expensive exchange rate, only to later sell their harvest at a much weaker dollar. In addition, the price of the main commodities in the international market fell considerably, leading to a drastic fall in income.
This made the sector as a whole to scale down investment in tractors and combines.
Between 2002 and 2004, the Brazilian market made up roughly 35,000 tractors and 5,500 combines, falling to 20,000 tractors and 1,000 combines by 2006. It was a very steep fall in the agricultural-related equipment market.
In 2007 we are seeing the market rally, no doubt about it. The sector is expanding and our forecasts point to the market growing as much as 29% for tractors and combines in comparison with 2006. Even so we will not reach levels seen at the start of the decade.
Besides this issue, there was a drought in southern states for two consecutive years, precisely in these two years I just mentioned. In the present year, market growth is anchored in two factors.
First, internal market demand has been growing, even in 2005 and 2006. Besides, commodity prices such as those for corn have rallied considerably. Prices for all commodities including cotton, sugarcane, and even soy, are increasing in the international market, very much due to the US utilising more corn-based ethanol.
We expect the market will end 2007 at about 26,000 tractors and 1,600 combines.
GTR: What role does corn-based ethanol in the US play in soft commodity prices
MR: It is very big. I believe 30% of all corn is directed to ethanol. And given that the US is the main corn producer in the world, this equals low inventories in the US and in international markets, prompting soy and corn prices to recover.
GTR: How much of CNH sales are rural / construction-related
MR: Historically it has always been about 60-65% in the agricultural sector and 35-40% construction. In the past two years it was almost 50-50%.
On the other hand, the construction sector rose in the last three years driven by the domestic market. Brazil is expanding continuously in terms of infrastructure. Our equipment is not related to housing, but to the construction of dams, roads, airports and bulldozing.
GTR: Is CNH planning to invest in Brazil
MR: Last year CNH announced US$200mn investments for the next six years mainly to develop products, systems, training and to launch new products.
GTR: How does Banco CNH Capital finance sales
MR: Banco CNH finances sales almost entirely through BNDES-funded lines.
GTR: What about exports
MR: Mercosur – the trade bloc comprised of Argentina, Brazil, Paraguay, Uruguay and recently Venezuela – is the leading customer. Then come Venezuela and Colombia.
The Caribbean is important for some products, then it is Eastern Europe, some markets in Africa, the US.
GTR: And what about the tax regime for intra-Mercosur trade
MR: All intra-bloc imports are exempt from import tax.
GTR: Is it difficult to collect payments deriving from Venezuela-bound exports
MR: So far we have become aware of this issue through the press. This has not affected us thus far. We are tracking this issue and I know that many manufacturers are having problems.
GTR: What tenors can you provide to your customers
MR: Those are BNDES tenors and they vary from four to six years. In the case of exports, it depends on the country and the type of financing, which is often government supplied. For exports it is not BNDES.
GTR: How much of your production is exported
MR: The export price is quoted in dollars, in the domestic market it is in reais. The product becomes less competitive for export when the real rallies. The ratio is 35% for export, 65% for the domestic market.
This year we are exporting less than we did last year, in terms of percentage. Naturally, the domestic market keeps rising, but mainly it is a matter of competitiveness. We do not have at this moment problems related to production limits.
GTR: What are the main risks when operating in the Brazilian agribusiness
MR: The main risk is unpredictability because as opposed to other countries or regions such as Europe and the US, the two main markets, there are very few anti-cyclical mechanisms in Brazil.
While in the US you have the Farm Bill, and in Europe there are a host of laws which depend from country to country to protect against a range of problems including a fall in productivity triggered by droughts or any type of cataclysm, or a variation in commodity prices and so on, in Brazil none of this exists.
In Brazil, agricultural insurance does not reach 5%. So Brazil is much more exposed because the rural market is cyclical the world over, but in Europe and the US there are anti-cyclical mechanisms.
In 2004, 2005 and 2006 we were in bad shape; now we are starting to grow. It is a story that keeps repeating.