May 5, 2021

 

Global grains merchants and Brazilian soy farmers dispute over agreements

 


Global grains merchants are monitoring Brazilian soy farmers to ensure the farmers deliver promised crops and do not seek a different buyer, as prices for soybeans have doubled since the agreements were made, Reuters reported.

 

Brazil accounts for 50% of the global trade for soybeans. Soybean prices have surged to its highest in eight years, with soy exports from Brazil in high demand especially to China.

 

If farmers deliver promised crops to traders, the traders will profit. If farmers renege on the agreement, they may double their income.


The dispute between traders and farmers have tested rural Brazil's informal business culture. Farmers said traders demand delivery even when no contracts have been signed. There are cases where agreements have been made via phone, e-mail, or through a Whatsapp verbal agreement. These agreed upon deals are less attractive to farmers because soybean prices have surged 71% from May last year, when many of these deals were closed.

 

Traders said farmers must deliver on their agreements. Lobbyists for top grains merchants such as Archer-Daniels-Midland Co, Bunge Ltd, Cargill Inc, and Louis Dreyfus Co have told Reuters the tactics they use to ensure farmers keep their word.

 

Nancy Franco, a lawyer that has represented major trading companies and currently overseeing dozens of lawsuits against farmers going against their contracts worth millions, said there are 40 cases against soy farmers this season compared to two or three in the past few years, as farmers threatened to renege on contracts or ask for higher prices.

 

The last major wave of farmers defaulting on agreements were in 2003 and 2004, when soybean rust disease affected crops. This year, traders said majeure clauses apply to only a few farmers, as most look to back out of contracts to profit on high prices. The traders said Brazil's US$45 billion soybean industry is sustained on trust in the integrity of contracts, from input and machinery sales to crop financing.

 

Farmers said the traders are ensuring soy deliveries by harassing them and violating their privacy.

 

According to a police report filed in March this year and a related court filing seen by Reuters, a farmer in Goiás said he was allegedly intimidated by Gavilon do Brasil hired contractors. The farmer said the contractors filmed his farm without permission and claimed rights to his 12,000 tonnes of soy valued at US$7 million based on current prices.

 

Gavilon, which is based in the United States, told Reuters that the contract with the farmer was legal and binding. The company said surging soybean prices have created issues in Brazil, so it is enforcing its fulfillment of most disputed contracts to obtain the soybeans it had negotiated for.

 

In 2020, soybean farmers in Brazil sold a record volume of crops before planting even began due to attractive prices. But tightened supplies resulted in prices surging further.

 

Traders agree with farmers to purchase soybeans in advance to guarantee supplies and fix purchase prices. Trades are hedged, with commitments to process or export tied to these agreements.

 

Tough tactics are a must to enforce contracts both informal and formal, said sources at trading firms and their lawyers. Farmers said a washout clause permits them to exit contracts without paying fines of 30% to 50% of the spot price of the soybeans committed.

 

Wellington Andrade, executive director of grower group Aprosoja, said they do not admit that this is contractual non-compliance, as it is a contractual resolution.

 

Alessandro Reis, COO of CJ Selecta, the local unit of South Korean group CJ Cheiljedang, said if the traders did not organise, the supply chain will be affected.

 

The CJ Group purchased 4 million tonnes of Brazilian soybeans this season to process and resell to international clients, such as Unilever and salmon producers in Norway. Reis said CJ Selecta had about 2,000 active Brazilian soybean contracts and more than 400 farms being monitored to ensure farmers do not sell their soybean to other companies that pay more.

 

CJ Selecta secured a court order to ensure delivery of 3,600 tonnes of soybeans from one farmer in Minas Gerais state in February. The farmer committed soybeans to CJ Selecta in May 2020 at between BRL 90 and BRL 95 (~US$16.53 to US$17.45; BRL 1 = US$0.18) per bag, but pursued a more profitable deal later.

 

Marcus Reis, a lawyer for Brazilian grain buyer Agrobom, used evidence from a Whatsapp chat to get a court order to seize thousands of bags of soy from producers seeking to renegotiate prices. Reis said Agrobom had contracts to sell soybeans to Bunge and could not afford to purchase soybeans on the spot market if the farmer defaulted, Reis said.

 

Courts have sided with trading companies, but farmers say informal contracts should not be legally binding.

 

Nelson Barduco, who defends grower Marcelo Rezende, one of the farmers sued by Agrobom, said there was a Whatsapp chat between his client and Agrobom about selling soybeans. But the farmer turned down a formal contract later.

 

Agrobom told Reuters that as long as the farmer says "okay", it is considered a commitment especially if a deal has been done between both parties in the past. Barduco said his client accepted BRL 80 (~US$14.69) per bag of soybean worth double the amount, otherwise the court case would continue while the soybean remained in storage.

 

Rezende and the other farmers refused to speak to Reuters. 

 

Two Mato Grosso state farmers, who spoke to Reuters on condition of anonymity, said some farmers did default on their contracts. One farmer said rains disrupted harvesting, while the other knew farmers who willingly delivered product to other traders.

 

An anonymous source close to Cofco, China's state-run trading house, said farmers defaulting on agreements are two to three times higher compared to past seasons. The source said Cofco had purchased monitoring and satellite technology knowing that this season will be challenging.

 

Cofco did not respond to Reuters' request for comment.

 

In February, the Brazilian association representing oilseeds crushers and traders, Abiove, announced a database allowing members to share information on farmers and contract details, which angered farmers.

 

André Nassar, Abiove's president, said the third-party managed database is legal, adding that together with with surveillance efforts, it helped keep defaults below 1% of contracts. Nassar said a similar tool may be used to monitor corn farmers.

 

Paulo Sousa, Cargill's president in Brazil, said there are concerns over farmers defaulting om agreements but said cases are isolated.

 

Bunge and LDC, members of Abiove, declined to comment. ADM did not respond to a Reuters' request for comment.

 

Aprosoja said the sharing of information of private contracts breached data protection laws. Executive director of the group, Wellington Andrade, said the monitoring system could blacklist farmers that intend to renegotiate contracts.

 

- Reuters