December 8, 2008

Global financial crunch hampers Brazil's credit financing activities

The global credit crunch is hampering slowing Brazil's agricultural sector as steep drop in world crop prices and rising costs of farm supplies have tightened credit borrowings.

Many Brazilian farmers had hoped a booming grain market would help them dig out of debt and become more competitive with American farmers. However, they found themselves financially-strapped and have reduced their size of crops and even forgoing debt payments.

The farm-belt slowdown could drag the Brazilian economy, which had been boosted by robust agricultural exports to China and other emerging economies.

In the past several years, amid surging global demand for grain, farming went on a a feverish pace to plant soy, and roads were carved into the countryside to move the goods. Climbing grain prices through the first half of 2008 accelerated the growth.

Growers are now finding it harder to get loans sufficient to cover the rising costs of fertilizer, pesticides and seed. Growers rely heavily on a handful of multinational grain companies, including Archer-Daniels-Midland Co., Bunge Ltd. and Cargill Inc. for credit financing.

Unlike in the US, where farmers depend on loans from private banks and the government, Brazilian farmers get as much as 40 percent of their financing from agriculture companies. That could drop to as low as 25 percent this year, according to M.V. Pratini de Moraes, a former Brazil agriculture secretary.

Volatile commodities market and the global financial crisis have increased the risk and expense of doing business in Brazil. 

Stefano Rettore, general manager at CHS Brazil, a major grain-trading company said every company is trying to secure as much as cash as it can to withstand the longer-term effects of the credit crisis, leaving less cash available to finance Brazilian agriculture.

The squeeze is expected to contribute to a 2 percent drop in Brazilian soy production for the 2008-2009 crop year, according to the US Agriculture Department. Steve Cachia, a commodities analyst at Brazilian consultancy Cerealpar, says next year's crop could be smaller than this year's if credit continues to tighten.

Farm-equipment maker Deere & Co., of Moline, Ill., forecast Wednesday that farm-equipment sales in South America will fall as much as 20 percent next year, partly due to "the difficult credit situation in Brazil," said Susan Karlix, Deere's manager of investor communications, on an investor call.

Bunge, one of the world's largest soy processors, has cut advance cash payments to Brazilian farmers 70 percent since the end of last year, according to company filings. Bunge, like other companies, makes advance cash payments and loans to farmers in exchange for future delivery of grain.

ADM, of Decatur, Ill., and Cargill, of Minneapolis, say they have increased the overall amount of credit available to Brazilian farmers. Still, farmers say the loans aren't enough to cover their rising costs.

Private financing for farmers has fueled a rapid growth in agriculture and infrastructure in Brazil's central-west region over the past decade, helping the country become one of the world's largest agricultural producers. Today, Brazil is the second-biggest producer of soy after the US and accounts for a quarter of world soy production.

Brazilian farmers have accumulated large amounts of debt over the years following a spate of poor crops and unfavourable exchange rates in the early 2000s. That debt load is making it harder for many farmers to take out new loans.

The total cost to produce the three main crops in the state of Mato Grosso -- soy, corn and cotton -- is expected to increase 42 percent this year over last, says Michael Cordonnier, president of Soybean & Corn Advisor, a consulting firm in Illinois.

Now many farmers are rationing fertilizer and other supplies to save money. That could translate into lower yields.

Farmers also are forgoing debt payments to free up cash. More than 100 pieces of farm machinery such as tractors and combine-harvesters have been repossessed by banks in recent days in Mato Grosso, Brazil's top soy-producing state, says Glauber Silveira, president of the Mato Grosso Soy Growers Association, known as Aprosoja.

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