O boom in the agricultural sector in Brazil triggered a rush of investments and attracted people from all layers of society in the last three years, accumulating R$35 billion in the agribusiness fund market. But conditions today have changed.
With record harvests around the world causing prices to plummet, in addition to Brazilian farmers filing for judicial recovery at alarming rates, retail investors are paying the price.
The losses serve as a lesson in market risks for investors who have been bombarded with national television messages promoting agriculture as hip and cool, and even songs celebrating the sector’s success. Many invested money in new instruments created to finance agribusiness, attracted by the promise of high returns.
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Now, industry executives are worried that the new source of revenue could soon dry up, and officials are faced with the dilemma of how to keep credit accessible to farmers without hurting investment.
“A problem that was contained within the industry has spilled over to the non-professional investor, to the investor who makes his investment, his savings, his retirement,” said Fabiana Alves, executive director of Rabobank in Brazil, in an interview on Bloomberg New Economy at B20 , in São Paulo, last month.
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The origin: Faria Lima and the Fiagros
It all started when financiers in Faria Lima, known as the Wall Street of Brazil, found an innovative way to finance the country’s massive agricultural expansion. They created so-called Fiagros, investment funds backed by agricultural receivables such as interest, dividends and land lease payments.
This represented a change from the past, when the sector was mainly financed by the State. Farmers had access to subsidized credit lines offered by the government, but this was not enough to feed an industry responsible for almost a quarter of the national economy.
The market soon expanded to professionals like Rabobank, and in the last three years it has been opened up to retail investors.
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“We are gradually freeing the Treasury,” said Agriculture Minister Carlos Fávaro. Expanding new mechanisms like Fiagros allows the government to focus on financing small farmers rather than having to support large producers as well, he added.
Agriculture is already extremely popular in Brazil, with a recent survey by marketing group ABMRA showing that around 68% of people in the country admire agriculture businesses. Soap operas and songs praise country life. This attracted some Gen Z heirs to take over agribusiness companies and made it easier for investment banks and brokerages to sell agricultural notes and funds to ordinary investors.
Still, farming is a risky business, as farmers’ success depends on the weather and volatile crop prices. commodities.
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Requests for judicial recovery
The recent problems emerged after years of debt-financed expansion at the agricultural powerhouse, followed by a fall in the prices of key crops and a rise in borrowing costs. The number of Brazilian farmers who requested judicial recovery in the second quarter of 2024 reached 215, the highest number in at least 18 months and more than double the same period in 2023, according to credit data from Serasa Experian.
A wave of bankruptcy filings could “scare” investors if they feel there are not enough guarantees, the minister said.
A major concern is that judges in Brazil have recently protected crop producers’ lands from seizure by creditors. Because agribusiness receivables are often secured by real estate and other assets, such decisions mean creditors face the prospect of costly and protracted legal fights to take possession of the collateral.
An additional risk is that most receivables issuers supporting investments in Fiagros do not have credit ratings and do not provide any public information to investors.
Alves said that although Rabobank has a credit portfolio of more than R$50 billion in agricultural businesses in Brazil, the company was not affected by the most recent crisis. This is because the bank focuses on the largest farmers, and bankruptcies affected smaller producers.
But individual investors may be more exposed.
“Analyzing agriculture in its various aspects requires expertise that not every financial operator has,” said Alves. “You can’t sell this to an average investor like you would a CDB,” she said, referring to Brazil’s low-risk bank certificates.
