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Agribusiness in Brazil

Editor’s note: Agribusiness is increasingly becoming the backbone of Brazil’s economy. While other sectors have suffered from multiple crises in the last few years, the development of agribusiness in Brazil has been continuous. Renato Buranello from Vaz, Buranello, Shingaki & Oioli Advogados has topped Brazil’s agribusiness rankings for the last ten years, being a key player in this successful story. He authors the overview below.

Assessing modern agribusiness requires setting aside the idea of it being a production-only activity, so as to further understand that the supply and distribution of food, fibers and bioenergy is integrated into global commodity chains. Such a perspective represents a move away from the traditional division of the economy into the three-sector model (primary, secondary and tertiary sectors), instead recognizing that it comprises a set of integrated economic activities ranging from input supply for production, all the way through processing, sale and logistics, to eventual distribution to end consumers. All these links are connected by specific types of funding and investment, within the scope of the financial and capital markets.

Hence, the setting up of trades and contracts in the agribusiness market requires a specialized perspective that fits the assessment of said set of integrated activities into a real network of very specific businesses with very particular risk allocation schemes. These trades performed in the rural environment are further permeated by public policies, such that they entail the analysis and joint interpretation of public law rules and business law principles.

The agribusiness industry has proven to be resilient in recent years, especially in 2020 within the context of the COVID-19 pandemic, since it has grown amidst the crisis and has also ensured the supply of food and products to the industrial markets without any trouble. Also, record harvests have been confirmed in recent years, together with an undisputed lead in the export of several commodities, contributing over USD100 billion to Brazil’s balance of trade. This scenario reflects the growth in the industry’s real income, which takes into account the variations both in volume and in the prices of products in the international markets.

The fact that rural producers have to juggle so many balls at once leads to the need to use tools that help them duly manage all the production, sale and funding mechanisms. Highly skilled and professional teams assisting in such matters must be fully knowledgeable in the administrative, operational and legal risks involved.

In addition, rural producers are also under pressure to comply with environmental, social and governance, or ESG, indicators. One is well aware that there will be no room in this market for those that are unable to operate sustainably, as this new paradigm in agribusiness goes far beyond compliance with the rules set forth in Brazil’s Forest Code or adjustment to the Rural and Environmental Registry (CAR).

Adherence to such mechanisms therefore opens the way for more investment and more balanced growth of the activity, acting as true obligational criteria, by means of Environmental Reserve Quotas (CRA), Payments for Environmental Services (PSA) or Green Bonds. All of these depend, in turn, on clear and accurate communication between the players in the commodities chain and related institutions.

As for governance and the relationship with the other players, the strong technological development of agribusiness has given rise to considerable complexity involved for companies, which therefore become dependent upon organized structures, relational contracts, associations, business partnerships and joint ventures. They therefore gain better standards in terms of risk assessment, controls, transparency and management, which play a key for role for investors interested in mitigating the contingencies of the activity, consequently giving them more guarantees vis-à-vis expected return.

This has also been the case with respect to recent legislative amendments, effective immediately, within the context of greater transparency and data protection between agents and market players, such as Brazil’s General Data Protection Law (LGPD), which has affected liability for data transfer and the structure of network transactions, also seen in agribusiness.

It has also become clear in recent years that the industry will no longer be funded by previously used public or subsidized schemes, which calls for Brazil’s doors to be open to capital.

The available opportunities have not gone unnoticed, and according to the B3 stock exchange index BrasilAgro, investments have increased by 60% in the last year. Expanding access to the capital market, by using its company-oriented tools, both for publicly traded companies and small, mid-sized and large closely-held businesses, improving the dynamics, and promoting the liquidity of the secondary market of private debt seem key to increasing long-term investments that are essential for the agribusiness activity.

It is worth mentioning that the fundraising mechanisms available in the capital market, such as IPOs, bonds and securitization, already represent hundreds of billions of reais in investments, and account for approximately 15% of the private investment level in the economy. Increased presence in the capital market stands for the healthy diversification of the financial intermediation systems, which result in greater operating and economic efficiency.

In order to do so, key and complex mechanisms have been developed to further expand existing investments. This is the case with agribusiness negotiable instruments such as the Rural Product Certificate (CPR) and the Agribusiness Receivables Certificate (CRA), the latter being a securitization mechanism. In addition to the complex transactions with receivables, property or equity interests, the agribusiness industry now has an industry-oriented investment fund, the Fiagro, an acronym which stands for Investment Fund in Agribusiness Chains. Also, in addition to the debt transactions, less formal markets or segments have also been consolidated, such as the distribution of input or, furthermore, in production, with the purchase of land, as well as within the scope of succession and wealth planning for family businesses.

Brazil, as the world’s leading tropical agriculture today, with high-end technological development and greater governance at rural establishments, confirms a new paradigm for activities and investment opportunities in the industry. It will take further investments, especially long-term funding, to ensure the maintenance and growth of production and productivity, by means of players that have the expertise to understand the industry’s challenges and specific needs. The modernization of agribusiness chains comes with a greater “urban feel”, as they become more formal and more organized, bringing about improved governance and helping to secure a leading position in a new global and digital environment that is responsive to good practices.