Brazil strongly supports farm barter

Across Brazil's farm belt, barter trade is making a comeback as tightening credit, falling crop prices and a volatile currency open a multi-billion dollar business to merchants and tractor makers.

With an era of cheap government farm credit ending as Brazil tries to curb runaway spending, farmers are seeking different ways to pay for fertilizer and equipment, potentially doubling the share of barter-based financing to 40 percent of the cost of the nation's crops, the most in at least a decade.

Equipment makers see it as a chance to shore up their business hit by the credit squeeze. Sales of tractors and harvesters were down 30 percent in the first nine months of this year.

For merchants, such as Cargill and CHS Inc, the largest U.S. agricultural cooperative, it is an opportunity to secure physical commodity supplies for trading while also collecting financing fees of up to 20 percent.

"We want to be the link between the producer and supply industry for crop inputs," says Anderson Cavaco, the head of barter at CHS. The cooperative will open the first of seven new one-stop shops in Brazil where farmers can swap soybeans or corn for fertilizer, seed and agrichemicals early in 2016.

Barter sales rose 15 percent this summer and are up 25 percent for the coming winter crop, he said.

Some analysts warn that by assuming more of producers' financing needs, commodities merchants expose themselves to irregular rainfall patterns caused by a strengthening El Niño weather system. A drought could make farmers default on their deliveries, leaving traders holding worthless paper.

Tractors and Soy

Yet more are willing to take the risk because of growth opportunities offered by one of the few big commodity producers where output is expected to keep rising.

In many cases the ventures are led by relatively new entrants to Brazil's well-established barter trade: big equipment makers, who see alternative financing as a competitive necessity.

In April, in a venture with global trader Cargill, London-based tractor maker Case New Holland became the first equipment maker to barter machinery for soy. U.S. machinery giant Agco Corp, which makes Massey Ferguson and Valtra tractors, began doing the same in November, also with Cargill.

"The companies that hadn't gotten into the business yet, are realizing they must now," said Carlos Cogo, a specialist in farm credit at consultants Cogo Consultaria. He said the barter market has grown too big to ignore as sales financed by credit plunge in the current economic crisis.

In the past four years, only about 20 percent of grain producers' operational costs were covered by barter due to the abundance of heavily subsidized government credit, but this figure could double this year, Cogo added.

He estimates up to 50 billion reais ($13 billion) in fertilizer, agrichemical and seed costs will be financed by barter in 2016, surpassing the last peak in 2004-2005.

Barter for machinery alone, a less developed segment, may reach 20 billion reais ($5.3 billion) this year, Case New Holland's marketing manager Jefferson Kohler estimates.

Established Tradition

Barter developed in the void created by high lending rates in Brazil over the past decades and reduced suppliers' payment risks by designating crops as collateral.

The practice has been so successful that large agrichemical companies, such as Syngenta AG, Bayer AG and BASF SE have launched barter operations in Europe and elsewhere, using Brazil as a model.

Barter is most prevalent in fertilizer and agrichemicals, accounting for roughly 35 percent of nearly $26 billion in combined annual sales in Brazil, industry leaders said.

Far from the pre-industrial images of scruffy trappers swapping pelts for whisky, modern barter is a structured transaction typically among three parties: a producer pledging a crop; a seed, fertilizer, agrichemical supplier or tractor dealer; and a trader equipped to hedge the carriage risks of physical commodities.

Despite losing ground in recent years to subsidized credit, barter is bouncing back as banks are tightening borrowing requirements in response to rising default rates in Brazil's deepening recession.
Interest rates on state-subsidized farm credit have doubled this year and will remain high as the government struggles to contain inflation.

Marco Parzianello, who farms 20,000 hectares (50,000 acres) in northern Mato Grosso, late in 2014 used a fixed 4 percent rate bank loan to buy a new 1.5-million-real ($400,000) Case 9230 harvester.

"Rates are twice that now and banks are not lending even if I wanted to" borrow, he said. For now he is paying cash to prepare for the next crop, but plans to return to barter if the real currency declines much further or soybeans edge up.

Traders, such as Bunge or Louis Dreyfus, stand to regain market share in the producer financing business that the state banks are giving up, says Angelo Ozelame, a manager at IMEA, the farm economics institute in Brazil's biggest grain state Mato Grosso.

Barter also offers traders an opportunity to buttress bottom lines that have come under pressure from falling global crop prices and tricky trading conditions.

"Barter plays to our strengths, which aside from logistics, is managing risk," a director of sales at a large U.S.-based grains trader said.

And some are finding opportunities beyond the grains sector.

South Korea's LS Tractor, which began offering barter deals with global coffee trading group Mercon a year ago, has already closed nearly 200 sales for tractors. Barter will account for 30-40 percent of its sales this year, far surpassing projections, sales director Andre Rorato said.

"When we started offering barter, we had no idea demand in the coffee sector would be so strong."