Dialogue with Agrochemical Distributors in Brazil: Moving Forward in Their Exploration (Part 2)

Brazil is one of the largest agribusiness players in the world and also one of the biggest markets for agri-inputs products, such as seeds, fertilizers and pesticides. 

The agri-inputs distributor, as a part of the value chain, plays a very important role in the Brazilian agribusiness market. According to Kleffmann's data, in 2017-2018, distributors were responsible for 45% of the US$ 11.17 billion of pesticides sold in the country. 

The agri-inputs distribution market in Brazil is relatively concentrated, with about 50 leading distributors and cooperatives occupying 35% of the market, although there are thousands of distributors and cooperatives in the country. The concentration is expected to be higher in the next few years, as consolidation in the industry will continue to increase. However, this is only one of the challenges facing distributors.

They have more challenges to face among which are: transformation of crop planting structure, the ever-changing agricultural regulations and policies, pressure brought by manufacturers that are squeezing market share and optimizing sales model, farmer's shift in the concept of product purchasing, application and new technology adoption. There are all reasons why distributors have to think about how they should cope with the changes and take action immediately. 

AgroPages invited some agri-inputs distributors and experts in Brazil to discuss together what the challenges were in the market and how they should react to these challenges. The interviewees are: Renato Seraphim, CEO at Agro100/AgroFerrari; Ruy Cunha, Patria PE Director and Chief Operating Officer at Grupo Lavoro; Thomas A. Unger, Director of Acrom Agroindustrial Ltda; Renato Guimarães, CEO of Grupo Sinagro and Ivan Paghi, Agronomist, Engineer, Director of IP - Consultoria Mercado Agro.

Here below is the interview with Ruy Cunha, Patria PE Director and Chief Operating Officer at Grupo Lavoro. We will put the other interviews online successively.

What have been the significant changes in the crop planting structure in Brazil in recent years? What are the main challenges facing farmers and agrochemical distributors?

Cunha: I think the most relevant changes were related to agriculture technology, which, made possible significant increase in productivity. Some research shows that technology improvement was responsible for nearly 60% of our production growth in the last 40 years while land represented around 16%. Technology advances include genetic enhancement research, new techniques related to soil preparation and fertilization, direct planting, etc. All these factors combined with the abundance of natural resources in Brazil resulted in the outstanding production growth we have seen in recent years. 

On the other hand, we still have relevant challenges related to poor logistics infrastructure in Brazil which reduces our cost competitiveness and limited availability of qualified labor force to make use of modern technology. Also, an important question is how to keep up with accelerated production growth to meet food demand without compromising environmental protection and sustainability. In my opinion, it comes down to technology and research again. 

Agrochemical distributors need to step up their product and service offerings to support farmers in those challenges. This includes a more extensive presence in the production cycle, helping farmers from crop planning to crop selling. We believe modern distribution can play a significant role in supporting farmers’ productivity and profitability gains.

The government approved an unprecedented number of pesticides in these two years. Does this mean that distributors/retailers and farmers have more options for pesticides? What are the recent changes observed in the demand for agrochemical products by Brazilian farmers? 

Cunha: Yes, in recent times the numbers of product options have increased. This increase means more technical alternatives to farmers and more competitiveness in the pesticides market which may lead to lower prices. 

I believe we will see farmers more and more concerned with the technical aspects of the products. Recent surveys here show that the new generation of farmers is much more pragmatic when it comes to product selection valuing performance and price more than branding for instance. Both product manufacturers and distributors need to be prepared for this change in demand. 

What are the recent changes in the distribution channels for Brazilian agrochemical products? In addition to mergers and acquisitions between companies, what are the changes that have occurred in the distribution model for agrochemical products? What are the new technologies and ideas driving the change in the industry?

Cunha: The distribution consolidation trend is a reality in Brazil. This is a necessary change that will bring benefits to the entire value chain and, consequently, we will see an acceleration in the next 3 to 5 years. 

We currently have more than 2000 independent distributors of AG inputs in Brazil. In fact, the number is even higher depending on what type of products we consider. Top 10 players have less than 20 % of the market. Approximately 80% of the distributors are managed by the original founders or family. 

The agrochemical industry consolidation and the growing sophistication of farmers demand a new type of distributor. I believe we will see a significant advance in management capabilities related to financial risk management, S&OP and compliance to name a few. We will also see distributors enhancing their service offering to clients, including digital tools. 

The advances in digitalization should be one of the major drivers of change in this industry. Distributors need to invest and be prepared for this new scenario. For instance, distributors will be much more challenged in the technical aspect of sales. Farmers currently have an unprecedent number of digital tools and large amount of data to understand the actual performance of products. Consequently, when it comes to making a new purchase decision, they expect to have deep technical discussions with the sellers. This is also true from the perspective of the products being sold. As agrochemicals industry invest many millions of dollars to bring new technology to producers, they need distributors to be able to communicate the actual value of those products. This implies investments in team and technical capabilities. 

Bio-solution is becoming more and more popular in Brazil. What about the acceptance of Brazilian farmers to biological products? Will biological products become mainstream products in this market in the future?

Cunha: In recent years, Bio-solutions growth was exponential supported by the development of new products and by organic agriculture trends. Despite that growth, the relative volume of sales is still relatively small considering the Ag inputs market in Brazil. 

We have started to see changes here though with the combination of bio-solutions and agrochemicals applications in large scale agriculture. Environmental concerns, new bio-solutions appearing in the market and growing resistance of plagues to some pesticides are catalysts of further growth. We believe bio-products will continue to gain space as complementary solutions to agrochemicals, growing 20% to 25% a year over the next years.

Precision agriculture and digital agriculture are developing rapidly around the world. What impact do you think this will have on the distribution of agrochemical products in Brazil?

Cunha: Maybe the most important change is the total integration of the value chain. Digital agriculture allows real-time communication in the entire chain. Also, the accumulation of an extraordinary amount of information can be used to promote further efficiency gains. We need to think of the new value chain as a web where all the players are connected and interacting with each other. 

The direct implication is that distributors need to think of new ways to create value to the industry and clients. For instance, the agrochemical industry is becoming less dependent on distribution to gain client insight. Similarly, farmers can access product and application information directly and with limited support from the distributor. 

We do not believe, however, that the digital transformation will eliminate the need for strong physical presence and technical support. During the production cycle, there will be moments when the farmer will prefer to have direct physical contact and others when the online tools will be preferred. Typically, when it comes to actual production (for example, planting, product application, harvesting), local physical support is important. The winners here will probably be the distributors who can design an effective combination of online and physical approach.

About Grupo Lavoro

Lavoro is an invested company from Patria Investments, one of the largest alternative investments manager focused on LatAm assets. Lavoro is also a leading player in the Agriculture Inputs Distribution in Latin America. The company is at the forefront of the distribution segment transformation and consolidation in the region. It currently has 9 companies in the group, 108 sales points and presence in the most relevant agricultural markets in Brazil (including Mato Grosso, Paraná, Goias, Rondonia, São Paulo) and Colombia. The company currently serves more than 21,000 clients in those markets. 

Lavoro has a unique value proposition for both clients and suppliers which have been designed to meet the new standards of modern distribution. Our strategy is based on four key differentiation pillars: extensive presence in most relevant markets in Latam, solid operation with strong financial position and risk management capabilities, commitment to clients and partners and innovative approach to distribution including technology and digital platforms. The company recently launched a digital marketplace that will complement physical presence and offer clients and partners new ways of doing business. 

The company strongly believes in the agriculture potential in Latin America and is totally committed to supporting its growth and modernization. 

As an agri-inputs distributor, if you have interests to share your company's story with us, please contact:

Christina Xie

christina@agropages.com

This article was initially published in AgroPages '2020 Latin America Focus' magazine. Download it to read more articles.