Observations of Brazilian agricultural input supply chain

This article was initially published in AgroPages' '2022 Market Insight' magazine.

Brazil is the world’s granary. Through consecutive global crises, such as the COVID-19 pandemic, energy shortages and climate change, the country’s 6,000,000 farmers have been looking for more productive agricultural solutions and continuously supplied food to the world’s population, reflecting the resilience of Brazilian agricultural production.

In 2021, the GDP of Brazilian agribusiness increased by 8.36%, the highest level since 2004. The huge local agricultural market has cultivated a thriving plant protection market in Brazil, which is regarded as the largest pesticide market in the world. According to Nirus SA, the Brazilian plant protection market grew by 17% in 2021, from BRL62 billion (approximately USD12.1 billion) in 2020 to BRL73 billion (approximately USD 13.3 billion) in 2021. The revenue and profit in the seed, fertilizer and specialty chemical industry sectors have both shown two-digit growth.

The Brazilian plant protection market is characterized by its high level of profitability, high degree of centralization, longest term of payment, prolonged period of registration and increased sustainability. Since the 1990s, Brazil’s plant protection supply chain has developed considerably in both the upstream and downstream of the agrochemical industry. The market entry mode of active ingredient manufacturers has changed, and consolidation between big players have also started with the change from a global top six to a top four, while mergers and acquisitions have taken place increasingly among dealers, just like the consolidation between distributors in the US, which is now becoming a trend in Brazil.

Consolidation creates new types of partnerships among multinationals, local companies, co-operatives, distributors, and small and large farmers. Accordingly, new business models came into being. The article aims to address the issues facing Brazilian distribution market consolidation, the changes to the market entry mode and marketing tactics for the year ahead. This article is based on presentations of Brazilian agriculture delivered respectively by Jones Yasuda, founder of CONNECTION ADVISER & MANAGEMENT, and Renato Seraphim, Chief Marketing Officer of UPL Brazil, at the 2022/2020CPEW (China Pesticide Exporting Workshop) hosted by AgroPages. It also included the interviews with leaders from two prime Brazilian agricultural input distributors, André Dias, President of Nutrien LATAM, and Fernando Manzeppi, executive VP of AgroGalaxy. 

A profitable market: 500,000 farmers account for 95% of plant protection market

Brazil is one of the most important economies in Americas, with considerable natural resources. Agriculture is an important contributor to its GDP, as well as the only economic sector that experienced growth during the COVID-19 pandemic.

According to the estimates of CEPEA and CNA, the GDP of Brazilian agribusiness increased by 8.36% in 2021, accounting for 27.4% of Brazil’s total GDP, the highest level since 2004. This spectacular figure was generated from Brazil’s 6.4 million plots of land, of which 68 million hectares of agricultural land was productive, equivalent to 8% of Brazil’s total territory.

Brazil is the world's largest producer and exporter of soybeans, coffee, orange juice and sugar, and the second largest exporter of corn and cotton. In 2021/2022, soy cultivation in the country suffered drought damage, affecting both production and exports. In 2022/2023, a recovery in productivity and an increase in planted area are predicted. According to the latest survey conducted by the National Supply Company (CONAB), Brazil’s soy harvest should grow 21.3% in 2022/23, with a forecast of more than 152 million tons, as well as exports of 95.87 million that will represent a rise of 22.5% over 2021/2022. On the other hand, forecasts made by Safras&Mercado show that while planted area decreased slightly, per-unit recovery is increasing, making it possible for Brazil’s corn production to reach a record high of 126 million tons, up 5.7% year-on-year.

In early 2022, the war in Ukraine was a concern around the world. In the first few months of the war, supplies and the pricing of fertilizers in Brazil became volatile. Despite the unfortunate situation, with the efforts of the Brazilian government and private companies, fertilizers from Russia and pesticides stocks are sufficient to meet the new planting season in September. Every year, farmers have to deal with the rising number of uncertainties of various types, showing the resilience of the Brazilian agricultural production system. On the other hand, there is the challenge of balancing production costs as fertilizers continue to be priced higher than in recent years while commodity prices have not risen at the same rate. However, Brazilian farmers are still excited about the prospect of a bumper crop.

Among the 6 million farmers Brazil has around 500,000 farmers above scale accounting for 95% of market share of plant protection inputs. All the farmers are constantly looking for more productive and adaptive agricultural solutions, enabling Brazilian agriculture to further progress. The Brazilian government is implementing a program to create new "startups" companies focusing on the digitalization of the production process and everything that surrounds agribusiness to optimize and bring competitiveness to the production of healthy and competitive foods globally.

Brazilian Farmers’ Level and Quantity 

Brazil is the world’s largest plant protection market. According to data from National Syndicate of Plant Protection Products Industry (SINDIVEG), the Brazilian plant protection market was valued at $13.3 billion in 2021, a 9.9% increase over 2020. Considering that it is such a huge market, the number of 500,000 farmers over scale is very small in proportion. According to the data from Multcom, 27% of the above market is directly accessed, i.e., direct and face-to-face dealings between agronomists and 3,000 farmers or groups, and 26% are accessed by the services of experts from farmer cooperatives, while 47% are accessed by distributors and re-distributors. This market accessibility also applies to the fertilizer, seed and other sectors.

Therefore, agronomists can greatly influence the market, which is a basis for the commercial success of plant protection suppliers. According to data from CONFEA, there are currently 105,293 agronomists in Brazil, and nearly 10,000 agronomists will graduate from 534 national universities every year. These professionals, along with animal technicians, veterinarians and agricultural technicians, will jointly help Brazilian farmers and ranchers to position Brazilian agriculture at the forefront of the world.

All market levels face complex risks and challenges

Although the Brazilian market is a profitable one, there are many factors that restrict the profitability of market players. During a time when black swan events frequently happen, all levels of the Brazilian agricultural market are facing various risks and adaptation requirements.

According to the report of Renato Seraphim, Chief Marketing Officer of UPL Brazil, the profit margins of agricultural manufacturers are at the low side. In order to ensure the safety of products, enterprises have increased their investment in research and development. In addition, product registration takes an exceptionally long time in Brazil, taking 5 to 10 years to obtain product registration. Although the Brazilian government has established a series of special channels over the past two years to facilitate the registration process, related costs are still high while the time required for granting a registration is unpredictable.

Brazilian farmers grow crops two or three times per year, meaning that they face more risks. In Brazil, pesticide purchase decision-making has become more complex, and farmers have to make decisions on which crops to plant based on weather forecasts,  credits available for financing production, production prices, the availability of infrastructure, genetically-modified varieties and relevant events, and the risks posed by nematodes. Moreover, agricultural planting also faces environmental regulation challenges.

The profits of distributors are declining year-by-year while operating costs remain high. In 2004, the average profit of distributors was 21%, and by 2018, this went down to 15%. For distributors, there is a high risk of breaches of agreement from farmers, as credit defaults rose from 1.5% to 3% in 2018. In addition, new marketing models, such as direct sales to farmers or to group buyers, have affected the distribution market. The commercialization of products has accelerated, with a product being handled by all channels in all markets within two to three years after its release while prices become lower year-by-year. The rise in the number of generic pesticides has made it even more difficult to attain product value.

To cope with this phenomenon, distributors need to scale up their business dealings and provide more varied solutions. The inefficiency of the system creates opportunities for existing and new market players, more consolidation for market reshaping, and the emergence of new business models within the industry. 

Brazilian pesticide supply chain evolution

The rapid improvement of Brazilian agriculture and its mature plant protection market cannot be separated from the strong alliances and support from Chinese agrochemical manufacturers. Jones Yasuda, founder of CONNECTION ADVISER & MANAGEMENT, said in his report that Brazilian agriculture and the Chinese chemical industry have partnered together, advancing hand-in-hand over the past 30 years. Brazil has increased production in a very competitive way, producing food for almost 20% of the world’s population, while 60% of global pesticide technicals are supplied from China. Brazil is China’s largest pesticide technical export destination, and Brazilian agriculture would not be what it is today without the partnerships with China pesticide producers, while the Chinese pesticide industry would not have progressed rapidly without the massive Brazilian market. Under this type of dependent relationship, the supply and price volatility of Chinese products will have a considerable effect on the Brazilian plant protection market.

In 2019 Jones Yasuda coordinated a meeting between Brazilian authorities and directors of Sinochem & Chemchina, to discuss collaborations between Brazil and China. Mr Frank Ning, at the time president of Sinochem & Chemchina, Brazil's former Agriculture Minister Tereza Cristina and several congressmen participated in the meeting. (To reach Jones Yasuda: jones.yasuda@hotmail.com

Therefore, before understanding the market changes, it is also important to review the changes of Brazilian pesticide supply chain in the past 30 years, in which one can observe the important role played by Chinese manufacturers.

Source：CONNECTION ADVISER & MANAGEMENT

1990s: Trade and distribution

In the 1990s, there were thousands of producers in China and there was little direct business with Brazilian customers, due to the lack of knowledge of the international market and country-specific risks, and most negotiations were done through trading companies. 

Companies in other countries were conducting their business in the same way, and they preferred to transact with local Brazilian companies via traders for fear of Brazil-specific risks.

Japanese companies have their particularities, possessed a higher number of proprietary active ingredients, and are in a position to cooperate with multinationals for joint developments in the international market via approvals or collaborations.

There were also 2,500 dealers and 400 traditional cooperatives in Brazil, when product registrations owned by foreign companies were very limited, while 85% of registered products were sold through dealers. 

Small businesses directly bought from dealers, such as small resellers, to supply small farmers. The farms owned by large industries that planted citrus, sugar cane, tobacco, industrial tomatoes and apples purchased directly from registrant companies, but the total volume was not more than 15%. This was what the 1990s looked like.

Thirty years later (2020): A.I. (active ingredient) industries begin implementing a strategy for independent registrations, distributor consolidations happened often

Over the past 30 years, significant changes have happened to all links of the supply chain, where industry mergers took place one after another. The product portfolios of multinational companies increased and became competitive, supported by Japanese product portfolios. Today, major Japanese companies have separated their products from those of multinationals and have direct access to the Brazilian market via distribution operations. These companies include Sumitomo Chemical, NIHON NOHYAKU, Nippon Soda, Kumiai Chemical and Ishihara who are managing their business in cooperation with local Brazilian companies.

In 2014, China’s environmental policy halted the unrestrained production of pesticide technicals, leading to the consolidation of Chinese pesticide technical manufacturers, which made major producers stronger and pushed out smaller producers. During this period, companies became more knowledgeable about the international market and reduced their perception of risk. In the case of Brazil, despite the risks becoming lower; some 200 Chinese companies created export divisions and prepared to negotiate directly with their customers, becoming independent from trading companies. 

In light of this market change, the long product registration process in Brazil and the limited number of registration services offered by product registration companies, as well as the fact that A.I. industries have begun to implement their own registration strategies, many foreign companies began their own product registrations. Some Chinese and India companies are moving in the same way that Japanese companies did years ago, by establishing their own distribution channels in Brazil.

In the last few years, direct sales have gradually become mainstream. Multinational companies are intensifying their direct marketing efforts to farmers, which is close to 40%, compared to 15% in 1990. Accordingly, sales through dealers dropped from 85% to close to 60%. Agricultural commodities traders such as LDC, Cargill, Amaggi and ADM began to offer pesticides in the form of exchanging for grains, which is its main objective. Some companies have established operations based on new business models, such as InstaGro and Orbia, which have launched e-platforms to sell directly to farmers.

In the same period, two new forms of market access took shape in Brazil, one being pesticide dealers consolidated by investors (Private Equity, Commodity Trading and others) experiment with importing pesticides directly from manufacturers (Chinese or Indian), and the other being some large farmers import directly.

The consolidation of resellers is causing a rapid change in the way of market access, and direct negotiations with small and medium-sized farmers can become a future business model.

2030: Pesticide technical producers will become closer to terminal users, direct sales to further develop 

By 2030, pesticide technical producers will become closer to terminal users, and the number of off patent A.I. producers should drop based on China’s 14th Five Year Plan. No change to the global top six structure is expected. Brazilian distributors will greatly favor consolidation, which will continue and bring the total number of 1,600 distributors down to less than 500, and the number of cooperatives is expected to fall from 220 to close to 100.

As a result, direct sales from off-patent A.I. producers to distributors and cooperatives are expected to further rise, while sales from local entities, registrant companies and formulators to dealers will decrease by 1%. On the other hand, these companies should aim to sell more directly to farmers, which could grow from the current 40% to close to 45%.

Direct sales from A.I. producers to farmers must deal with an issue, which is the fact that credit is required, but there could be groups of organized farmers who can import directly from industries.

What impact will channel integration have on farmers?

According to the analysis of Markestrat and Jones Yasuda’s report, the Brazilian agricultural input market has three categories of active investors:

• Investment funds: Represented by Acqua (Agrogalaxy) and Patria, which are very active and larger in terms of store numbers.

• Strategic investors: Agricultural commodity trading (Bunge, Marubeni, Sumitomo Corporation and Mitsubishi Corporation) and pesticide companies (Syngenta and UPL).

• Smaller independent investors: Few activities so far.

• Dealers networks: Agreements between dealers to buy together, create purchase centers.

In Yasuda’s opinion, after consolidation, dealers can create a more balanced relationship with suppliers, including multinationals, but before this happened, individual dealers were totally submissive to their main suppliers. Now that this relationship has changed companies can create a portfolio offering fertilizers, seeds and grains.

With this consolidation, large companies are directly selling to farmers, as they do not want to be dependent on distributors. Multinationals do not want to use the US distribution model in Brazil, because they aim to do direct marketing, as dealers have the initiative to import products and buy fewer local products.

What impact will channel integration have on farmers? In the opinion of Renato Seraphim, consolidation will offer greater balance to the opinions of rural producers regarding services, as they will have the option to choose between the most diverse forms of access: large cooperatives and distributors offering attractive prices for inputs, and medium and small resellers specializing in market niches and products, such as biologicals and nutrition, as well as agronomic services.

Producers will have to become more professional and generalist. Seraphim believes that the farmers that integrate crops and livestock, grow a second crop in the same season and are concerned about the sustainability of their operations will be more successful.

So, according to Seraphim, this channel integration will impact farmers in four pillars, which are:

• Credit - In order to obtain the necessary limits, guarantees and documents will be required proving all operations. For conventional distributors, this credit was obtained informally, and the amount of guarantees and documents will now increase safety in offering credit, which will affect the entry of new players in the market that offer more credit. More credit means that farmers will invest more in technologies to increase productivity.

• Logistics – Products are already being delivered on schedule and with better planning. Before this ″Consolidation,″ which calls for better professionalization, farmers could contact the distributor at any time and remove necessary products or even receive deliveries on weekends, creating a rich environment for organized crime that stole from farmers and resold their products, creating a large black market.

• Technology – The consolidation brought more digital tools for the market helping the farmer to be more digital. The digitalization will increase the use of technologies and will reduce costs and the risks. At this point we will have another revolution in the field for the next years, and this will be the more significative impact on Brazilian agribusiness.

• Agronomist Consultancy – The other significative impact of this change will be the professionalization of the agronomists and consultants. These companies are investing a lot of money to teach and enable these professionals to offer farmers a structured agenda through scheduled visits, as well as digitals tools to improve their agronomic recommendations and a variety of soils never seen in Brazilian agriculture and pastures. Farmers will be better served and receive better services through this channel.

Market players: The strong becoming stronger and bigger

Nutrien Soluções Agrícolas and AgroGalaxy are two of the largest agricultural input distributors in Brazil, representing active players during the current round of acquisitions, while UPL is a multinational manufacturer achieving rapid expansion. What have these companies done in Brazil in recent years? And what are their future development strategies? 

Nutrien Soluções Agrícolas: Shows its value to growers by offering knowledge, services and integrated solutions, regardless of specific products

Globally, Nutrien is the world's largest supplier of agricultural inputs and services and plays an important role in helping farmers increase food production safely and responsibly, by using innovative tools and technology combined with flexible and reliable services. In Brazil, Nutrien is becoming the largest and best retail solutions platform in the agricultural industry.

André Dias, President of Nutrien in LATAM spoke to AgroPages about the company's rapid development in Brazil. In 2018, Nutrien Soluções Agrícolas started the operations in Brazil, and since then the company has fast tracked its development. In the same year, Nutrien acquired Utilfertil and Agrichem. In 2020, Nutrien acquired Agrosema, Grupo Tec Agro, Sementes Goiás and the registrations of more than 100 products from BRA Agroquímica. In 2021, Nutrien further expanded its presence in Brazil by acquiring the agricultural input retailers Terra Nova and Bio Rural. In 2022, Nutrien completed its most recent commercial expansion and reached the state of Minas Gerais through the acquisition of Marco Agro Mercantil and Casa do Adubo, thereby increasing its presence from 5 to 13 Brazilian states.

Thanks to its strategic acquisitions, Nutrien has emerged as one of the largest agricultural retailers in Latin America, by bringing customized and complete agricultural solutions to farmers through its extensive portfolio of products and services. The company will have approximately 200 commercial locations, including retail branches and Experience Centers, distributed throughout Latin America, in addition to 4,000 employees and more than 1,000 specialized professionals in the field operating throughout the region to serve more than 110,000 customers. 

André Dias said that retailers must show their value to growers by offering knowledge, services, and integrated solutions, regardless of specific products. ″We believe it is essential to have a brand-agnostic approach, which is what sets us apart from other retailers in the market″ said Dias.

AgroGalaxy：Development based on consolidation, strongly bonded with farmers  

AgroGalaxy was established through the acquisition of leading regional companies, typically via investment funds. Fernando Manzeppi, executive VP of AgroGalaxy, told AgroPages that since its first acquisition in 2016, the company has completed another seven, and has closed partnership deals. Today, AgroGalaxy is a major retail platform for agricultural inputs and services, with a focus on agribusiness in Brazil. It is also engaged in the sale of agricultural inputs, seed production, the origination of grains, storing and selling grains, and providing agricultural, financial and digital services. With nationwide coverage, the company has an integrated ecosystem, delivering products and offering unique solutions to meet farmers’ needs. 

Until June 30, 2022, AgroGalaxy had 145 stores; 28 silos, with a grain storage unit in the seed processing unit; three soybean plants; and 10 toolings units located in 12 Brazilian states covering some 13 million hectares and 1,000 cities, consolidating its strong capillarity strategy in the country’s most strategic agribusiness regions and its close relationships with farmers, therefore, delivering leading-edge solutions with flexibility.

As previously mentioned, the bond between agronomists and farmers is a basis for success. Manzeppi said that AgroGalaxy has a team of close to 600 agronomists, who are working in the field, helping customers and recommending the best solutions for inputs. The company offers a wide range of products, which are all tested in the agronomic technical center to guarantee safety and knowledge to customers, through the company’s technical team.

How will AgroGalaxy maintain sustainable growth? Manzeppi said, ″Consolidation is very beneficial to our suppliers and customers, as we are increasingly investing in technology, innovation and operational efficiency, to provide agricultural producers with the best solutions in the field. Supply security, product quality assurance and credit are key factors to ensuring access to small and medium farmers. The most likely scenario is that the role of the distribution channel in offering required solutions to small and medium-sized farmers will be further enhanced.″

AgroGalaxy’s focus for 2022 and 2023 will be organic growth and operational efficiency gains. After its IPO in mid-2021, the company completed three acquisitions, allowing it to expand its operations to other regions. This year and at the start of 2023, AgroGalaxy is focusing on developing its new unified ERP, concluding the last mile of these companies’ integration, therefore, allowing it to grow inorganically further to the next year.

UPL: Creating a distinctive partnership to become the best partner to industry chain  

UPL is a multinational company that aims to increase its distribution in Brazil. As one of the fastest growing global off-patent crop protection product suppliers, UPL has committed  considerable resources to its distribution in the Brazilian market, including in direct marketing and its cooperation with grain trading companies to provide products and services to farmers. 

Seraphim told AgroPages that UPL has been growing exponentially and is now among the top five companies in the Brazilian crop protection market, being a leader in some products and crop segments. UPL’s strategy has always been to be the best partner I  the agricultural chain. UPL believes that the Brazilian agricultural chain can only become be sustainable through the theme, ″Win Win Win.″

UPL’s market access strategy is to allow every Brazilian farmer, regardless of size, to discover its products and services quickly and safely, and this will only be possible through partners who communicate daily with farmers. ″UPL can serve customers in different ways. It has launched some initiatives to offer solutions and services through its own distributor, SINAGRO, in some regions of Cerrado. In terms of direct sales, UPL launched a joint venture with Bunge, which offers a total package of solutions from the stages of planning to commercialization. In my opinion, ORIGEO, the name of this joint venture, will be the breakthrough in this market. No company in the Brazilian market has this capacity to serve larger farmers as ORIGEO. I am confident that our focus and relationship with farmers and ranchers will be unique on this market,″ Seraphim said.

UPL understands that agriculture in Brazil is a global reference, and, therefore, it has spared no efforts to offer the new technologies developed by its R&D team to Brazilian producers. UPL’s OpenAg platform is unique in the market. ″We are inviting everybody that works win agriculture to reimagine their sustainability with us,″ Seraphim added.

With regards to the growing biological crop protection market in Latin America, UPL’s biological products aimed at regenerative agriculture are pillars of future sustainability. Seraphim said that UPL wants these bio solutions to quickly become equal to agrochemicals in its business portfolio, which will require concerted efforts from all involved researchers and institutes.