Exploring the development and market potential of the Sino-Brazilian agri-inputs trade from the perspective of grain traders

Editor’s note: From the end of 2022 to 2023, the agricultural and crop protection markets in Brazil experienced significant turbulence, with grain prices plummeting after a substantial surge. This upheaval had a ripple effect on the agri-inputs sector, leading to corresponding decreases in the prices of fertilizer and pesticide products. The consistent growth trajectory of pesticide imports experienced a notable decline, putting pressure on Chinese manufacturers’ export operations.

Pengdu Agriculture & Animal Husbandry Co., Ltd. (Pengdu) is a Chinese grain trader that controls nearly 7 million tons of grain resources in Brazil. In 2016, it acquired two local Brazilian agri-inputs companies. Through collaborating with high-quality Chinese agri-inputs suppliers, Pengdu adopted a barter model to simultaneously engage in grain and agri-inputs trade in the Brazilian market.

As a company that has a comprehensive business loop, from agri-inputs to grains, how does Pengdu perceive and comprehend the overall challenges confronting the current Brazilian agricultural market? What are the risk resilience assessment and development prospects of this business mode?

During the 2023 China Pesticide Exporting Workshop(CPEW)  held in Hangzhou, China, in July 2023, Wang Xun, vice president of Pengdu Agriculture & Animal Husbandry Co., Ltd., and Alberto Araujo, CEO of Belagricola, a Brazilian agri-inputs distributor under the control of Pengdu, addressed these questions. They also provided insights from the perspective of seasoned experts in the grain trade, shedding light on the anticipated developmental trends of Brazilian agriculture and the immense potential for agricultural collaborations between China and Brazil.

Wang Xun, vice president of Pengdu Agriculture & Animal Husbandry Co., Ltd.

Alberto Araujo, CEO of Belagricola (video speech)

Chinese grain companies begin overseas acquisitions of agri-inputs channels

In order to ensure national food security, Chinese enterprises began to seek overseas acquisitions more than a decade ago, and in recent years, the scale of Chinese capital to "purchase" overseas food-related assets has gradually expanded, but is mainly concentrated in state-owned capital. Pengdu Agriculture & Animal Husbandry Co., Ltd., formerly known as Hunan Dakang International Farming & Agriculture Co., Ltd., is one of the earliest companies in the domestic grain sector to expand into overseas markets. It is the only privately-owned Chinese enterprise engaged in direct overseas grain procurement and storage.

As early as ten years ago, the company acquired 29 pristine pastures in New Zealand, establishing a production base for dairy products aimed at re-entering the domestic market. In 2016, it expanded its reach to South America by acquiring ranches and farmland in Bolivia for both crop cultivation and livestock rearing. In 2021, the company underwent a name change to Pengdu Agriculture & Animal Husbandry Co., Ltd., and subsequently went public on the Shenzhen Stock Exchange. In 2022, Pengdu recorded a consolidated total revenue of CNY20 billion, with CNY6 billion coming from agri-input operations and CNY14 billion from grain operations.

Brazil is Pengdu’s largest foreign market for grain operations. To establish a foothold in the Brazilian agri-inputs market, Pengdu made strategic investments by acquiring two Brazilian agri-input distributors in 2016 and 2017, with both boasting over 35 years of developmental history. The combined agri-input sales volume from these acquisitions amounted to a total of BRL16 billion.

In 2016, Pengdu acquired a 57.57% stake in the Brazilian company, Fiagril, for US$250 million, and its ownership is now 60.57%. Fiagril is situated in Mato Grosso, Brazil’s largest soybean and corn cultivation region, primarily serving larger-scale farmers with land areas exceeding 500 hectares. It offers comprehensive input solutions to farmers, encompassing over 1,000 products and agricultural services, including seeds, pesticides, fertilizers and specialty fertilizers. Fiagril operates 14 grain warehouses with a total storage capacity of 800,000 tons, along with 18 retail stores, and maintains stable business relationships with over 2,000 farmers.

In 2017, Pengdu acquired a 53.99% stake in the Brazilian company, Belagricola, for US$200 million. Belagricola’s operations span 165 cities across the largest grain-producing states in Brazil, including the northern region of Paraná, the southern region of São Paulo, and Santa Catarina. Belagricola owns 37 agricultural product warehouses and 57 retail stores. With a team of over 200 agricultural experts, Belagricola has established a comprehensive sales system offering one-stop agri-inputs solutions, including seeds, pesticides and fertilizers, as well as a complete industrial chain layout encompassing grain procurement, warehousing, logistics and exports.

These two transactions helped Pengdou to quickly build its own agricultural and grain platform in Brazil, implement the "agricultural materials + food" barter trade model, and create an industrial closed loop with linkage to middle and downstream business.

Barter: Creating a comprehensive business loop from agri-inputs to grains

In Brazil, there are primarily three modes for engaging in the grain trade. Firstly, there is the cash-on-delivery approach, where farmers directly pay cash to agri-inputs dealers for purchasing agri-inputs and then, upon harvest, sell their grains for cash at market prices. Another mode is the forward-spot trade, where farmers purchase agri-inputs in advance for the next year and then sell next year's grain produce to companies for cash.

By holding controlling stakes in two local agri-inputs companies in Brazil, Pengdu primarily focuses on building a barter business model. This model involves exporting agri-inputs from China and offering a comprehensive package of farming supplies to Brazilian farmers. When the harvest season arrives, Pengdu purchases and stores the produce for Brazilian farmers, and completes the full cycle by transporting the grains back to China.

Based on the grain collection, storage and control capabilities of the Brazilian platform, combined with the export business of Chinese agricultural inputs to Brazil, Pengdu has created a complete closed loop from pesticide exports to grain imports. The company coordinates two types of resources both at home and abroad, utilizes advantageous grain sources, avoids the risk of grain price fluctuation, and takes the initiative for grain imports. On the other hand, controlling high-quality food resources drives the company's overall profit improvement. Through the merger and acquisition of Brazilian agricultural material enterprises, Pengdo has obtained channel advantages, customer relations and brand effect. The steady possession of grain resources ensures Pendu’s grain imports and stabilizes the scale and overall costs of imports of bulk agricultural products, such as soybeans and corn, meaning that the company has become a model for Chinese private enterprises to invest in Brazil.

Securing profits to counter market fluctuations

Five years ago, the barter model accounted for a substantial share of trade in Brazil and even across the entire South American region, possibly exceeding 50%. However, over the past three years, international grain prices have surged, leading to a corresponding rise in agri-input costs. As a result, farmers have experienced historically high levels of planting profitability. Brazilian farmers accumulated significant financial gains during the 2020-2021 season and the first half of 2022. However, from 2021, Brazil’s central bank interest rates began to rise rapidly, escalating from the benchmark rate of less than 3% in the first half of 2020 to 13.75% by mid-2022. As a common practice, local commercial banks in Brazil added 3% to 5% on top of this rate. As a result, while farmers were inclined to engage in barter when interest rates were lower, the current situation of significantly increased capital costs and favorable cash inflows for farmers over the past three years led them to reduce their participation in barter.

Over the past two to three years, Brazilian farmers have developed a habitual mindset of market operations. Coupled with the accumulation of cash resources and the establishment of grain storage facilities, Brazilian farmers have become more hesitant to sell their produce as grain prices declined. Despite being the world’s largest soybean producer, Brazil’s logistics and warehousing capabilities are still struggling to keep pace with production, resulting in a lack of storage space for new soybean harvests. Agricultural cooperatives, facing pressure, were compelled to lower their prices, subsequently triggering synchronized price reductions among major farm owners and subsequent price reductions through competition. This dynamic partly contributed to the rapid decline in grain prices from mid-March to mid-April 2023.

The ″disaster″ on the grain side had a ripple effect on the agri-inputs sector. The price reduction through competition further dampened farmers’ willingness to purchase agri-inputs, resulting in a vicious cycle. Throughout this year, Brazil’s agri-inputs prices have collapsed, leading to a notable increase in defaults. The price of pesticides has been consistently dropping since the second half of 2022, with temporary stabilization observed in April and May. However, there has been no substantial recovery, with destocking efforts ongoing within distribution channels. Default rates in fertilizer procurement have also been on the rise.

The weak market demand has also impacted imports. Data from the National Association of Distributors of Agricultural and Veterinary Inputs (Andav) revealed a substantial decline in the imports of fertilizers and plant protection products in the first five months of 2023 compared to the same period in previous years. From January to May 2023, Brazil imported fertilizers worth US$5.934 billion, indicating a decrease of 37.8% in import value and a decrease of 10.4% in import volume year-on-year (Fig.1). The decline in imports of plant protection products was even more pronounced. From January to May 2023, Brazil imported plant protection products worth US$1.288 billion, with a decrease of 32.7% in import value and a decrease of 48.9% in import volume compared to the same period in 2022 (Fig.2).

Fig.1 Brazilian fertilizer imports data, 2012-2023 (January-May)

Source: Andav www.andav.com.br

Fig.2 Brazilian pesticide (herbicide, fungicide, insecticide) imports data, 2012-2023 (January-May)

Source: Andav www.andav.com.br

If farmers persist with the barter model, it can help them secure profits and counter market fluctuations. Fiagril and Belagricola, the two Brazilian agri-inputs distributors acquired by Pengdu, have established strong footholds in the agri-inputs sector and enjoy strong customer loyalty. As a result, they continue to engage in a significant volume of barter transactions with farmers. In comparison to common grain traders and smaller-scale agri-inputs distributors, the two companies have achieved effective risk management amid market fluctuations, with an average default rate of under 0.5%.

The prospects for the Brazilian agri-inputs market remain incredibly promising over the next ten years

Looking ahead, the Brazilian agricultural market is expected to continue growing at a pace that surpasses all other regions globally. According to research and analysis conducted by Pengdu, agri-inputs sales in Brazil are projected to witness a remarkable 150% increase over the decade from 2020 to 2029, from BRL98.6 billion to BRL246 billion by 2029, at a compound annual growth rate (CAGR) exceeding 10%. The industry is anticipated to generate a revenue of around BRL1.786 trillion over the next ten years.

This growth will be primarily driven by the three key factors illustrated below (Fig.3).

Firstly, there will be an expansion in cultivated land area. By 2029, the growth resulting from the increase in cultivated land area in Brazil will account for 43% of total growth, amounting to BRL63.4 billion. By 2029, Brazil’s total cultivated land area is projected to reach 78 million hectares, a growth of 22 million hectares of arable land compared to 2020. This expansion will generate demand for more agri-inputs and crop protection products.

Secondly, growth will be driven by sales of innovative agri-inputs. Apart from conventional pesticide and fertilizer products, there will be the increased adoption of biofertilizers and biopesticides to enhance soil resource conditions.

Thirdly, there will be a rise in the use of agri-inputs per hectare of land. The agri-inputs industry will offer products with higher technological content, therefore, boosting production potential and enabling farmers to attain greater yields per acre. Notably, packaged agri-inputs products are expected to offer higher added value, contributing to around 50% of the overall growth of the agri-inputs sector.

Fig.3 The key factors that drive the growth of Brazilian agriculture input market

When assessing the agricultural development potential across different states in Brazil, it is evident that 51% of growth will be concentrated in the central-western region, contributing 30% to the total market value of agri-inputs. The state with the most significant growth potential is Mato Grosso, with its ten-year increment alone surpassing BRL45 billion (Fig.4). In the future, corn and soybeans will continue to be the principal crops in Brazil’s agriculture, for which cultivated land will be expanded (Fig.5).

Fig.4 Growth of agricultural inputs market in Brazil by state and region, 2020-2029

Fig.5 Crop acreage growth in Brazil, 2020-2029

The significance and complementarity of Brazil and China in the international grain and oil markets

China is the world’s largest net importer of grains and oils. In terms of grain imports, the main products include feed grains (such as corn, barley, sorghum and distiller’s dried corns with solubles), high-quality wheat, oilseeds (soybeans and rapeseeds), and various types of edible vegetable oils. The dependency on imported plant-based proteins in China exceeds 85%, while its reliance on imported vegetable oils reached 90%. Additionally, China maintains the world’s largest reserves of grains and oils. Reserves at all levels exceed 50% of global totals and are continuing to expand.

Due to the trade war between China and the US and the conflict between Russia and Ukraine, Brazil has emerged as a stable global grain source for China. The further development of the China-Brazil grain trade relationship will play a stronger role in boosting Brazilian agricultural production.

According to statistics from the US Department of Agriculture, global soybean production and export data over a decade from 2013/14 to 2022/23 showed that global soybean production increased from 280 million tons to 370 million tons (Tab.1). Notably, Brazil witnessed the fastest growth rate. In terms of exports, Brazil’s soybean exports doubled over the decade, rising from 47 million tons a decade ago to the current 93 million tons. Meanwhile, China's soybean imports, which stood at 70 million tons a decade ago, are projected to surpass 100 million tons in the 2022-2023 period, with Brazil significantly surpassing the US as China's primary source of imports.

Tab.1 Global soybean production, 2013/14-2022/23

The US is the world’s largest corn producer, with an annual output of 350 million tons. However, Brazilian agriculture has made a significant contribution to the global growth in corn production over the past decade. In the last ten years, global corn production increased from 1.03 billion tons to 1.15 billion tons, with half of this incremental increase coming from Brazil (Tab.2). In terms of trade volume, global corn exports grew from 130 million tons to 180~190 million tons over the past decade. Brazil has experienced the highest growth rate in terms of exports, expanding from less than 21 million tons to 55 million tons. In the 2022/23 season, China imported corn from Brazil for the first time in its history, with import volume exceeding 2 million tons from November 2022 to January 2023. Due to the ongoing Russia-Ukraine conflict, the 8 million tons of second-crop corn that China used to import from Ukraine will now be replaced by imports from Brazil. More importantly, the proportion of ethanol blended with gasoline in Brazil is continuously increasing, leading to the expanded production of corn-based ethanol. In the future, a significant portion of Brazil’s newly cultivated area will likely be dedicated to corn, which has a substantial export potential.

Tab.2 Global Corn production, 2013/14-2022/23

Technological trends in the Brazilian agriculture market

As Brazil’s agricultural production continues to advance, the market will witness the emergence of more new technologies.

Firstly, seed technology will witness significant improvements. Seed companies are actively driving advancements in this field, such as using herbicide resistance to increase yields. Genetic modification (GM) technology is a revolutionary approach that can greatly enhance crop resistance. However, in Brazil, GM technology is still in its early stage of application and requires further development. Along with traditional leading multinationals, new players are emerging, including those from China.

Sustainable agricultural practices will also play a crucial role. Sustainable agriculture encompasses the sustainable and intensive management of farming system resources, low-environmental-cost field practices, carbon sequestration, and other related aspects. It also requires advanced crop protection technologies for the precise application of corresponding pesticide products in areas with pests and diseases, to significantly reduce pesticide usage while enhancing efficiency.

Another vital trend is precision agriculture and digital farming. In Brazil, remote sensing, drones, satellite imaging, and other agricultural technologies or information technologies are widely used in agricultural production. Real-time monitoring of crop growth and data collection through satellite imaging technology provides convenient and efficient field management solutions for farmers. By analyzing extensive data on soil, pests and diseases, farmers are guided to apply pesticides and fertilizers with pinpoint accuracy. Advanced field management techniques are set to significantly enhance the efficiency of farming operations.

The data and content in the above article comes from 2023CPEW presentation"Brazil's food market dynamics and the new trade model of pesticides between China and Brazil" and ″Integration of Brazilian agri-input channels and supply chain management of ag-retailers″

Click to see: 2023CPEW report