Confronting the Crisis: Challenges in Brazil's Agricultural Input Distribution Post-Judicial Recoveries

In recent years, Brazil's crop input distribution system has undergone significant transformations and faced profound challenges.

A "perfect storm" has hit various segments of agribusiness in 2024. The combination of lower prices, high interest rates, and the costs associated with extreme weather events has triggered a wave of judicial recoveries, raising alarms among investors. 

This crisis has not only exposed the vulnerabilities of a business model based on consolidation but has also brought to light issues that resonate in traditional retail, as evidenced by the recent case of Lojas Americanas.

In this article, inspired by insights from my friend Antonio Prado Neto, a former CEO of one of the large distributors in the Cerrado region, and by the lessons I've learned during my time in this sector, I will explore the challenges faced by the distribution sector, as well as a forward-looking perspective that I believe should be part of the strategic plan for anyone aiming for success in this field.

The Era of Consolidation

The agricultural input retail sector is one of the most dynamic in our economy, estimated at R$350 billion, with 70% of this market served by distributors, cooperatives, and redistributors, and 30% through direct sales to farmers. This sector, often overlooked, is larger than pharmaceuticals and household goods in Brazil and is undergoing a unique transformation.

Consolidation in distribution began in 2016 when private equity funds began acquiring medium and large distributors, sparking a wave of acquisitions. This attracted market attention and raised concerns among major industries about the Brazilian market resembling the U.S. model, dominated by large distributors.

In response to this opportunity and threat, companies like Nutrien, Marubeni, and major producers like Syngenta, Ihara, UPL and Bunge rushed to seize the best business opportunities. 

In the figure below provided by ZMP consulting, we can see a clear illustration of this consolidation.

Challenges of Consolidation

The ideal thesis for private equity suggested that rising EBITDA margins, operational improvements, financial restructuring, and better supplier negotiations would yield substantial benefits. However, the reality has been more complex. High interest rates, substantial debt, fierce competition, and consumer defaults have resulted in significant losses 

Retailers, whether traditional or agricultural, commonly relied on suppliers for working capital, increasing their dependence and reducing profit margins.

With fierce competition, companies expanded aggressively, leading to soaring operational costs. Reduced margins, rising costs, and higher capital expenses contributed to the sector’s downfall.

Loss of Identity and Knowledge

A major challenge was the departure of founders from acquired companies. These owners had invaluable market knowledge and strong relationships with farmers. Their absence highlighted the importance of local expertise for sustainable business. Additionally, renaming companies eroded brand trust, crucial for farmers who prioritize reliability in suppliers.

Changes in Compensation and Talent Retention

The restructuring of pay policies had a significant impact. Commissions that used to motivate salespeople were replaced with more centralized and rigid systems, causing many talented individuals to leave. The best sellers, who knew the market and had close relationships with customers, sought new opportunities or started their own businesses. This turnover disrupted ongoing relationships with farmers and customer retention. Examples like Agro infinity are proliferating across Brazil, showcasing innovative approaches in the agricultural sector.

Digital franchises as For Farmer Innovation and new business models as Agri connection  that allowed these sellers to own their territory attracted top professionals and weakened the consolidation model.

Management and Structural Challenges

Rapid expansion resulted in management challenges. Centralized decision-making alienated field teams and reduced store autonomy. Many new managers lacked experience in the distribution sector, leading to decisions that did not consider daily operations.

Stock management became difficult due to varying ERP systems across the acquired stores, creating inefficiencies that negatively affected service to farmers.

Price Pressures and Sustainability

Pressure to keep prices low in an already tough market created a vicious cycle. Selling at prices that barely covered costs resulted in order cancellations and customer dissatisfaction. Suppliers struggled to maintain healthy profit margins, which strained their relationships with distributors.

The Illusion of Volume and Price Ambition

The rapid expansion of the distribution network, which surpassed 2,000 stores, attracted suppliers eager for high sales volumes. However, many suppliers, drawn in by large contracts, neglected their long-standing partnerships with smaller channels, a strategic misstep in a volatile market.

Some suppliers chose not to join this rush, instead focusing on strengthening direct sales and cooperatives, which have grown over 50% in recent years. This decision proved to be wise, as market consolidation exposed vulnerabilities that affected both distributors and overly ambitious suppliers.

Impacts of the Pandemic and Increased Farming Areas

COVID-19 worsened the situation. Increased demand for food and rising commodity prices encouraged farmers to expand their fields, leading to an 11 million hectare increase in soybean cultivation from 2019 to 2023. While this growth was promising, it created logistical challenges that distributors were unprepared for.

Input prices skyrocketed, doubling or tripling, which strained the working capital of many operations. Rising overhead costs and financial debt trapped distributors in a vicious cycle where pressure for higher volume did not translate into financial stability.

Consequences of the Ukraine War

As the pandemic's grip loosened, the Ukraine war brought new challenges. Fertilizer and input prices soared again, leading to greater losses for companies already struggling financially. Poor stock management forced many distributors to sell products at a loss, worsening the crisis.

In the 22/23 and 23/24 seasons, many were forced to liquidate inventory at low prices, severely impacting profitability. Farmers faced difficulties locking in costs and delayed payments, worsening the situation. By June 30, one major distributor reported R$1.7 billion in overdue debts, highlighting financial deterioration.

The IPO and Market Reactions

The euphoria of IPOs raised millions for operations, initially suggesting sustainable growth. However, as results were published, underlying difficulties surfaced, revealing a fragile financial structure unable to withstand market pressures. This was particularly troubling for publicly traded companies compared to others that maintained simpler operations.

Rumors about the viability of the business model grew, fueled by distrust in companies' abilities to survive. 

One recent episode involves a request filed last week by AgroGalaxy (AGXY3), one of the largest conglomerates in Brazilian agribusiness, which operates in the inputs and services sector. In a relevant disclosure to the market, the company pointed to "various climatic events and the deterioration of Brazilian and international market conditions" as factors putting pressure on its capital structure. 

They stated that the request aims to ensure the company's sustainability, maintain the services provided, and fulfill commitments made.

I previously wrote an article about judicial recovery in the sector and how some companies manage to emerge from such situations. The solution is tough and requires resilient management and employees. The coming chapters will reveal how much this resilience will be tested.

You can read the article here: 

https://news.agropages.com/News/Detail-48728.htm

Reflections on the Current Situation and Future

Since market consolidation began in 2016, the experiences of these distributors provide valuable management and strategic lessons. The growing disparity between prices, salaries, and organizational structures has left many employees confused. Communicating the scale of the crisis is just the first step. Recovering from massive debt in a low-margin environment makes recovery efforts even more challenging, especially as producers grapple with declining profitability.

The Impact on Farmers:

The situation is critical for thousands of producers who depend on these distributors, many of whom are vulnerable after paying for crop inputs they have yet to receive. This creates uncertainty as the rainy season approaches. The trust that underpins agricultural business, built on promises of delivery and payment, has been shaken, leading to an atmosphere of doubt.

This breakdown in trust can severely harm commercial relationships, causing producers to hesitate in signing new contracts and suppliers to be reluctant to do business without proper guarantees. The long-term effects could be devastating for the entire production chain.

Challenges in the Financial Market

With the financial landscape becoming more critical, financial institutions face a period of contraction. Banks and capital markets, already cautious, will be even more stringent in assessing new ventures. The impact on investment funds, like Fiagros, is evident, and credit scarcity may hinder sector recovery.

This unstable financial environment could deter new investments, leading to stagnation that compromises agricultural growth in the coming years. The ability of distributors to attract capital and form healthy partnerships will be severely tested.

Implications for Suppliers and the Distribution System

Outstanding debts will also impact supplying industries, creating a domino effect that could threaten their financial health. With millions in pending debts, uncertainty will spread, raising concerns about the sustainability of agricultural businesses.

The distribution system will face pressure, as questions about the financial health of major players lead to cautious evaluations of new business opportunities. This complicates market entry for new distributors, potentially resulting in an even more competitive and challenging landscape.

Human and Moral Impact

Beyond the numbers and strategies, many families rely on jobs at these distributors. The atmosphere of uncertainty and sadness hangs over workplaces, with recovery prospects looking bleak. This decline in team morale could lead to a talent exodus that’s hard to replace in an already saturated sector. Resilience will need to be a priority from management down to store employees.

The company’s challenges might require offering higher salaries to attract qualified professionals, complicating financial management further. At the same time, valuable clients may seek safer alternatives, leaving only high-risk customers behind.

Conclusion: Navigating Through the Storm

The current state of the agricultural input distribution system serves as a warning for the sector. For recovery to be achievable, open and honest dialogue with all stakeholders—producers, suppliers, financial institutions, and employees—is essential.

Once trust is broken, it’s difficult to rebuild. However, with proactive management and innovative solutions, there is a chance to reverse this trend. Brazilian agribusiness must learn from past mistakes to create a more resilient future, where collaboration and transparency form the foundation of a new era of prosperity. Only then can the sector confront upcoming challenges and secure a sustainable path for growth.

Given this scenario, the challenges are evident. To stay competitive and sustainable, companies need to rethink their strategies. Focusing on local knowledge, building trust, and centralizing decision-making could provide effective solutions to turn things around. 

Opportunities will increase for distributors that deliver value, simplify processes, and uphold the core principles of a good distributor—trust from farmers, credibility with suppliers, and strong employee engagement.