Brazil looking at economy and agribusiness revival

Date:11-11-2020

 By Marcos Fava Neves

The Brazilian economy is gradually showing signs of improvement against the pessimistic scenario observed two months ago because of the pandemic of Coronavirus. 

The market expects Brazil's GDP to decline by 5.05% in 2020 and projects growth of 3.5% for the following year. It is worth mentioning that the basic interest rate in the country (Selic) is 2.0%, which is its lowest historical level, inflation is under control and by the end of the year should close at 1.99%. Moreover, the government has taken measures to inject liquidity with emergency aid to needy people and corporate debt financing.

Despite the fall in the GDP by 9.7% in the second quarter of the year, compared to the previous quarter, we began the third quarter keeping in mind economic recovery, according to the sector data from IBGE. Estimations claim that economic growth in July was 2.8% compared to the previous month, which had already presented a 3.9% increase (data from FGV). Such a scenario is already motivating rehiring in the industrial sector. Gradually the scenario is reversing, and economists project a “V” shaped recovery process for the country.

Brazil's Agribusiness in 2020

Agribusiness was the sector of the Brazilian economy that may have suffered the least influence from this, which may be one of the biggest crises faced by Brazil and the world due to severe health and economic implications. That is because food is the last item to be cut in budget constraints scenarios by families, and this is a predominantly exporting activity. With currency devaluation, domestic products have become more competitive internationally, although some costs linked to the US dollar have increased, as have some production supplies.

In addition, a record grain harvest is coming during this period, estimated at over 250 million tons, and with favorable prices due to the exchange rate, Brazil will export about US$100 billion up to the end of the year. In the accumulated (Jan-Aug), agribusiness already exported $69.63 billion (50.3% of all exports from the country), 8.3% more when compared to the same horizon of 2019, and consolidating the surplus balance of $61.50 billion. The proceeds from the field will also be a record in 2020, going over $125 billion, due to record production and attractive prices.

With the COVID-19 crisis, the demand from Asia, especially China, intensified, favoring grain and meat chains, which significantly increased their participation in the Eastern market. China is by far the largest trading partner of Brazil, which reflects in the purchase of 40% of all exports. Furthermore, to minimize the risk of shortages, many countries, which did not have trade relations with Brazil, have come to us to meet their food needs, such as Egypt and Thailand. Thus, the pandemic has favored the opening of new markets to Brazil, enabling the diversification of client countries with great potential for future return. It is worth mentioning that the market opening process is usually quite strict and time-consuming, and, due to the pandemic, such processes have been simplified and shortened. If on one hand the interruption of some supply chains have increased the search for global suppliers, other countries are going against this process by banning exports and closing their economy, which can highlight risks in the medium and long-term to predominantly exporting nations.

Some chains ended up benefiting from the pandemic, while others lost out. Among the first, we can highlight those that took advantage of the wave of the pursuit of immunity and health, such as the orange juice sector, where Brazil is the leading exporter, accounting for 90-95% of the foreign market, both frozen and whole, which had a representative increase in consumption in the main markets, namely Europe and the United States. Other citrus fruits also have seen increased demand given health and welfare. Within this wave, the internal market of eggs was also favored.

Referring to the chains that have gained with the pandemic, as mentioned before, export commodities such as soy, corn, meat (chicken, pork and beef) and cotton, in addition to taking advantage of the exchange rate, have seen their international demand increase. Pulp and paper also benefited of the increasing concerns with hygiene and sterilization.

On the products that had a negative impact, the flower sector is in the most critical situation. One of its main flow channels is events (weddings, graduation parties, among others) which have been canceled or postponed, leaving the cut flowers for example, without a market, while retail was not able to absorb such an offer. In addition, Brazilian consumers are not in the habit of buying flowers. With the horticultural sector having suffered from the loss of its main customers – restaurants and other players in the food business and open fairs – there is a need to redirect production, mainly for retail, with the latter, having good growth prospects due to the increased consumption within households. 

Another severely shaken sector was sugar and energy that in addition to the problems of reduced car traffic flow suffered from the decline in international gasoline prices, causing major cash problems for the mills, especially those without the ability to produce sugar. This last product was the alternative found by the groups to minimize the problems, increasing their product mix of the sweetener.

Concluding this section, when we look at the macro scenario of the sector we can affirm that this is a very positive year for Brazilian agriculture, although some specific segments have suffered great shocks due to social confinement and reduction of consumption.

2020 Agricultural Crop Protection Market in Brazil

A survey conducted by Sindiveg revealed that from January to July, the area treated with crop protection products reached 64.2 million hectares, representing a growth of 6% compared to the same period of 2019. The crops that had the highest growth in utilization were soybean with an increase of 33%, corn with 22% and cotton with 18%. In terms of revenue, the first half results were $6.04 billion, a slight increase from $6.03 billion in 2019.

Soybean, corn, cotton and sugarcane crops concentrate about 80% of this market in Brazil. As for consumption regions, Mato Grosso was the state with the highest demand, representing 20% of the total, followed by São Paulo with 13% and Matopiba with 12%.

Given the phytosanitary challenges of producing in a tropical climate, these products play a fundamental role in the success of agriculture, meeting the demands of technology to increase production.

It is also worth mentioning that while the area treated increased by 6%, the revenue of the sector grew only by 0.2%, since the industry also suffered from increases in the cost of production, because of imported supplies and an unfavorable exchange rate. It has not yet been able to pass these costs on in full to the market. 

Key Changes in Market Behavior

The agricultural activity presented impressive advances in digitization, with the pandemic intensifying the search for digital solutions for remote property monitoring and information systems to support farmers' decision-making.

Online services for the purchase of supplies and sales commodities have also stood out in the current scenario. Agricultural supplies companies made several efforts to conduct digital fairs, as well as service and negotiations via platforms. 

There is a very large avenue of opportunities to be explored in line with digital agriculture, internet of things (IoT), big data, aerial imaging and management systems. This technology is revolutionizing activity in the field and allowing agriculture to be treated in the logic of square meters (m²) and no longer from the point of view of the hectare, aiming at saving resources and supplies and ensuring more sustainable agriculture.

With the wave of digitization and adoption of working from home by much of the administrative structure, many processes began to be optimized, related to displacements to perform activities and meetings, logistics flows of products, among others. The importance of risk management has also come to the fore, with agribusiness companies investing efforts into such activities. 

OURO FINO AGROCIÊNCIA protecting businesses, employees and contributing to the community

During the pandemic, Ouro Fino acted strongly from the beginning to protect what is most valuable to it – its set of collaborators. The actions were completely aligned with health protocols giving employees prevention materials and allowing them to take work home. ‘Work from home’ was adopted in all areas where this was possible and the company performed well in coping with this difficult situation. 

Other actions and donations were made by the company to the most vulnerable, contributing to alleviate suffering. The company organized charitable online music concerts and engaged in the support processes in crisis management. 

OURO FINO AGROCIÊNCIA Outstanding Performance

Ouro Fino has been performing surprisingly well, being able to compete with multinational companies that have been in this market for decades. The success of the company has been achieved thanks to the vision of its founders, who have enormous experience in management with simplicity, but at the same time guidance to rural producers and channels aiming to build margins for the company's users. 

The product line has had great evolution in this period, as well as the robust growth of commercial teams, besides having one of the newest and most modern factories in the world. Other than that, the products are strongly grounded in delivering value, and the company recently had Mitsui and ISK participate in its shares, both with Japanese culture, which greatly enriched the way of management, the board of guidance and now enabled increased access to the product portfolio of these companies, which should complement the scope of the company's products. The mentioned acquisition of equity will also allow for faster growth of the company. As a member of the Council of Ourofino Agrociência I have been able to experience all of this growth. 

About the author

Specialist in strategic planning in agribusiness, founding partner of Markestrat Group, creator of Doctor Agro platform and professor of business administration at FEA-RP/USP and EAESP/FGV.