IMD-81503 06.12.2013
NEW REALITIES: BRASILAGRO AND THE AGRIBUSINESS SECTOR IN BRAZIL
The Evian Group Deputy Director Michelle Barbeau Noguchi prepared this case adapted from the desk and field research of consultant Fabrice Lehmann and journalist Patricia De Campos Mello and under the supervision of Professor Carlos Braga for The Evian Group@IMD as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation.
Companhia Brasileira de Propriedades Agricolas (BrasilAgro) was the first publicly listed company active in farmland acquisitions on the “Novo Mercado” segment of the São Paulo Stock Exchange (2006). In 2012 it also became the first Brazilian agribusiness company to list American Deposit Receipts on the New York Stock Exchange. As a pioneer in large-scale farmland development and agribusiness production in Brazil, BrasilAgro was rapidly becoming a large holder of farmland in the country, and it was positioned to become a model of global agrarian capitalism by increasing its exposure to a widening international pool of financial investors. The acquisition by financial firms of land with agricultural potential in emerging and developing markets was a global trend that had gained momentum since the turn of the century. Some saw this trend as an opportunity to draw capital and reverse underinvestment in agricultural production while fostering technological transfer. Others saw it as a trend that could lead to conflict over land and environmental degradation, which could accentuate inequality. Brazil was at the forefront of this debate, having become one of the principal recipients of international financial investments in agribusiness. Brazil’s attractiveness reflected not only its natural endowments, but also the dramatic increase in productivity fostered by scientific breakthroughs, research and adaptation in tropical agriculture. This had led, for example, to an increase in grain production yields of roughly 150% over the last 15 years. However, this line of business faced many hurdles – from the natural environment to logistics and from regulation to the knowledge gaps of potential investors.
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Brazilian Agribusiness By 2013, world markets and food supply chains were having an enormous impact on the manner in which Brazil’s agricultural system was being organized. The country had become the leading producer and exporter of a whole host of products and the advent of Brazilian agribusiness production on international markets was one of the more remarkable global development features of the previous two decades. BrasilAgro’s area under cultivation was a measure of these dynamics; its properties had nearly quadrupled from 22,100 to 81,600 hectares (including safrinha)1 between the 2007-08 and the 2012-13 harvests. This was achieved by transforming native and degraded land on its vast rural landholdings into high-yielding commercial crops, most notably soya, through technologically advanced and input-intensive tropical farming. The agricultural frontier regions of the Cerrado, in which BrasilAgro and a cohort of financial agribusiness firms were prospecting and developing arable land, were some of the poorest and least developed in rural Brazil. At the same time, investors availed themselves of the cheap prices of land that had close proximity to the coastline in this area. Brazil’s new agriculture frontier was commonly called “Mapitoba,” an acronym that uses the first two letters of the four states where soybean production was expanding – southern Maranhão (MA), southern Piauí (PI), Tocantins (TO) and western Bahia (BA) (refer to Exhibit 1). Urban and rural landscapes in many areas were changing quickly and socioeconomic patterns were being restructured. The virtue most often relayed in the financial and economic press was that these investments – when done through transparent channels – brought new standards of corporate governance to the farms they purchased and the regions they opened to new farming development. From CEO Julio Piza’s perspective, “BrasilAgro has brought technology, training, infrastructure. It respects the law and pays taxes. It works to improve governance everywhere it invests – every contractor follows the same standards we do (labor and environmental regulation and compliance, etc. …).”
Key Facts about BrasilAgro
Founding and main shareholder was Cresud: Important holder of farmland and real estate developer in Argentina.
Business model: Acquisition, development, operation and sale of large-scale agricultural land in Brazil.
Main element of the strategy: Price appreciation of rural properties through modernization of land use and agricultural production.
Accumulated a portfolio of 166 thousand hectares on eight properties located in the Cerrado biome.
Sold three rural properties in 2011 and 2012 with significant capital gains.
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A farming strategy through which farmers take advantage of the long tropical growing season to produce a second crop in a single season crop.
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In May 2013, BrasilAgro sold 4,895 hectares of Cremaq farm grain fields for $16.5 million. It had purchased the land in October 2006 for $2.8 million.2
Deloitte independent evaluation: Property values had appreciated over 100% as of December 2010.
Two-thirds of acquired land was potentially productive and one-third was to be set aside as an environmental reserve.
Diversified geographic portfolio with projects from grains to sugarcane and pasture.
Started farming operations with the 2007-08 crop and has since developed 80 thousand hectares of productive arable land.
70% of crop planted area in 2012-13 is devoted to soya bean.
Access to subsidized credit lines to finance capital expenditures on property development. 20% of BrasilAgro’s capital expenditure was financed in such a way.
The Business Model: Horizontina Farm as an Example The BrasilAgro model of acquisition, development, operation and sale of large-scale agricultural properties added value for its shareholders by transforming land, making it productive, generating high-volume production and fostering the price appreciation of rural properties (refer to Exhibit 2). As an example, BrasilAgro’s Horizontina Farm in the northeastern state of Maranhão was bought in 2010 then sold in 2012 for twice the original purchase price. The 14,359-hectare farm, purchased in March 2010 for R$37.7 million3 (US$16 million), was sold for R$75 million (US$32 million). According to the company earnings report, the transaction generated an internal rate of return of 27%, which included profits from capital gains and crop production. While BrasilAgro benefited from extremely high appreciation rates when it divested two smaller farms located in the south in 2011, Fazenda Horizontina represented the first rural property on which the company completed, in earnest, a full project cycle from acquisition to sale via development and operation. Acquired with 2,100 hectares of productive arable land, the company invested more than R$10 million ($4.3 million) in clearing and rehabilitating the land and improving the infrastructure for mechanized and intensive commercial crop production. This included laying 60 kilometers of internal roads. Horizontina, which was still managed by BrasilAgro over the 2012-13 harvest, was expected to produce soya and a second crop of corn on 8,506 hectares. By 2013, Horizontina engaged 80 to 110 direct and indirect employees.
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In addition to the acquisition price, BrasilAgro invested US$2 million between 2006 and 2013 in clearing the area, restructuring, road building, improvements. See Fiscal Year and Quarter ended June 30, 2013, p. 5. www.brasil-agro.com/brasilagro2011/web/conteudo_en.asp?tipo=36907&id=0&idioma =1&contra=44&submenu=0&img=0&ano=2013 (accessed December 3, 2013). The total investment from the acquisition date to the sale date amounted to $4.8 million. 3 R$ = Brazilian real.
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Cremaq Farm: The Second Demonstration of the Model’s Viability At the heart of BrasilAgro’s model was its ability to prospect the vast Cerrado landscape and anticipate the market in land valuation. Infrastructure, or the lack of it, played an important part in this investment strategy, as did the belief that a particular area would consolidate as an important producer of grains with improved logistics at a future date. When we look into a farm, infrastructure problems are both a threat and an opportunity. We like to look for farms where the intrinsics4 are pretty good but the rest is bad. Those are the circumstances we like most because we can change the situation by acting and solving the problem quite easily. Typically, these are the properties where the upgrades have not been priced into the market – for example, where by building 20 kilometers of road, you save a huge amount of money on logistics or by erecting a new bridge, you save $15 per round.5
Multi-thousand hectare farms devoted to commercial crops in the northern Cerrado were run like an industry. Capital investments were substantial, operations were highly mechanized and technologies were advanced – be it biotechnology or soil and crop management techniques or monitoring systems for precision farming or SAP applications on smartphones that linked farm managers with distant business managers and executives for purchase and sale orders. Cremaq Farm in the state of Piauí – BrasilAgro’s largest rural property in asset valuation, capital expenditure, planted area and cash flow – best demonstrated this innovative model of rural development in Brazil (refer to Exhibit 3). Most of the output produced at Cremaq farm was destined for the domestic market. This was due to the fact that there was a crushing plant in the same province, operated by the multinational Bunge, and it made fiscal sense to feed the plant rather than export. In contrast, crops from the recently sold Horizontina Farm, located across the state border in Maranhão, were mostly exported via the seaport of Itaqui next to the state capital São Luis. The port and the railway feeding it were concessions administered by the Brazilian conglomerate Vale. It held a single grain terminal and was often subject to delays that increased the cost of exporting and importing. Nevertheless, rural properties in the Cerrado regions of Maranhão and Piauí situated a few hours away by truck were in the vicinity of a deep seaport that was the best conduit to Brazil’s main export markets – East Asia and Europe. When inland transport infrastructure, storage and port management improved, BrasilAgro would be well established and able to reap the benefit.
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“Intrinsics” are the factors that help determine whether a farm will be a success or not, some of which are difficult or impossible to improve afterwards such as soil relief, structure, local climate, as well as proximity to existing infrastructure such as railroads and ports. Other important aspects to consider initially are whether the land is in compliance with environmental legislation and the presence or not of people living on the land who are not landowners. BrasilAgro’s success in each investment depended on whether it could acquire land where such intrinsic factors were highly favorable from the start. 5 Statement made by Julio Piza, CEO of BrasilAgro. During the seed and the harvest season, trucks made rounds from the farm to the fields dozens of times per day.
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Source: http://www.portodoitaqui.ma.gov.br/
Conclusion BrasilAgro’s transparent and compliant approach placed the company in the lead from a corporate governance perspective compared with many ventures seeking to expand farming potential in Brazil’s new agricultural frontier (the tropical savannah known as the Cerrado). The model was highly efficient and generated economic value in response to rising global demand for food, feed and fuel. When asked about the evolving geography and institutional profile of investors, CEO Julio Piza emphasized that all was still in the early stages. “The interest is there – some important pension and equity funds – but few investors really understand the agricultural sector. The financial vehicles and companies to channel substantial capital are just being developed. There is a need to educate and inform.” Long term, could BrasilAgro maintain its profitability and expand while holding true to beneficial norms? In other words, did its business model provide a new standard for effective agricultural development and commodity production in developing economies? Could it benefit from the new flexibilities introduced by the 2012 Brazilian Forest Code (refer to Exhibit 4)? Julio believed so – this was a fundamental value of BrasilAgro. He stated, “The land is our product. If we don’t take good care of it, we don’t have a product.” The social side was equally important to him and to the company – as the value of a farm was dependent on how well other farmers did in the region. If BrasilAgro was the only one making money, then its farm was not going to be as valuable to others.
Questions for Class Discussion 1.
Do you believe that this model could be applied in other developing economies? Explain how and why – or why not.
2.
What are the pros and cons of having companies doing what BrasilAgro does, i.e. large-scale farmland development and agribusiness production?
3.
In your opinion, what level of infrastructure investment can be internalized by BrasilAgro so that the company still maintains the profitability of its business model?
4.
Are environmental regulations in Brazil a constraint to the expansion of BrasilAgro? Explain why.
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Exhibit 1 The Mapitoba Region
Source: http://www.ecoagro.agr.br/en_ocerrado.php
Land Use in Brazil 2011 (i) Total 851 million ha (8,514,880 km2)
175 million ha national parks / indigenous reserves (21%) 62 million ha productive arable land (8%) 182 million ha pastures (21%) 35 million ha urbanization and water (4%) 27 million ha other uses (3%) 370 million ha remaining vegetation (43%)
Source: ICONE – Agricultural Land Use and Expansion Model – agLUE-BR
Land Use in Brazil 2011 (ii) Non-arable area (61%) Arable area (39%): Cultivated area – 72 million ha (9%) Pastures – 172 million ha (20%) Available area – 86 million ha (10%) Source: IBGE, http://www.ibge.gov.br/english/
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Exhibit 2 BrasilAgro Business Model
Source: BrasilAgro, http://www.mzweb.com.br/brasilagro2011/web/arquivos/BrasilAgro_Presentation_Eng_Long_V1.pdf
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Exhibit 3 Cremaq Farm in the State of Piauí
Source: BrasilAgro, http://www.mzweb.com.br/brasilagro2011/web/arquivos/BrasilAgro_Presentation_Eng_Long_V1.pdf
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Exhibit 4 The New Brazilian Forest Code The new Brazilian Forest Code approved in 2012 brought important changes vis-à-vis the 1965 Forest Code and the 1988 Federal Constitution. The push for such changes had strong support from the rural and agribusiness sector, which felt the previous legislation was too restrictive in relation to land use for farming and imposed undue costs on farmers for conservation of native vegetation and restoration of degraded areas, even when the current owner was not responsible for the original deforestation. Under the previous Forest Code, degraded areas deemed of importance for conservation and ecosystem functioning, such as margins of rivers, had to be restored back to native vegetation and then set aside with no commercial use. The 2012 Forest Code introduced greater flexibility in achieving compliance of rural properties with the legislation since the States are now responsible for defining much of what constitutes compliance – especially for areas that were already degraded before July 22, 2008. In those cases, the need to pay fines for the degradation and the requirements to restore native vegetation would be analyzed and agreed on a case-by-case basis with the respective State Environmental Agency. For example, a farm could now be in compliance by just setting aside and not using a certain amount of degraded area (thus allowing for natural regeneration), while before the farmer was responsible for the actual restoration of the native vegetation, often with significant expenditures on soil preparation, planting of seedlings and caring for them to ensure the re-establishment of the forest. Overall, the new legal framework should facilitate BrasilAgro’s business model in that, among others, a greater percentage of the land would now be available for farming activities; previously degraded areas won’t necessarily have to be restored back to the original vegetation; and a greater percentage of farms would, in the near future, have their “rural environmental certificate” (Cadastro Ambiental Rural – CRA), a document describing the status of compliance of each rural property with the Forest Code and the plan agreed with the State environmental agency with actions and timeline to bring the farm into full compliance. The CRA would help future investors more clearly evaluate the costs of bringing new areas into compliance with the environmental legislation, thus decreasing the uncertainty and hopefully enticing more investors to support BrasilAgro’s operations in Brazil. Source: Edição Manual Novo Código Florestal, 2013, www.mp.mg.gov.br/mpmgjuridico
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