Corn as cash: Brazil's bartering farmers raise risks for Canada's Nutrien
by: Rod Nickel, Ana Mano
published: March 12, 2018
WINNIPEG, Manitoba/SAO PAULO (Reuters) - Taking a page from its aggressive growth strategy in the United States, cash-rich Canadian fertilizer giant Nutrien Ltd plans to plow investment into Brazil in a bid to reap up to 30 percent of farm supply sales in fertile pockets of the country.
But business in Brazil’s farm sector - the world’s fastest growing - strays far from the usual practices in North America’s farm belt, where Nutrien is a top supplier of fertilizer, chemicals and seed.
It’s a place where the ancient economy of bartering – in this case swapping crops for fertilizer – is still common, helping Brazilian farmers mitigate their high reliance on credit. Selling directly to farmers in the way Nutrien plans is a risk that rivals Mosaic Co and Yara International ASA are avoiding, senior executives from both companies told Reuters.
For Nutrien, going big in retail sales of seed, chemicals and fertilizer to Brazilian farmers is a way to manage another risk - volatility in wholesale fertilizer prices. Retail stores in the United States are a boon during times of high supply and low prices – as now – because they give the biggest global fertilizer producer by capacity assurance of base demand in a major farm market.
Brazilian barters typically involve farmers, grain handlers such as Cargill Inc and fertilizer sellers in three-way arrangements that see farmers commit a portion of their future harvest to the grain handler in exchange for fertilizer from the manufacturer.
Such deals are unnecessary in Canada and the United States, where chartered banks and government lenders provide ample credit to tide farmers over to autumn, when they can start selling their output. Brazilian farmers lack such willing lenders, so they rely on monetizing crops that have not even been planted.
“Farmers use their soybeans like their money; use their corn like it’s cash,” said Rick McLellan, senior vice-president of Brazil for Mosaic, which does some barter deals involving its fertilizer deliveries.
Nutrien, formed in January by a merger of Potash Corp of Saskatchewan and Agrium, disclosed the same month that it intends to become a major farm supplier in Brazil, stretching its reach beyond North America, Australia and Argentina.
Chief Executive Chuck Magro revealed to Reuters that the company is looking to roll up as much as 30 percent of farm retail sales in pockets of central and southern Brazil - a level that it calculates may not raise antitrust concerns. The growth plan hinges mainly on buying existing retail dealers.
Getting there may take many years, with price tags to buy retail dealers currently high, Magro said, declining to place a timeline on his plans.
“What we’re doing today is going to be a program that will last many, many years,” he said. “The vision is to have a North American-South American integrated company. If we can get there, that’s a pretty powerful global complex.”
To build up its Brazil business, Nutrien is willing to barter by accepting grain as collateral against credit, similar to how it operates in Argentina, Magro said.
Julio Zavala, general manager at Brazilian fertilizer blender Utilfértil Indústria de Fertilizantes, which Nutrien owns, said the company is still devising its strategy for building retail. Utilfertil has already done some bartering with farmers through grain traders Cargill and Bunge Ltd, he said.
The Brazil venture could give Nutrien a grasp of the world’s fastest-growing major agriculture market, or cause an expensive slip-up just as it woos investors back to an oversupplied global crop nutrient sector.
The stock is trading around the same level it opened at on Jan. 2. Investors are focused on how Nutrien will spend some $4.6 billion on growth in Brazil and shareholder returns after it sells stakes in companies SQM, Arab Potash Company and ICL Israel Chemicals to appease merger regulators, according to analysts.
BARTERING AND BANDING TOGETHER
Rival Mosaic sees too much risk in Nutrien’s strategy to follow along.
U.S.-based Mosaic sells bulk fertilizer to Brazilian farms large enough to own storage facilities, but has no interest in creating a retail network, said Chief Executive Joc O’Rourke. Brazil’s retail system is “hugely fragmented,” made up of many tiny players, he said.
“A lot of these are almost back-of-the-shed type retail operations and we don’t want to get into the greater risk that goes with that,” O’Rourke said in an interview.
Some 100 retail dealers in Brazil sell to farmers, and none owns more than 5 percent market share, according to Bank of Montreal.
Yara sees different risk in any attempt to be a one-stop supplier: moving too far beyond its core expertise of fertilizer and into seeds and chemicals.
“That’s a totally different business,” said Cleiton Vargas, Yara’s senior vice-president of crop nutrition in Brazil.
Yara sells about half of the fertilizer it produces in Brazil in direct deliveries to mostly large, successful farmers and shares the risk of selling to smaller growers by utilizing other retail sellers, Vargas said.
While Brazil is a farm powerhouse, it still imported some 26.3 million tonnes of fertilizer last year, according to fertilizer association ANDA, which amounts to three quarters of the nutrients that farmers used.
According to a major farmer group, new entrants are welcome because they potentially increase competition among input sellers, reducing prices.
“The more players, the better,” said Antônio Galvan, president of the Mato Grosso soy growers association Aprosoja. Commonly, Brazilian farmers band together in large groups and buy directly from fertilizer producers in a bid to cut fertilizer costs.
Others, like Cayron Giacomelli, barter crops for fertilizer through grain traders including China’s state-owned COFCO and Amaggi.
A potential acquisition target, fertilizer distributor and farmer cooperative Fecoagro, is intrigued by Nutrien’s plan.
“We are open to anything,” said executive director Ivan Ramos.