Agribusiness slows down, affects supply chain

The prospect of lower GDP growth in Brazil and worldwide amid slow consumption, high grain stocks, and low soy and corn prices has discouraged investments in structure and inputs. The consequences could also be seen next year.

Agriculture GDP could decline by 3.4% this year after growing 15.1% in 2023, according to projections by the Getulio Vargas Foundation’s Brazilian Economic Institute (FGV/Ibre). Itaú Unibanco estimates a decline of 0.7%, while LCA Consultores predicts the result to be 0.8% lower and Bradesco expects stability. The market consensus points to a contraction of 0.7% as signaled by Central Bank’s weekly survey with analysts.

The slower consumption in Brazil and abroad is expected to curb the performance of the agricultural sector. With lower real income growth, Brazilian household consumption is expected to grow by 2.3%, compared with 3.1% in 2023, according to Macro Sector Consultores. Exports are expected to grow by 7% this year after increasing by 9.1% in 2023, in tandem with the global economy, which will grow by 2.7%, compared to 3% in 2023.

According to Macro Sector, agricultural revenues will decrease by 5.1% to R$901 billion this year. This decline is primarily attributed to a 6.8% drop in cereal production, reaching 296.7 million tonnes. Despite the decrease, the projected figure for the 2023/24 harvest is slightly higher than the latest estimate from the National Supply Company (CONAB), which stands at 295.6 million tonnes, representing a 7.6% decrease from the previous cycle. In terms of agricultural GDP, the consultancy foresees a 4% increase, taking into account the volume of production.

Fabio Silveira, managing partner of consultancy Macro Sector Consultores, said, “If there’s a decline in income and persistently low market prices, it’s improbable for agribusiness to show satisfactory development, thereby impacting GDP positively and sales within the agricultural production chain.” He does not anticipate a rebound in soy and corn prices shortly.

Silvia Matos, researcher and coordinator of the FGV Ibre Macro Bulletin, said that agriculture’s performance in the 2023 GDP was favored by lower inflation and production growth, which will not be repeated in 2024. “The current harvest will be very good, but smaller than the last, and the impact of the climate is not fully defined. In the world, global grain production is still going well. There isn’t enough strong demand to reverse the commodity price scenario. The growth of Brazil’s agricultural GDP will certainly be negative,” said Ms. Matos.

For Natalia Cotarelli, an economist at Itaú Unibanco, it is necessary to evaluate the indirect effects on the production chain. “The services, storage, and transportation sectors benefited greatly from the agricultural sector last year. This year, the impact may be smaller,” she said, adding that the agricultural sector will likely see a drop in income due to lower prices for soy and corn.

The impact is already being felt in the sector’s investment. A survey by the Chamber of Grain Storage Machinery and Equipment (CSEAG) of the Brazilian Association of Machinery and Equipment Manufacturers (ABIMAQ) points to a 15% to 20% drop in warehouse orders this year. In the equipment sector, this could mean a reduction in sales of up to R$600 million. The National Association of Motor Vehicle Manufacturers (ANFAVEA) expects sales of agricultural machinery in the country to fall by 11% this year to 54,300 units.

Sales of fertilizer for planting the next harvest have never been so low, according to industry sources. By the end of the first two months of the year, the Brazilian market had bought just 20% of the volume expected for 2024, half the percentage sold in previous years, according to Yara, the Norwegian company that leads the nitrogen fertilizers market in the country.

A survey by consultancy StoneX shows that the commercialization rate for fertilizer deliveries scheduled for the second half of the year—when the agricultural calendar begins for the 2024/25 harvest—is also lower, at around 20%. In the last two years, the rate for this period was 30%.

Disbursements from the investment lines of the 2023/24 Crop Plan also saw a decline, dropping by 3.8% to R$69 billion by February. However, the Brazilian Development Bank (BNDES) reported a significant increase in operations aimed at financing new grain storage facilities last year. Specifically, there were 13 loans provided to cooperatives and companies, totaling R$241.5 million. Additionally, through indirect operations facilitated by accredited financial agents, BNDES extended R$1.7 billion under the 2023/2024 Crop Plan, focusing on storage programs, such as the Program for the Construction and Expansion of Warehouses (PCA).

José Luis Pinho Leite Gordon, director of productive development, innovation, and foreign trade at the BNDES, said producers are still looking for loans to build warehouses this year. “There is a lot of demand, especially from corn ethanol producers,” said Mr. Gordon. He added that the bank has doubled its rural financing in dollars to R$8 billion. In addition, the federal budget earmarked R$2 billion for BNDES’s Procapcred program.

However, the storage sector has reported a decrease in orders by 15% to 20%. “In 2023, the storage deficit worsened due to a larger harvest,” said Paulo Bertolini, president of CSEAG. He estimated that the investment required per static tonne would be approximately R$1,500, with 40% allocated to equipment and the remaining 60% to land and construction works. Considering the country’s grain storage deficit of 124 million tonnes, an investment of R$186 billion would be necessary.

Daniel Belani, sales manager at GSI, which is part of the agriculture equipment maker AGCO, said that demand for grain storage this year is 10% to 15% lower than in 2023. “The credit lines under the Crop Plan were quickly exhausted. And part of the country is losing productivity. This is causing the market to shrink,” said Mr. Belani. He added that some producers prefer to save cash and wait for the next Crop Plan.

Denis Catelan, regional manager at equipment manufacturer Casp Indústria e Comércio, said the drop in the grain harvest forecast has led some producers to reduce their investment in storage. The exceptions are large producers operating in agricultural frontier regions. Casp expects production to remain stable this year, with exports offsetting the fall in domestic demand.

Kepler Weber, the leading company in the sector, has reported a 20% surge in orders for the current harvest compared to the corresponding period last year. Bernardo Gomes Nogueira, the company’s commercial director and incoming CEO, added that Kepler serves large producers and cooperatives that are maintaining their investment momentum. The company is already receiving orders for the construction of silos and structures slated for completion in 2024/25, he said.

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