Brazil turbulence creates high risk-high reward opportunities

Despite continued political and economic turmoil, Brazil’s agriculture sector could soon hold opportunities in export agriculture.

Despite Brazil’s continued political and economic turmoil, export agriculture is one sector where the bright spots have not entirely sputtered out, Agri Investor heard this week at the Brazilian-American chamber of commerce.

Revenues from agri goods priced in foreign currencies and production expenses denominated in reais are primed to increase margins for producers targeting the export market. Meanwhile, the commodities price bust and a tapering-off of finance capital have pushed asset prices down, a possible opportunity for high-risk investors.

Foreign investment in the country has declined for 9 consecutive quarters at an annual average of 10 percent, said Alberto Ramos, managing director of global investment research at Goldman Sachs, speaking on a panel. He predicted that the country’s economy, dogged by a deepening recession, will contract by another 3 percent this year.

Brazil’s farmers have suffered from plummeting commodity prices and a drying-up of financing sources. Domestic consumption is also down, meaning prospects for producers targeting domestic markets look equally bleak.

But a weaker currency could be a gift for operators selling on the international market, as revenues from agri goods priced in foreign currencies promise to stretch further when it comes to paying domestic expenses in reais. Agricultural products grew to nearly half of Brazilian exports in 2015, according to Brazil’s ministry of agriculture, as the country’s top non-agricultural exports, iron ore and petroleum, fell to a fraction of prices seen just a few years ago.

“I think the real will depreciate more, so I think the opportunities [in agriculture] are going to be interesting,” said Ramos. “The agriculture sector has a unique competitive advantage with prospects for productivity growth from technological innovation.”

At the same time scarce financing sources and a shrinking economy have left sellers hungry for cash, meaning assets could be available at cheaper prices – even if that means taking on the risk of entering a plummeting economy.

Valoral, an advisory group for investors in South American agribusiness, predicts the current conditions will give way to a number of high risk-high reward opportunities for investors in Brazilian agriculture.

Meanwhile, finance-starved asset holders could create opportunities for investors willing to jump in, although also at a significant risk. A partner at Valoral said he has already seen asset prices fall. Meanwhile, growers who have been hit hard by falling commodities prices will see increased liquidity as soon as this year, driven by the weak real.

“We see Brazil right now as a buyer’s market. You can get huge discounts if you are willing to invest in local farmland or local companies,” Valoral founder,Roberto Vitón told Agri Investor by phone. But jumping into Brazilian farming is not for the faint hearted, and requires significant access to local knowledge, he said.

That is because the upside potential falls unevenly across different regions and sub-sectors of the country’s agri sector. Major grains, for example, are likely to perform much better than crops that rely on local consumption. The effects of climate change are expected to have a more pronounced effect on some remote northern regions. And the uncertain political situation exacerbating the country’s economic woes makes it hard to predict how future policy decisions will affect the sector.

While opportunities are already emerging, Vitón says investors mulling the prospect of acquiring assets would be wise to take a wait and see approach to making any major moves. Continued economic problems could eventually spill over into agriculture if the Brazilian government doesn’t course-correct structural problems including a growing public debt burden expected to grow to more than 70 percent of GDP this year.

Panellists at the Brazilian-American Chamber of Commerce agreed that a slow and painful trudge toward stronger fiscal policy under a new administration is the most likely scenario. However, uncertainty over a corruption scandal that has already landed high-ranking members of the ruling Workers’ Party in jail and related impeachment efforts against President Dilma Rousseff cloud the political horizon.

With experts predicting Brazil’s economic situation will get worse before it gets better, Vitón said investors can afford to hold off on Brazilian agri plays until some of the questions surrounding the political situation are resolved.

“I think that the window of opportunity is between 12 and 24 months out,” said Vitón. “Investors have time to assess an entry strategy in the country. We don’t see any urgency to do so, and certainly this is the attitude of foreign investors that we speak with.”