Rural Credit Default

Historically, the Brazilian agribusiness, although highly profitable, depended mainly on bank credit, which restricted the participation of private investors in financing agricultural operations. This scenario began to change with the expansion of the capital market, driven by Agro Laws 1 and 2, which introduced new financial instruments for the sector.

These changes significantly expanded funding opportunities for agribusiness, allowing access to more diversified forms of financing. Currently, more than 1.5 million investors actively participate in this market, which now handles nearly R$ 1 trillion in assets, distributed among Agribusiness Receivables Certificates (CRAs), Agribusiness Credit Bills (LCAs), and Investment Funds in Agro-industrial Production Chains (Fiagros).

Since 2021, when agribusiness-related assets began gaining more traction in the market, investors and managers have observed, for the first time, an increase in default rates and the number of Judicial Recovery (RJ) requests in the sector. In this context, the econometric study conducted by Rivool Finance seeks to clarify the main dynamics of default in rural credit, highlighting important relationships between this default and macroeconomic variables such as the exchange rate, the cost of credit, and the prices of grains and fertilizers in the international market.

Just like agricultural production, default follows economic cycles and is strongly influenced by variables such as the exchange rate and commodity prices. Among all the variables analyzed, the international price of cereals stands out as the most relevant factor in explaining the levels of default in rural credit in Brazil, with approximately 48% of the variations in default attributed to fluctuations in this market.

In addition to cereal prices, the study reveals the importance of other variables. The exchange rate and the cost of credit also have a significant impact on default, although to a lesser extent. The exchange rate explains about 18% of the variations in default over 12 months, while the cost of credit is responsible for 11% of these variations in the same period, with its most intense effect observed in the sixth month, when it becomes particularly relevant in the short and medium term.

The increase in the cost of inputs like fertilizers also puts pressure on default levels, although this impact is more pronounced in the short term.

One of the main highlights is the cost of credit, which presents a rather high short-term elasticity, around 3.795. This means that a 1% increase in the cost of credit leads to an approximately 3.8% increase in the default rate.

This effect is most significant between months 4 and 6, showing an immediate and substantial impact in the short term. However, in the long term, the elasticity of credit cost is zero, indicating that, over time, producers can adjust to these variations, neutralizing the effect on default levels.

Regarding fertilizer prices, short-term elasticity is moderate, with a value of 0.699, and its significant effect occurs between months 3 and 5.

However, the impact becomes much more pronounced in the long term, with elasticity reaching 3.865. This demonstrates that while increases in input prices may not cause immediate problems, they accumulate over time, significantly raising default as producers face higher production costs.

The price of cereals in the international market stands out as the most influential variable on default in rural credit. In the short term, elasticity is -6.296, while in the long term, it reaches -9.273. This means that a 1% increase in cereal prices results in an approximately 6.3% reduction in default in the short term and an even more significant drop of about 9.3% in the long term.

When cereal prices were high, as occurred during the recent surge driven by the COVID-19 pandemic, producers saw their revenues increase substantially, allowing them to not only maintain operations but also amortize their debts.

With the stabilization and subsequent fall in commodity prices due to the normalization of supply chains and reduced demand, the profit margins of producers were affected. Additionally, the cyclical nature of commodity prices has direct implications for the rural credit market, which is also affected by default cycles.

To mitigate the risks of default, the study suggests several important measures. One strategy is the development of more precise forecasting tools that can incorporate fluctuations in commodity prices, such as cereals, and in the exchange rate.

Another alternative is the diversification of rural credit portfolios. By distributing loans across different regions and types of producers and crops, managers can reduce their exposure to specific shocks in certain commodity markets.

Public policies also help reduce default. One recommended measure is to reduce the frequency of debt renegotiations, a practice that can encourage risky behavior among producers.

Additionally, it is necessary to limit the indiscriminate use of judicial recovery, which tends to harm the credit market as a whole, increasing financing costs for good payers.

Author: Cristiano Aguiar de Oliveira, Head of Research at Rivool Finance.