Grain Storage as an Opportunity for Private Credit

Blog Grana

Oct 30, 2024

The shortcomings in logistics and storage sectors continue to pose obstacles to the development of Brazilian agribusiness. This is evident when comparing

The shortcomings in logistics and storage sectors continue to pose obstacles to the development of Brazilian agribusiness. This is evident when comparing the growth in grain storage capacity to the increase in production from 2010 to 2023.

Storage capacity has decreased by a third since reaching 91% in 2010, ending 2023 with a capacity of around 60%. This percentage is far from the United Nations Food and Agriculture Organization's (FAO) recommendation, which suggests a country’s storage capacity should be 1.2 times its annual agricultural production.

Unlike the United States, where storage facilities are located close to or integrated within the agricultural complex, in Brazil, only 15% of farms have their own warehouses or silos, according to data from CONAB (the Brazilian National Supply Company).

Meanwhile, this percentage is about 54% in the United States and roughly 80% in Canada.

Moreover, in Brazil, grain storage infrastructure primarily consists of dedicated units for bulk storage (silos), representing 78% of the total capacity.

The remaining 22% comprises conventional warehouses, which use bags and bales to store the product. This method presents disadvantages in terms of conservation and in grain loading and unloading operations compared to the silo system.

This characteristic is particularly evident in the data showing that the greatest grain storage deficit in Brazil is concentrated in the Central-West region, which is responsible for the largest share of the country’s grain production.

This is especially true in Mato Grosso, which, despite having the largest grain storage capacity among Brazilian states—around 38 million tons—has storage capacity that doesn’t even meet half of its grain production.

The storage deficit exposes Brazilian grain producers, not only in the Central-West region but across Brazil, to significant economic losses as they need to sell much of their production during harvest time, incurring higher freight costs (significantly higher during the harvest) and receiving prices below international levels by referencing Chicago Board of Trade values.

With record harvests in 2024 and the high grain storage deficit, export prices for soybeans and corn are currently negative compared to the international market.

The first estimate for the 2024/2025 grain season, conducted by CONAB, indicates a production of 322.47 million tons.

This volume represents an 8.3% increase over the 2023/2024 season, translating to 24.62 million more tons harvested compared to the previous cycle. Given the anticipated production increase, low prices are likely to persist in the coming years unless new investments in storage are made.

A study by Abimaq’s Sectorial Chamber for Grain Storage Equipment (CSEAG) indicates that around R$10 billion per year would be needed over ten years to eliminate the storage deficit by 2030.

However, recent data indicates that investments fall far short of the storage capacity required for production growth. The main public credit program for this purpose, the Warehouse Construction and Expansion Program (PCA) from the National Bank for Economic and Social Development (BNDES), provided only R$4.12 billion in 2022.

The program offers credit of up to R$50 million, repayable over 12 years, with a two-year grace period and interest rates ranging from 7% to 8.5% per year, depending on the storage unit’s size. Recently, Banco do Brasil and the New Development Bank (NDB) announced R$1.5 billion in credit for warehouse construction.

Even so, historical averages indicate that about 70% of the available public credit volume is actually contracted. The reasons for the reduced demand include excessive guarantee requirements, high bureaucracy, low market interest in such projects, and a lack of awareness about the storage “deficit” and its associated costs.

According to Tadeu Vino, commercial and marketing superintendent at Kepler Weber, a Brazilian post-harvest services company, producer profits could increase by approximately 15% with new storage facilities, allowing the invested amount to be recovered in five to six years.

When properly maintained with preventive care, a storage unit can last over 30 years. A study by the Infrastructure and Logistics Thematic Chamber (CTLOG) indicates that the Internal Rate of Return (IRR) for such an investment would be 6% per year, and the average occupancy rate required for the business to be economically viable would be 62%.

Consequently, there is an annual investment deficit in storage of at least R$5 billion in credit, while the sector incurs R$20 billion in losses.

There is a strong potential return for producers and entrepreneurs who invest in this sector, particularly in bulk storage (silos), as well as significant potential for expanding private credit in this area.

With less bureaucratic and results-driven credit sources, all parties involved will share in the gains that Brazil’s commodity export sector will provide in the coming decades.

Author: Cristiano Oliveira, Head of Research at Rivool Finance