Historically, Brazilian agribusiness, despite being highly profitable, relied primarily on bank credit, limiting 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 tailored to the sector.

As explained by Cristiano Oliveira, Head of Research at Rivool Finance, “These changes significantly expanded funding opportunities for agribusiness, allowing access to more diversified forms of financing.”

According to the expert, over 1.5 million investors are currently active in this market, which already moves nearly R$ 1 trillion in assets, spread across Agribusiness Receivables Certificates (CRAs), Agribusiness Credit Bills (LCAs), and Agribusiness Production Chain Investment Funds (Fiagros).

The executive highlights that since 2021, when agribusiness-related assets began gaining traction in the market, investors and managers have, for the first time, observed an increase in default rates and bankruptcy filings in the sector.

“In this context, Rivool Finance’s econometric study seeks to clarify the main dynamics of rural credit default, highlighting key relationships between this default and macroeconomic variables, such as exchange rates, credit costs, and the prices of grains and fertilizers in the international market,” Oliveira points out.

According to the executive, just like agricultural production, default follows economic cycles, being heavily influenced by variables like exchange rates and commodity prices.

“Among all the variables analyzed, the international price of cereals stands out as the most relevant factor in explaining rural credit default levels in Brazil, with approximately 48% of the variation in default rates attributed to fluctuations in this market,” he notes.

Oliveira also emphasizes that besides cereal prices, the study reveals the importance of other variables. The exchange rate and credit cost significantly impact default, though to a lesser degree.

According to Oliveira, exchange rates account for about 18% of the variation in default rates over 12 months, while credit costs explain 11% of this variation over the same period, with its most significant impact observed around the sixth month, making it particularly relevant in the short to medium term.

“The rising costs of inputs, such as fertilizers, also put pressure on default levels, although this impact is more pronounced in the short term,” he says.

According to Research Gate, various factors impact rural credit defaults over time. A key highlight is the cost of credit, which shows a high short-term elasticity of around 3.795. This means a 1% increase in credit costs leads to a 3.8% increase in the default rate.

Oliveira highlights that this effect is most significant between April and June, showing an immediate and substantial short-term impact. However, in the long run, the elasticity of credit cost is zero, indicating that over time, producers can adjust to these variations, neutralizing their effect on default levels.

“As for fertilizer prices, the short-term elasticity is moderate, at 0.699, with a significant effect occurring between the third and fifth months. However, the impact becomes much more pronounced in the long term, with elasticity reaching 3.865. This shows that while rising input costs don’t cause immediate problems, they accumulate over time, significantly increasing default rates as producers face higher production costs,” he notes.

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

According to data from the Central Bank of Brazil and the Food and Agriculture Organization of the United Nations (FAO), when cereal prices were high, as seen during the recent surge driven by the COVID-19 pandemic, producers saw their revenues increase significantly, allowing them not only to sustain their operations but also to pay off debts. With the stabilization and subsequent drop in commodity prices due to supply chain normalization and reduced demand, producers’ profit margins shrank. Moreover, the cyclical nature of commodity prices has direct implications for the rural credit market, which is also affected by default cycles.

To mitigate default risks, the study suggests several important measures. One strategy is developing more accurate forecasting tools that can incorporate variations in commodity prices, such as cereals, and exchange rates. Another option is diversifying rural credit portfolios. By spreading loans across different regions, producers, and crops, managers can reduce exposure to specific commodity market shocks.

“Public policies also play a role in reducing default rates. One of the recommended measures 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 bankruptcy filings, which tend to harm the credit market as a whole by increasing financing costs for reliable borrowers,” concludes Oliveira.

By Cristiano Oliveira, Head of Research of Rivool Finance.