A Brazilian Farming Boom Is Rewarding Funds That Bet on Bad Debt

(Bloomberg) -- Brazilian farmers flush with cash are taking the opportunity to repay old loans, rewarding investors that took on defaulted debt when times were tougher. 

A combination of strong global crop prices and weak local currency has meant years of record farming profits in the top producer of everything from soybeans to sugar-cane and orange juice. 

Even considering this year’s drought, the windfall has put farmers in a better position to pay back outstanding loans that their suppliers sold to financial firms. In the case of NPL Brasil, the value of repayment deals with farmers almost tripled in the first eight months of 2021 after gaining 150% last year. 

“That certainly shows more liquidity in the agriculture sector after many profitable crops,” NPL Brasil Chief Executive Officer Christian Ramos said in an interview. Artificial intelligence has also helped track missed payments, sometimes from decades ago, he said.

Driven by voracious Chinese demand, Brazil has become an agricultural powerhouse. Soybean output, for example, is up more than 40% in the past five years. With the international price of the oilseed rising about 30% in the past year, grower profitability will be the highest in least five years even as costs rise, according to consulting firm Agroconsult. While drought and frost hurt the latest corn crop, soybeans were spared serious damage and previous harvests enjoyed favorable weather.

Of the 5.5 billion reais ($1 billion) in defaulted debt that NPL manages, about 80% is from agriculture, mostly from portfolios previously held by agro-chemical, seed and machinery companies.

Firms that took over debts for 5-10% of face value now receive 20-30%, compensating long waits for payment and the risk of no payment at all, according to Jonatas Couri, a partner at Leaf Capital, which runs a 340 million-real fund of defaulted debt.

“For borrowers, it’s a unique opportunity to clear their name at a good discount,” Couri said. 

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