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Brazilian Farmers Pay the Price of Protecting Insolvent Growers

Brazilian Farmers Pay the Price of Protecting Insolvent Growers

(Bloomberg) -- A Brazilian court ruling allowing individual farmers to seek bankruptcy protection through proceedings typically used by companies is having an unwelcome side effect: pricier credit for all growers.

When Guilherme Scheffer was planning this year’s crop, he was surprised to hear lending rates weren’t falling in line with the nation’s benchmark. Banks told him rates would be 1 percentage point lower if it weren’t for the easing of bankruptcy protection rules.

“Banks say the entire sector is at greater default risk,” said Scheffer, whose group grows soybeans, corn and cotton on 165,000 hectares (400,000 acres) in Mato Grosso state and has been publishing audited balance sheets for a decade.

The ruling opens the door to thousands of individual farmers to use the country’s equivalent of Chapter 11. The decision also affects trading houses that put up funding for growers in return for crops months later. Last season, international firms accounted by 30% of soybean funding in Mato Grosso, according to the state’s rural economy institute Imea.

“These requests are eroding the legal safety of the model that has funded this gigantic expansion of Brazil’s agriculture,” said Andre Nassar, head of soybean processors group Abiove, an organization that represents Cargill Inc. and Bunge Ltd. among others.

As Brazil’s central bank slashes the benchmark lending rate this year, commercial banks’ lending margins in all sectors have fallen 30%. But in agriculture, they have remained little changed, according to Itau BBA.

“For good payers, it means higher interest rates,” Pedro Fernandes, agribusiness director at the bank, said by telephone. “For producers with high leverage levels, it means credit scarcity.”

Brazilian Farmers Pay the Price of Protecting Insolvent Growers

To contact the reporters on this story: Tatiana Freitas in São Paulo at tfreitas4@bloomberg.net;Fabiana Batista in Sao Paulo at fbatista6@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Patrick McKiernan

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