Default on rural credit is impacted by the price of cereals and fertilizers

Historically, 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 aimed at the sector. These changes significantly expanded opportunities for raising funds for agribusiness, allowing access to more diversified forms of financing. Currently, more than 1,5 million investors actively participate in this market, which already moves almost R$ 1 trillion in assets, distributed among Agribusiness Receivables Certificates (CRAs), Agribusiness Credit Letters (LCAs) and Investment Funds in Agroindustrial Production Chains (Fiagros).

Since 2021, when agribusiness-related assets began to gain greater traction in the market, investors and managers have observed, for the first time, an increase in default rates and in the number of requests for Judicial Recovery (RJ) in the sector. In this context, the econometric study carried out 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, defaults follow economic cycles and are 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 default levels in rural credit in Brazil, with approximately 48% of the variations in defaults attributed to fluctuations in this market.

In addition to the price of cereals, the study reveals the importance of other variables. The exchange rate and the cost of credit also have a significant impact on defaults, although to a lesser extent. The exchange rate explains around 18% of the variations in defaults at the end of 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 costs of inputs such as fertilizers also puts pressure on default levels, although this impact is more pronounced in the short term.

The table shows how different variables impact rural credit defaults over time. One of the main highlights is the cost of credit, which has a very high short-term elasticity of around 3,795. This means that a 1% increase in the cost of credit leads to an increase of around 3,8% 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 the cost of credit is zero, indicating that, over time, producers are able to adjust to these variations, neutralizing the effect on default levels.

For fertilizer prices, the short-term elasticity is moderate, with a value of 0,699, and its significant effect occurs in months 3 to 5. However, the impact becomes much more pronounced in the long term, with the elasticity reaching 3,865. This shows that while input price increases do not cause major immediate problems, they accumulate over time, significantly increasing defaults as producers face higher production costs.

The price of cereals on the international market stands out as the most influential variable on default on rural credit. In the short term, the elasticity is -6,296, while in the long term it reaches -9,273. This means that a 1% increase in the price of cereals results in a reduction of approximately 6,3% in default in the short term and an even more significant drop, of approximately 9,3%, in the long term.

When grain prices were high, as was the case during the recent COVID-19-driven surge, farmers saw their revenues increase substantially, allowing them not only to maintain their operations but also to pay down their debts. As commodity prices stabilized and then fell due to the normalization of supply chains and lower demand, farmers’ profit margins declined. In addition, the cyclical nature of commodity prices has direct implications for the rural credit market, which is also affected by cycles of defaults.

To mitigate default risks, the study suggests some important measures. One strategy is to develop more accurate forecasting tools that can incorporate changes in commodity prices, such as cereals, and in exchange rates. Another alternative is to diversify 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 rates. One of the recommended measures is to reduce the frequency of debt renegotiations, a practice that can encourage risky behavior among producers. In addition, it is necessary to limit the indiscriminate use of judicial recoveries, which tend to harm the credit market as a whole, increasing financing costs for good payers.

*Per Cristiano Oliveira (in the photo), Head of Research at Rivool Finance