Market Talks: The advance of the grain sector's share of the Brazilian stock market

Author Argus

The agribusiness is an important part of the Brazilian economy when we talk about wealth generation. Is this also reflected in the stock market?

Join Camila Dias, Argus Brazil Bureau Chief, and Alessandra Mello, deputy editor of the Argus Brazil Grains and Fertilizers. They talk about the advance of the grain sector's share of the Brazilian stock market, a phenomenon that intensified in 2021.

Stay connected with the grains and fertilizers market.



Transcript

CD: Hello and welcome to Market Talks — a series of weekly podcasts produced by Argus discussing the main events impacting the commodities and energy sectors in Brazil and around the world. My name is Camila Dias, Argus Brazil Bureau Chief. In today's episode I talk to Alessandra Mello, deputy editor of the Argus Brazil Grains and Fertilizers publication, about the advance of the grain sector's share of the Brazilian stock market, a phenomenon that intensified in 2021. Welcome, Alessandra.

AM: Thank you, Camila, I am glad to be here again at Market Talks.

CD: Alessandra, we know that agribusiness is an important part of the Brazilian economy, when we talk about wealth generation. Is this also reflected in the stock market?

AM: Look, Camila, actually not as much as it should. Although agribusiness represents almost 27pc of GDP, in the stock market this share is only 4pc, considering the market value of the companies. But this situation is beginning to change, and analysts believe there is great potential for growth. In fact, there was a first wave in the late 2000s, when meatpackers and also sugarcane mills decided to go public. It was also at this time that two companies linked to the grain sector, SLC and BrasilAgro, debuted on the B3, the current name of the Brazilian stock exchange, which at the time was still called Bovespa. But then there was a lull in this sector on the stock exchange.

CD: And what is the main characteristic of those grain sector companies that have shares traded on the Brazilian stock exchange?

AM: Well, one of the curiosities is that in Brazil we have large companies focused mainly on the planting and harvesting of soybeans, corn, and cotton. I talked to several executives of the sector and they affirm that worldwide, including in the USA and in Europe, the agribusiness companies listed in stock exchanges are mostly trading or processing industries, or even those that supply inputs for agriculture such as fertilizers, pesticides, and machinery. Here we have these two companies, SLC and BrasilAgro, which focus on crops, they own countless farms in the main producing regions of Brazil, in a corporate farming model.

CD: Interesting. And these companies that have been on the exchange longer, linked to grain production, have they been able to achieve what they expected when they went public?

AM: Until the beginning of this year, the highlights were really these two companies that I mentioned. The first company dedicated to the cultivation of grains and oilseeds to go public on the Brazilian stock exchange was SLC, which in the 2020-21 season planted 470,000 hectares. It is a traditional group from southern Brazil created in 1977, which decided to do its IPO 30 years later, in 2007. The strategy was to accelerate the company's growth. And it seems to have worked out well. The offering reached R$490 million, $234mn at that era's exchange rate. At the end of September this year, SLC's market value was calculated at R$8.5 billion or currently $1.5bn, following growth in Brazilian grain production and higher prices. Recently, SLC acquired another large group listed on B3 that’s focused on grain production, Terra Santa. Thus, in the 2021-22 cycle it should reach 660,000 ha of crops mainly of soy, corn and cotton, distributed in 22 farms in seven Brazilian states. To sum up, in these 14 years, the market value has grown almost 19 times in nominal terms, without considering inflation of course. And the planted area grew more than five times as well. Considering that soybean and corn productivity in Brazil has also grown a lot in the last decades, and that these corporate farms usually have above-average yields per hectare, this was certainly one of the contributions to the leap Brazil has been taking in grain and oilseed production.

CD: And how about the BrasilAgro, was the model similar?

AM: Look, BrasilAgro went public when it was founded, in 2006, but initially the company focused on the rural property market, the buying and selling of farms. However, over time it started investing in the cultivation of products such as soy, corn and sugar cane, as a way to take advantage of these properties it had. We talked to Ana Paula Zerbinati Ribeiro, the company's investor relations manager, and she told us that the controlling shareholders of BrasilAgro were familiar with capital market and knew that going public would be a success, as the company hit its business targets in just five years. Among the partners at the time were businessmen linked to agriculture in Argentina, to the real estate sector in Brazil, and a private equity fund. In 2012, the company was also listed on the New York Stock Exchange. When they started, they thought they would have 60,000 hectares under cultivation, and today the company has 275,000 ha between properties and preserved areas, of which 161,000 ha are occupied by crops. When BrasilAgro went public, it was valued at R$580 million, and today its market value is R$3 billion.

CD: Well, as we said, this year, 2021, was the turn of a new wave of agribusiness in the capital markets, right? Explain this to us.

AM: That's right, the strongest growth this year has been among companies that support the cultivation of soy and corn, mainly. We know that it has been a very turbulent year in the capital market and even so we had three agribusiness debuts at B3. The three groups do not have their own cultivation areas, but work in partnership with farmers, doing activities such as seed processing, production storage and crop commercialization. The most recent IPO of this type was of AgroGalaxy, at the end of July. The company's focus is to provide services to farmers, with emphasis on retail, through the sale of inputs such as pesticides and fertilizers, but with a strong performance in buying from producers, storing grains for them and selling the production to trading companies. The group, which is controlled by Acqua Capital fund, has been acquiring large input reseller networks and today has more than 100 stores in the main producing regions of the country, in addition to 19 silos and its own production of 2mn bags of seeds. In the IPO, the company raised R$350mn and, to get an idea, in September its market value was estimated at 1.5bn reais. I talked to Marco Teixeira, Chief Operations Officer, at AgroGalaxy, and he said these financial resources will be used for the company to continue investing and growing, they intend to make new acquisitions and grow twice the market average.

CD: And what were the other companies that debuted this year?

AM: Look, also in July, the Brazilian stock exchange had the debut of 3Tentos Agroindustrial, with similar activity to AgroGalaxy, but with greater representation in southern Brazil. The IPO raised R$ 1.3 billion, the largest sum raised by a new agro businesss in 2021. The company operates in the retail of agricultural inputs, in the commercialization of grains, and also in industrialization, with factories that produce soy meal, soy oil, and biodiesel. 3Tentos told us that the purpose of entering the stock market was to finance the company's expansion to the Central West region of the country, which leads the national production of grains. For now, the evaluation has been very positive. 3Tentos said that agro is also benefiting from this greater presence of individuals investing in the stock market in Brazil, something that was not common here. The company said that two months after the IPO, it already had more than 12,000 individual shareholders accounting for more than 13pc of the company's free float. And it was an IPO aimed at qualified investors, those who have investments worth more than R$1 million. The market value of 3Tentos is currently around R$5 billion.

CD: This movement also marks an advance for the agribusiness companies in terms of governance rules, better management of the business?

AM: Yes, Camila, this is a differential of the companies that have been growing, becoming more professional, and it also has a lot to do with this new generation connected to the countryside. There was another IPO this year that could be an example. It was Boa Safra Sementes, which focuses on soybean seed production and processing. The IPO fulfilled the dream of chief executive Marino Colpo, the son of a farmer who went to the US to study economics. The conversation with him was interesting; he told us that in the ‘70's his father went to Goias state, first he had an input retailer, then he also had a farm, but nothing very relevant, and he went to study abroad. When he returned to Brazil in 2008, they focused on the production of soybean seeds and invested in management software and also in cold chambers for seed storage. Marino said he always told his father that he dreamed of taking the family business to the stock exchange. He ended up approaching those who make the capital markets in Brazil, groups such as XP, and the result was the IPO of Boa Safra in April this year. Today he celebrates the increase in the number of shareholders. There were 17,000 right after the IPO and now there are 40,000 shareholders, according to Marino. In partnership with 170 producers who planted 95,000 ha, last year 100,000 big bags of seeds were produced, with 5mn seeds each bag. In this harvest, the expectation is to reach 130,000 bags. At the time of the IPO, at the end of April, the value per share of Boa Safra was R$9.90, reaching R$16 two months later, and in September it was close to R$14, following the devaluation that the Brazilian stock exchange presented in general.

CD: So that small percentage of participation of agribusiness — that we talked about in the beginning — tends to grow?

AM: I believe so. I talked to an executive that is part of the board of directors of several agribusiness companies — Júlio Toledo Piza. He's also the former president of BrasilAgro and current partner of Demeter Capital. He explained that the agribusiness chain is very long and that until recently, the capital market was restricted to the trading and transformation agribusinesses, just as we see in developed countries. But over time, family farming groups have grown, and today the companies are of a size compatible with the stock market; before, they were not big enough. These groups have also advanced in management and more transparent governance rules.

All sources that I talked with for this story agree with this growth trend. They say that the capital market was unaware of the agricultural business. The market really did not know how this sector worked. But now, with its growing presence, capital market is slowly becoming more familiar with the features of agribusiness. Considering that not long ago, Brazil dreamed of producing 100mn t of grains and that the country is set to produce nearly 300mn t in 2022, I should say that agribusiness in stock market really has everything to keep growing.

CD: That's right, and we will keep a close eye on it! Thank you so much, Alessandra.

This and other episodes of our podcast are available on the Argus website at www.argusmedia.com. Visit the page to follow the events that affect global commodity markets and understand their developments in Brazil and in Latin America. We'll be back soon with another edition of Market Talks. See you soon!

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