Risk Management in Brazilian Agribusiness

“The farmer produces with excellence, but fails in management”

José Luís Bassani is coordinator of educational and student success projects at Agrinvest Commodities and executive consultant at Finfarms.

Bassani has a degree in economics from the Universidade Estudual do Oeste do Paraná, with an MBA from the Escola Superior de Agricultura “Luiz de Queiroz” – USP.

José Luís Bassani, coordinator at Agrinvest Commodities

AgriBrasilis – What do you mean by “if you do not have production insurance, it is definitely a loss of capital”?

José Bassani – When an extreme weather event occurs, there will be losses in agricultural production. If the farmer does not have insurance to compensate at least the cost of production, the capital invested in farming will be lost.

AgriBrasilis – What does risk management involve in agribusiness?

José Bassani – Risk management involves a series of measures that need to be adopted to mitigate financial losses.

In addition to rural insurance, which can protect the farmer’s assets, income, and profitability, it is necessary to: pay attention to cash flow management; adopt protection strategies against the risks of fluctuations in commodity prices, such as futures, forward, and options markets; map environmental, labor, operational, legal and other risks that can cause activities to stop, generating loss of income.

AgriBrasilis – What are the challenges related to credit risk analysis in agriculture? What do farmers need to know?

José Bassani – The farmer needs to be aware of their debt level. A good monitoring index is to evaluate how leveraged they are in relation to the operating result, and the acceptable index has a value below 3.5.

When farmers go to seek credit, they have what we call in behavioral economics excessive optimism bias. This means that income projections will always be positive and growing, for example. This does not match reality: we live in economic cycles of booms and busts. This is difficult to predict, but it needs to be considered.

The asymmetry of agricultural information, necessary for a safe credit analysis to be carried out by financiers, has decreased, but is still large.

AgriBrasilis – What are the main financial management mistakes made by farmers?

José Bassani – The main mistakes are the omission in cash flow management and the difficulty in separating personal finances from those of the business. The farmer has to be the protagonist in his management and decision-making, and not outsource, letting others decide for them.

The farmer produces with excellence, but fails in management, especially when selling the production. Therefore, seeking knowledge about risk management is important for business continuity.

AgriBrasilis – In what ways can credit be used as a tool for growth and protection of assets in agriculture?

José Bassani – When it will provide an increase in income in the activity. For example: to start a new agricultural activity, to purchase equipment that will generate greater efficiency and income, etc. These are factors that contribute to greater revenue, and if revenue is well managed, there will be growth in assets.

Regarding asset protection through credit, if the land is mortgaged, the farmer must take out insurance that protects all facilities linked to that guarantee.

AgriBrasilis – Do farmers face credit constraints? Why are 27.4% of farmers in debt?

José Bassani – There is excessive optimism when taking out credit, often based on intuition and emotions, without evaluating the real situation. For example, the farmer, thinking that commodity prices would continue to rise, may have made hasty decisions. A clear example is the decision to change machines when it was not necessary.

The lack of cash flow management is also a driver of this percentage. The mismatch between inflows and outflows in the middle of a due date leads to delays and, consequently, default.

AgriBrasilis – How should farmers manage their farm’s cash flow, aiming for a more efficient and sustainable business?

José Bassani – You need to be consistent and analyze the flow frequently, know all the possible expenses involved in the business, establish rules and budgets, define how much you will withdraw from work for family maintenance, and measure the final result, whether it was a profit or a loss. When you make a profit, you need to establish how much you will use to reinvest in the business. The farmer must always have an entrepreneurial vision.



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