El resultado del negocio agrícola depende fundamentalmente de la combinación de dos factores: la eficiencia con la que una empresa ejecuta sus rutinas y el contexto en el que se desarrollan sus negocios.
The outcome of the agricultural business fundamentally depends on the combination of two factors: the efficiency with which a company executes its routines and the context in which its business develops.
Among our main routines are agricultural operations, input procurement, service contracting, marketing, financing, accounting of operations, tax management, and team coordination.In the context of the agricultural business, we find variable factors such as the weather, with its direct impact on yields, volatile factors such as prices, and uncertain factors such as available financing rates, the prevailing exchange rate, and inflation.
The context, primarily due to climatic variability, means that 1 in 5 years results are negative, and 1 in every 10 to 15 years, depending on the region, results are very negative. This dispersion in results due to the impact of weather on productive yields translates to the agricultural business being high-risk, and therefore its return should also be high. It is common to hear in the sector that one bad year wipes out the gains of 3 to 4 good years, provided the routines are efficient.
Currently (April 2024), when we project agricultural results on leased land with average yields and current projected prices and costs, the determined profitability does not align with the assumed risk.
The following Sensitivity Analysis of Profitability on changes in Prices and Yields demonstrates the high variability of the agricultural business. For example, a mere 10% drop in productive yield (or prices), with other variables constant, would result in negative business profitability. As mentioned, this business variability explains the high returns demanded.
Chart 1: Profitability Sensitivity
The bad news is that the projected product prices are not “bad” since they are close to the historical average of the last 15 years (for example, the price of Soybean is around the average of $307/ton as shown in Chart 2), as well as most of the costs of major inputs (in the case of Urea in Chart 3, its price has recently converged to the historical average). It is worth mentioning that costs related to fuels are an exception, as they are above their historical average values.
Chart 2: Soybean Price Trend
Chart 3: Urea Price Trend
Undoubtedly, the rules of the game seem to have changed; rents are not decreasing due to the interplay between supply and demand, and the market no longer offers subsidized interest rates as in the past.
A mixed bag of results. The good news is that the 24/25 campaign is just beginning, and the grains to be produced will be marketed primarily within 12 months. During this period, the producer will have the opportunity to arbitrate prices, costs, and interest rates.
In this regard, Chart 4 demonstrates this arbitration possibility. The historical dispersion of the soybean price over the T+12 months period compared to today (T) indicates that it can scale up to 40% or decline up to 70%. Most importantly, in only 20% of cases was the price at the start of the campaign projection exercise, i.e., the planned price, similar to the final price.
Chart 4: Soybean Price Volatility (T+12/T)
Another example, the fluctuation of the equivalent interest rate in dollars for different expected exchange rates and peso interest rates over a 12-month period, indicates that agricultural companies can benefit as long as they remain alert to market opportunities.
Chart 5: Equivalent Interest Rate in Dollars (Pesos vs. Dollars). Term 12 months
This scenario requires being very stringent with routine efficiency: operational routines to maximize yields with available resources, commercial routines to arbitrate prices at opportune moments, procurement routines, and financial routines to seek the best options for financing a high-risk business with unsubsidized interest rates.
In summary, to succeed in the 24/25 campaign, agricultural companies must optimize their operational, commercial, and financial routines and be vigilant for arbitration opportunities in a highly uncertain context.
