A bumper year for Latin America’s agricultural sector is fueling a new wave of M&A activity.
The stars were aligned for Latin America’s agricultural sector in 2021. Rising global commodity prices and favorable exchange rate differentials for exporters in the region, combined with strong harvests, drove record profitability for virtually all major crops in the region. “There has also been a significant increase in the total area planted, which shows the great moment we are going through,” says Guilherme Melo, head of agro-industry consulting at Itaú BBA.
“This past year has been nothing short of awesome,” adds Uriel Rotta, Partner at Stracta Consulting and Partner at WBGI Venture Building. “[It was] something we don’t see too often in terms of margins, especially for growers. »
Rising earnings are now fueling expansion across the sector, as a wave of Brazilian-led consolidation sweeps across the region. The country, responsible for 70% of total M&A activity in Latin America in 2021, saw a 250% increase in agricultural mergers year-over-year.
Given the cross-border nature of most transactions, the economic impact has been felt far beyond the borders of the South American country. Last month, meat processing giant JBS announced its $92.5 million acquisition of Italy-based Kings Group. The company also entered the Australian market with the acquisition of Huon Aquaculture, and the Spanish market with the acquisition of the cell cultured meat group BioTech Foods.
Even the many climate-related challenges could not hamper the performance of the sector. Widespread droughts and frosts in southern Brazil and Argentina weighed on coffee, soybean and wheat production in the second half, but the monumental rise in commodity prices was more than enough to compensate.
“Production was not the key driver of agricultural profitability in 2021,” notes Dev Ashving, Latin America economist at Societe Generale. “The strong recovery in external demand and the surge in commodity prices have improved the terms of trade and contributed to the profitability of the agricultural sector in Latin America in 2021.”
The S&P GSCI Agriculture Index, a gauge of combined world agricultural commodity prices, jumped 20.3% for the year, in line with the closely watched FAO UN Food Price Index, which saw global food prices increase by 19.5%.
Some of Latin America’s main exports saw even greater price increases. CME Live Cattle futures are up nearly 26% year over year, while the Dow Jones Coffee Index is up 95%. “Coffee production is increasing; the technology is improving,” says Rotta. “In the short term, we expect prices to remain high as demand will remain difficult to meet. »
Brazil, the world’s largest exporter of meat, soybeans, coffee and sugar, reached a total of $120.6 billion in exports for the year, a record high and a 19.7% increase from compared to the previous year.
Although harvest volumes in the country were roughly stable compared to the previous year, Brazilian producers took advantage of the devaluation of the Brazilian real to export more.
The impact was felt across the region. In neighboring Paraguay, wheat and soy have led the country to new export records. A 20% rise in crude palm oil prices helped propel export growth above 30% in Colombia and Ecuador, although Ecuador’s dollarized economy did not benefit from devalued currencies. Andean countries benefited from stratospheric coffee prices due to frosts in Brazil.
Uruguay broke its previous records in terms of volume and margins, with agricultural production reaching a record 70% of all the country’s exports. Additionally, Uruguayan President Luis Lacalle Pou recently announced that an impending free trade agreement with China is expected to propel the country’s meat sector even further in the years to come.
Meanwhile, Argentina, the world’s largest exporter of soybean fodder, saw its grain exports in 2021 reach $32.8 billion, according to national oil and grain industry group CIARA-CEC, the largest raised in 20 years. Producers there also benefited from higher corn and wheat prices.
The country’s meat exports fell by 5%, mainly due to government restrictions that prohibited the sale of more than 50% of the country’s favorite cuts of meat in external markets. Even so, the higher prices more than made up for it.
“Argentina lost a golden opportunity to combine record production with growing increases in meat prices, although it will be a good year nonetheless,” said Francisco Ravetti, an analyst at AZ Group. “But we were about to end the year with 800,000 tonnes of beef exports, a record for us.” Neighboring Uruguay has taken over by developing its meat sales, mainly in China.
Wave of consolidation
With profits fueling balance sheets, the entire agricultural chain is ripe for expansion and restructuring, and a wave of mergers and acquisitions is already sweeping the field. Meat processor JBS, in addition to its move to Europe and Asia-Pacific, is reportedly offering $1.3 billion to complete the $5 billion acquisition of US firm Pilgrim’s Pride, a deal that began in 2009 JBS currently owns 80% of the company.
Minnesota-based Cargill, which saw its Brazilian profits soar 500% in 2020, posted record revenue of $134 billion in 2021. Those profits helped fund its $4.5 billion takeover from poultry producer Sanderson Farms, with the goal of creating the world’s leading poultry company. WE. In Argentina, multinational venture builder Cono Sur Inversiones has purchased the credit operations of grain giant Los Grobo.
Also last year, Brazilian food processor Mafrig acquired Canadian Sol Cuisine, American Hillary’s and 25% of Brazilian giant BRF. The merger of sugar cane producer Terra Santa with grain producer SLC Agricola has also shaken up the market in the region. The deal led to massive share buybacks in the largest public-private deal ever in the region.
Brazil also served as the base for Latin America’s biggest agriculture-related IPO to date, the $1.3 billion debut of sugar cane and ethanol producer Raizen. on the São Paulo Stock Exchange in August.
“The greater M&A and IPO activity seen last year highlights improved governance among agribusiness players in the region,” says Melo. “Given the importance of the sector to the economies of the region, we view this trend as a sign of further sustained expansion.”
Noting, however, that private companies make up a large portion of agricultural producers in the region, Uriel de Stracta cites other widely used expansion strategies: “Land purchases, machinery, technology and hedging have been among the main investments on the producer’s side”.
What awaits us? Supply chain bottlenecks, climate risk, inflation and rising interest rates could make 2021 an outlier.
“Food prices are at their highest level in a decade, and further gains would be difficult to make, especially when supply and demand dynamics reverse,” says SocGen’s Ashving. “Rising input and borrowing costs could also hurt industry profitability.”
The pain of the subsector will not be distributed evenly. Rotta expects that while robust sales will continue overall, 2022 will be much tougher, “particularly for small and medium-sized producers who have fewer ways to protect themselves from growing market risks. Line commanders will likely continue to maintain last year’s gains,” Rotta says, “but producers will be more exposed.
Overall, despite the short-term risks, conditions appear favorable for continued growth of agribusiness in the region, although not at the same pace as last year. The UN’s Food and Agriculture Outlook, for example, predicts that net margins in Latin America and the Caribbean will grow by 31% over the next decade, half the rate recorded between 2000 and 2010.
The report also highlights the importance of trade in mitigating seasonal risks and securing future growth. “Geopolitical issues and partnerships also prove to be crucial for the business partnership,” Ashving notes. “To that extent, the LatAm region is relatively better placed than some major competitors.”
Ashving says the continent’s banking system is in good shape to help the sector in the long term, but warns of short-term risks posed by rising interest rates and global financial tightening. “The ongoing financial tightening and the gradual withdrawal of emergency liquidity and credit supports will likely lead to higher NPLs [nonperforming loans], with the economy also moving in the wrong direction in the near term. However, banks have planned for these future eventualities and should remain stress-free during the tightening phase. At the same time, rising costs and potentially higher NPLs will hurt banks’ profitability,” he explains.
But Uriel adds that banks are only part of the equation: “Agribusiness has many parts. And while rising interest rates are affecting the sector, we believe capital inflows are likely to remain very high across several sectors, such as agritech and agriculture-focused debit.
Additionally, the Stracta associate notes that the technology could help mitigate many of the current risks, such as weather disruptions, supply chain constraints and labor shortages. “5G internet technology will be a watershed for agriculture in Latin America, leading to greater efficiency and better yields.”
Societe Generale’s Ashving measures the importance of long-term environmental objectives for the entire sector. “In our view, global trade treaties/relationships and environmental goals are likely to have greater implications for Latin American agriculture and politics than domestic politics, which will continue to inadequately address the growing needs . In the long term, climate goals, regulations and trade relations will drive major agricultural trends in the region.