Brazil is an agribusiness giant, and financing is key to keep the cogs of its agricultural engine whirring. A growing number of fintechs are trying to modernize services for farmers in order capitalize on this demand.
Agricultural fintechs operate in various ways: connecting those who need investment with those that have resources; providing services to modernize financing; or technologies that improve crop monitoring via satellite as a way to generate data for credit histories.
In Brazil, a significant of lending to the sector comes from Plan Safra, a federal government initiative designed to foster rural development through investments in the industrialization and marketing of crops and livestock. However, the Safra program alone can’t cover the industry needs, despite its budget being increased by 26.8% to R$364 billion (US$74.8 billion) for the 2023-2024 cycle.
“About 30% of the required resources will be obtained via Plan Safra; another 30% is capitalized producers, and around 40% are resources provided by private institutions, such as banks, input suppliers, etcetera,” says Mariana Silveira Bonora, who is both the executive director of trade association ABFintechs and CEO of agricultural fintech Bart Digital.
Economic growth in the first quarter of 2023 was partly driven by higher agriculture output, which increased 18.8% year-on-year. Brazil’s total gross domestic product rose 4% to R$2.6 trillion from the same period of 2022 and grew 1.9% compared to the fourth quarter.
The proliferation of fintechs for agricultural services reflects the advance of digitalization in a sector that has lagged other parts of the economy in this respect.
One use case that’s gaining momentum is the digitalization of accounts receivable. In agribusiness, it’s very common for the farmer to obtain resources from suppliers by agreeing to pay for inputs at the end of the harvest or through an ad-hoc agreement between the parties. “When the capital market began to heat up, it lead to debt offerings that were then transferred to the stock market. Suppliers originate debts, which are accounts receivable, and these are transferred to transactions in the capital market to raise funds,” Bonora says.
Some 30 ABFintechs members are agfintechs, of which 12 offer financing to growers, eight provide risk analysis and the remainder provide a variety of other services. Bonora says Bart Digital is expected to double digital loan placements in 2023.
High expectations
The future for agfintechs looks promising, says Bonora. Public resources can’t provide everything that agribusiness needs, which obliges growers to look elsewhere.
“For many years, there has been a process of plugging the agricultural credit gap and moving it away from the government, because it does not have sufficient resources and the demand for credit is double,” what’s available, says Alex Kalef, executive director of AgroPermuta, which provides financing to corn and soybean producers.
However, in order for the capital markets to take up the slack, they need to know the sector well. For example, how’s the harvest looking and what’s the flow of each crop, be it soybeans, coffee, corn or something else. The key is in agfintechs using technology to develop custom credit models.
“Most agfintechs decide grant credit for either inputs or for durable goods. It’s not something they have to do, but it’s inevitable they will because the business models are different,” says Kalef.
Founded in 2020, AgroPermuta finances the purchase of agricultural machinery and tools as well as for irrigation, storage and photovoltaic solar energy systems. The company has a technological model that includes analysis of a prospective customer’s creditworthiness, productivity and income potential.
AgroPermuta estimates demand at about R$650 million and has a R$40 million portfolio with 50 clients. It aims to expand that figure to R$100 million by the year’s end. “We’re a fintech and we use other institutions that do Banking as a Service. We’re not a bank and we don’t have a license. Maybe [we will] eventually, but currently we’re a capital market agent doing securitization work,” Kalef says.
He argues that this is a way of taking the weight off the banking sector.
Indeed, Banco do Brasil (BB) is the biggest lender to local agribusiness. The bank expects to provide some R$240 billion to the sector using various modes of financing this year, according to Luiz Gustavo Lage, BB’s vice president of agribusiness.
The importance of understanding agribusiness
As Kalef pointed out, those working in finance must understand that agriculture is very different from other industries. For example, producers are exposed to weather-related risks and setbacks to crop production.
Gustavo Foz, who has worked in the credit market for 20 years, spotted a business opportunity in agriculture financing. In 2020, he co-founded Culttivo, an agfintech that mainly lends to small producers, who traditionally have lacked access to banking. The firm currently finances coffee growers, which have a long-term production cycle and are very vulnerable to adverse weather. Foz knows the agricultural sector well: he’s the son of a farmer and has worked on the trading desk of an agricultural business.
“Lending to agriculture is a challenge since you have to know all its particularities,” says Foz, who is Culttivo’s CEO and co-founder. “Our greatest differentiator is that we’re a fintech developed for the producer and not for the production chain like the vast majority of agfintechs. The producer is my client,” he says.
TerraMagna, another credit fintech, started life as a provider of risk analysis for the sector. Then, in late 2020, the firm changed its business model and began using its own technology to offer loans to the suppliers of farming inputs. It has no direct contact with growers.
“There’s a big shortage of capital in the countryside, because for a long time we had subsidies that kept the banks away. There’s also a perception —not entirely misplaced— of risk linked to agriculture, because in fact it’s easy to lose money if you don’t know the business,” says Bernardo Fabiani, co-founder and CEO of TerraMagna.
TerraMagna’s first disbursement took place in 2021 and totaled R$50 million. It aims to have a portfolio of R$5 billion by 2026.
“We finance the sale of inputs through partners, who’re the ones who sell the products, because everything in agriculture is sold [using deferred payments]: Everyone delivers the input at the beginning of the season and receives the payment at the end,” says Fabiani.
P2P for agriculture
Campo Capital operates in a different corner of the agfintech market. Its business model is built on person-to-person loans in Brazil, connecting investors with rural entrepreneurs who are socially and environmentally responsible. The startup was launched in June 2021 by Bruna Aguiar and sisters Isadora and Rafaela Caixeta.
“We do a very thorough credit analysis, including a technical visit to the farm. Our objective is to connect farms that have some level of financial and socio-environmental sustainability with those who want to invest in agriculture,” says Isadora Caixeta, the company’s co-founder and CEO.
The fintech focuses on coffee growing on the one hand and grains, such as soybeans, on the other. Just like AgroPermuta, Campo Capital isn’t a financial institution. Caixeta describes the business as a marketplace and points out it doesn’t get involved in moving money from lender to borrower. It counts Banco Ribeirão Preto and the Iugu payment platform as partners.
Campo Capital raised about R$2 million in a pre-seed round at the end of 2022. It currently has a R$4-million credit portfolio and aims to increase it to R$10 million by the end of this year.
Agfintechs were born to fill the gap in farmer credit “because banks don’t offer them the best solutions,” says Isadora Caixeta.
“We launched a short-term credit line. The resources come from individuals who invest. Each operation has a return. For example, one we launched has a net return of 15.5% per year and the products are exempt from tax on financial operations for individuals,” she adds.