By Tatiana Freitas
Some Brazilian soybean farmers are defaulting on forward sales made months ago when prices were lower, sparking lawsuits and potentially causing financial losses for trading houses.
Farmers in the world’s largest producer and exporter of the oilseed have sold the most supply ever in advance this season, boosted by strong demand and a weak Brazilian real. By last July, 40% of the 2020-21 crop was already disposed of, compared with the five-year average of 12%. Since the first negotiations, prices more than doubled on robust China demand, causing some farmers to regret selling so much volume.
While the defaults are still seen as isolated cases, buyers are growing more concerned that more farmers may take similar action, which could lead to financial losses if exporters have to buy beans in the spot market to cover their own sales overseas.
Rushing to sell
“Trading companies will have a big financial loss if farmers don’t deliver the soybeans,“ said Andre Nassar, head of Abiove, a group representing major trading houses. “If the company doesn’t receive the soybean, it will have to buy it in the spot market at a much higher price. The exporter doesn’t have the option to not meet its contract.”
Forward contracts between traders and farmers usually don’t have a washout clause, but a fine that must be paid in case of non-compliance. The penalty ranges from 20% to 50% of the value of the non-delivered cargo, according to lawyers. Considering soy local prices may have doubled since the forward sale, farmers can make more by paying the fine and selling the same beans in the spot market.
Some companies have requested permission from a judge to seize the soybeans they’ve purchased from farms, according to Nassar. While there have been “less than 20” episodes like this so far, Nassar said it’s high for this early stage of the harvest, which is delayed with only 15% complete.
Fernando Billoti, a partner at Santos Neto law firm, opened 12 lawsuits in the past two weeks against farmers who declined to deliver the soybeans sold in advance to trading houses. “We have clients that considered as suspicious 2,000 forward contracts from a total of 5,000 signed,” he said.
Beyond lawsuits, companies have taken measures to discourage defaults. Last week, Abiove launched a tool to monitor farmers’ fulfillment of soy contracts. The idea is to register contract data in a confidential platform, providing companies information on the aggregate volume sold by each producer.
This is not the first time Brazilian farmers defaulted on forward contracts. In 2004, the same happened after prices soared during the season, leading grain merchants to cut back forward purchases and reduce the funding for planting, according to Frederico Favacho, a lawyer representing Brazil’s grain exporter group Anec.
“There’s a risk and the market is concerned about it,” he said. “But, at the moment, we consider it as a moderate risk and highly concentrated in certain players.”