Technology is critical to financing agribusiness

Agribusiness is an activity in which the demand for capital is increasing, especially in Brazil. In most cases, the producer even needs to make use of financial resources to purchase the inputs and machinery and thus start producing the next crop.

Until a few years ago, the credit market in rural areas was highly concentrated in the hands of public institutions, but little by little this scenario is starting to change. Increasingly, this activity has sparked greater participation from private banks and other companies, due to a more accurate perception of risks in the sector, which stem from technological improvement in data analysis, as well as economic policies that favored activity as a whole.

The act of financing something depends primarily on an available cash resource. When lending it to the interested customer, it is necessary to have an understanding of the destination of the supplier, i.e. to manage, monitor and check the risks of that process. In agribusiness, this process is more complex, because, in most cases, it is remote and associated with uncontrollable variables, with little available and/or structured data.

One of the risks involved is image or reputation. In this aspect, among others, there are social and environmental risks, which are included in the global agenda of environmental, social and corporate governance (short for “environmental, social and governance”). Since they are responsible for the work of the product, the entity that funds them must be aware of actions that may harm social welfare and the environment, such as working in conditions similar to slavery and deforestation, respectively. This risk comes even with legal and infrastructure issues that must be followed, such as barriers to areas restricted by Ibama (Brazilian Institute for the Environment and Natural Resources), overlapping with conservation units, among other criteria contained in the Guidelines for Rural Credit, MCR, which is published and managed by central bank.

Recently, in September 2021, one of the most uncontrollable risks emerged through Central Bank Decision No.
Monitoring crop performance (performance risk affecting credit risk) is also an important task for those providing resources. Unexpected events in the field can occur at any time, from drought and heavy rain that can completely damage the crop, to the appearance of a pest capable of delaying the harvest of produce. These issues become more sensitive in portfolio analytics, as after all, weather is a risk that can have a wide impact, geographically speaking. Therefore, the spread of risk is a critical factor for agricultural financiers.

As a result of this challenging scenario, financial institutions increasingly need to turn to digital solutions, which use remote sensing, data transit and fuzzy modeling, to solve the problem, which have a wide range of knowledge, techniques, methodologies and tools. Indeed, turning away from producers is perhaps the primary challenge that must be overcome by the banks that finance them. Even relatively minor problems can become more difficult to solve if the institutions financing the sector do not have effective digital platforms at their disposal, such as appraising or valuing collateral with real estate.

Therefore, technology today is the most recommended way for banks to comprehensively, digitally and remotely manage the domain, initiating a cycle that is monitored before and during the loading of the financing contract. Through it, financial institutions can collect data in an automated way, making the information reach the decision makers in the right way.

The truth is that agribusiness still has a lot of room to grow in Brazil. By reducing the risks to the financial sector (we can’t forget the insurance sector and the capital market), technology also creates opportunities for even groups with a smaller credit portfolio to get a chance to make resources available to the market in a safe way, which is the latest case for brave new adventurers (derived from Venture) from agro, Fintechs. Undoubtedly, with more players funding the region, the perception that Brazil is an agribusiness country will be stronger.

Submitted by Lucas Tuffi is the Commercial Director of Agrotools

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