Feeding the future
Demand for commodities financing in Brazil has remained robust despite the impact of sluggish global growth and the recent slump in commodity prices. So says global head ING Trade Export Finance, Gerrit Stoelinga, who attributes the nation’s export success to its savvy food producers and traders, and to strong market fundamentals that continue to drive overseas demand.
“The commodities sector is very capital-intensive so it’s key for our clients to have liquidity,” he explains. “They also need capital for more long-term investments in infrastructure, logistics, processing facilities etc., so demand has remained high overall in 2014 and so far in 2015.”
In any case, he adds, while oil and metals prices have suffered, demand for the nation’s foods and grains is driven by different dynamics, namely global population growth and consumption patterns arising from expanding middle classes, most notably in Asia. Demand for food will continue to increase in the long term, says Stoelinga, despite the fluctuations in the global economy.
His colleague, Eber Faria, head of Trade & Commodity Finance ING Brazil, agrees. “Crises are not new to this region – they have come and gone and our clients have learnt to deal with them. What is key is that we fully understand the dynamic of the sectors in which we do business,” says Faria. “This particular sector in the economy is less affected by the macro issues, and in fact can benefit from a depreciation of the currency. The gut reaction of international banks is to question Brazil right now, but the deep sector understanding that ING has can truly distinguish us as a leading global franchise in commodity financing.”
The focus of Stoelinga’s Brazil team has been on soft commodities; sugar, ethanol, grains, soy beans and coffee and on the local food and beverage sector. When coffee prices increased last year, ING was on hand to provide clients with much needed working capital. Its ability to take a truly global view of market developments through its nine global locations means that it can track demand as it changes in Europe, Asia and locally, and better anticipate future needs.
In Brazil, ING typically finances export-oriented producers and traders with revenues mostly denominated in dollars. This enables it to finance clients with dollars on export-oriented structures. Recent pressures on the Brazilian Real have benefited these exporters, as their costs are mainly in the local currency.
“The competitiveness of each player in the commodity market is very much dependent on cost,” says Faria. “If you take soy beans for instance, Brazil is the largest producer after the US and right before Argentina, so if our currency depreciates against the dollar, we become more competitive against other countries and that provides us with better conditions to place our products abroad.”
As well as the relative stability in demand for Brazilian soft commodities, Faria points to the nation’s unique qualities as a producer, which often puts it ahead of its global peers.
“The conditions in Brazil are simply superior to those of most other countries in the world - there is a uniquely high availability of land and water,” he explains. “We are very confident about the long term prospects of our country, which is why it is so important that Brazil continues to invest in infrastructure to ensure that it remains cost competitive and reliable for exports.”
Looking back at a good year
After a highly successful 2014, Stoelinga expects ING's TCF team in Brazil to continue its growth in 2015, following the strength of demand that continues in the market.
“Our standing in Brazil has notably improved. We were recognized as the best bank in trade commodity finance in Latin America, while the Biosev deal was voted the best commodity deal in the Americas,” he says “These examples underpin our capabilities and our position for 2015. Ultimately, we don’t control or influence global commodity prices, so increasing volumes are much more important than revenues.”
Faria notes that beyond the changing realities of the market environment, there will always be a careful balance to be struck between prices being high enough for clients to take on financings, and on the other hand,producers being prepared to sell or not. With today's favorable currency conditions many farmers are ‘sitting on top of their grains’ to achieve the best possible benefit from the dollar’s upward trend.
“Our clients are the traders and buyers that buy those products. Under normal market circumstances, they will buy at the beginning of the year and carry their stocks throughout the year to be crushed and exported,” he says. “But this year, if they can’t buy now, they will wait and so won’t need much financing or maybe they will but just for shorter periods of time.”
Faria continues to be sanguine about market conditions in 2015, and expects to see a good crop yield. He knows producers will be forced to sell at a certain point in order to ready their lands for next years' crop. Even so, he notes that not all foods and grains have the same market dynamics. For example, inventories of sugar around the world have been growing over the past five years, so he expects more of it to be routed to the nation's domestic ethanol market until inventory levels fall and prices recover.
Bottlenecks still stifle
Both Stoelinga and Faria question whether Brazilian exporters and market players are investing enough in their infrastructure to maintain good growth levels in the long term and protect their competitive edge. While investments could be higher, it is often the unique dynamics of the local market that holds them back.
“Some producers feel that it is the government’s responsibility to invest in infrastructure, but they also know that they are highly dependent on it,” says Stoelinga. “But if the government is not investing, then at some stage they will have to do it themselves and we do see some of our clients investing in infrastructure like port facilities and logistics centers. If volumes continue to grow, so too will the need for investments.”
Contrary to how they may operate in other countries, the main global commodity players in Brazil own most of the fixed assets to secure their own infrastructure, says Faria, which is not necessarily the most efficient way to operate.
“It is absolutely crucial for local Brazilian producers and for international traders that Brazil’s infrastructure is efficient,” he explains. “Every time there is a trucker strike or a problem at a port, we all see what happens – there is no plan B, no second option to transport the goods. So plan A has to work. For a country our size, with the resources we have, we shouldn’t be just relying on one option. At the end of the day, the producers gets hurt by such bottlenecks because they take a discount on their margin. Even with a more depreciated currency, if the costs of getting the goods to the port are higher compared to a US producer, then we are losing competitiveness.”
Broad regional offering
In addition to soft commodity exporters and traders, and the local food and beverage space, the team also focuses on the financing of capital goods supported by export credit agencies (ECAs). ING enjoys good relationship with the various ECAs and makes use of its client network in Brazil to ensure that teams work together to provide financing.
“I believe there is a clear opportunity for international banks like us to provide financing with the support of such ECAs,” says Faria. “It is also an opportunity for some Brazilian importers to acquire the best equipment globally which will make them more competitive in the long run. We are able to source such transactions with ECAs all around the globe and hopefully will be able to bring such a benefit to the Brazilian market too.”
ING’s approach in Brazil, is part of a broader strategy to explore long term growth opportunities around the globe, particularly in Latin America. ING also maintains an office in Buenos Aires with dedicated TCF focus, covering Argentina, as well as select activities in Paraguay and Uruguay - wherever clients are doing business.