Change comes after tax credit that prevented a larger drop in 2023 earnings
02/16/2024
Heineken’s taxation department must be dealing with mixed feelings regarding Brazil’s taxation system. After having been granted a tax credit in the country last year, which helped the company reduce a drop in its global profits, Heineken is preparing for the impact of changes recently approved in Brazilian tax legislation in 2024.
According to calculations unveiled on Wednesday (14) with the brewery’s financial report, the average effective rate paid by Heineken worldwide will increase from 26.8% in 2023 to 29% in 2024—and Brazil’s new legislation is cited by the company as the main cause. But the company has not revealed which changes will cause the biggest problems.
One change that could affect the beer industry in Brazil is the creation of a selective tax, which will replace the Industrialized Products Tax (IPI) with higher rates for products that could be harmful to health or the environment, such as cigarettes and alcoholic beverages, which already happens with the IPI. However, a supplementary law still has to approved by Congress to define the new tax rates. The new tax will not come into force in 2024.
The expected increase in the tax burden for Heineken will come shortly after the company was granted €661 million in tax credit in Brazil. According to the company, the amount helped to partially offset exceptional expense increases in 2023. Last year, Heineken posted €2.3 billion in net earnings, down from €2.7 billion in 2022.
The company did not specify in its financial statements what such tax credit refers to. According to the company, such credit is not related to the annulment of an infraction notice of nearly R$900 million in the Administrative Council of Tax Appeals (CARF) of 2023. The decision recognized the right to use premium to reduce Business Income Tax (IRPJ) and Social Contribution over Net Profit (CSLL) amounts. The fine refers to the acquisition of the Schincariol Group by Kirin Holdings (now Heineken, which inherited the dispute). Heineken acquired Brasil Kirin in 2017 for €664 million.
The original story in Portuguese was first published on Valor’s business news website Pipeline.
Falling interest rates, while helpful, are not yet enough to significantly improve companies’ financial situation, but outlook is expected to improve this year
02/16/2024
Ricardo Jacomassi — Foto: Gabriel Reis/Valor
Even with the onset of the monetary easing cycle, the country has yet to witness a significant improvement in the situation of companies, which are struggling with declining sales and gross profit margins. A study by the Center of Capital Market Studies (Cemec-Fipe) reveals that the number of publicly traded companies unable to cover their financial expenses with their cash generation is high, and the indicators are likely to deteriorate in the coming months.
That is the result of a period of still high-interest rates. However, the survey indicates that spending on financial charges shows a “clear downward trend,” while the drop in profits is less severe. According to Carlos Antonio Rocca, coordinator of Cemec-Fipe, the scenario should begin to improve this year.
The current picture presented by the study is challenging: the default rate for businesses remained high, at 3.58% in November last year, more than double the rate at the end of 2020 (1.45%). Consultancies specializing in debt restructuring report that demand from companies seeking renegotiation with creditors, a buyer or partner, or court-supervised reorganization has increased significantly. Experts named construction, retail, and agribusiness among the most problematic sectors.
“The number of inquiries we’ve been receiving from companies with debts of more than R$200 million has risen considerably,” stated Ricardo Knoepfelmacher, founder of RK Partners, a firm specializing in restructuring. A survey by the consultancy indicates that, on average, working capital credit rates have decreased by three percentage points from January 2023 to last month, from 30.3% to 27.3% per year, indicating still quite high levels. Concurrently, the capital market remains very selective following the cases of Americanas and Light at the beginning of last year.
In accordance with the scenario indicated by Cemec, the RK study shows that among publicly traded companies, 27% have generated less profit than what they need to pay in debt this year—the highest percentage in the consultancy’s history, which started in the first quarter of 2019. “It takes 18 to 24 months for the decrease in interest rates to affect companies’ accounts. So 2024 is still going to be a tough year,” stated Mr. Knoepfelmacher. He notes that 15% of these companies have leverage exceeding six times their cash generation. “More than three times is already considered a very high level with the Selic at its current level.”
Ricardo Jacomassi, partner and chief economist at TCP Partners, observes that companies’ cash flow remains very tight. “Costs have risen with the increase in the Selic rate and haven’t fallen yet. At the same time, sales performance hasn’t improved enough for cash generation to cover debts,” he explained. To alter this scenario, he suggests, revenues would need to return to their 2019 levels. A report by the company, which monitors 60 sectors, forecasts a 6% rise in requests for court-supervised recovery this year compared to 2023, when, according to data from Serasa Experian, reorganization filings surged by 68.7% to 1,405, the highest number since 2020.
Mr. Knoepfelmacher, however, points out that the indicators for court-supervised reorganization filings are not fully representative, considering the country has 21 million companies, almost 7 million of which have at least one overdue debt. “In a year and a half, many won’t be able to pay and will need to renegotiate their debts. Court-supervised reorganization is a bitter pill to swallow, with high costs for lawyers and administrators. We’ve handled 128 restructurings in recent years, and only 29 have been court-supervised reorganization.”
Mr. Jacomassi mentions that there has been an increased demand at the start of the year from companies seeking a buyer or partner to inject capital, in market terminology, the so-called “distressed M&A,” a situation also observed by Salvatore Milanese, founding partner of Pantalica Partners and an expert in company recovery and restructuring. He recalls that he used to prepare an average of three to four proposals a week. Since January, this number has escalated to eight to 10 a week. The demand is for diagnoses to extend debt and the pursuit of a merger or acquisition. Judicial recovery, he asserts, is the last resort. “In these cases, the sale of all or part of the company is not at the price the controlling shareholders would prefer, but it prevents the disastrous outcome of court-supervised reorganization.”
Mr. Milanese includes the call center sector in the list of sectors to be concerned. Mr. Jacomassi adds the hospital health sector, described as “highly leveraged and with tight cash flow,” along with the printing industry (label printing, etc.). He notes that agribusiness suffered due to the drop in international commodity prices, while raw materials had already been purchased at higher costs. “Improvement should only begin in November. We’re not optimistic for 2024.”
The study from Cemec reveals that after reaching its most recent high of 23% in the fourth quarter of 2021, the growth rate of financial expenses varied by only 0.1% in the 12 months ending in the third quarter of 2023. This calculation excludes Petrobras, Eletrobras, and Vale, as their size would skew the figures.
Simultaneously, the decline in cash generation is less severe: from -5.2% in the first quarter of last year to -1.7% in the third quarter. However, the gross profit margin (24.8%) was at its lowest since the 12 months ending in the first quarter of 2016, when it hit the same level.
Reflecting such a situation, the so-called financial expense coverage ratio has almost stopped declining, hovering around 1.8 for the 12 months up to the second and third quarters of 2023. This index reflects a company’s ability to cover the interest on its debts with cash generation and is calculated from the ratio of EBITDA to financial expenses. The higher this ratio, the more comfortable the company’s situation. Mr. Rocca clarifies that when it falls below 1, it indicates financial difficulties.
In 2019, around 11% of large and medium-sized companies (with revenues between R$90 million and R$300 million) had this index below 1, according to the Cemec report, which encompasses 337 companies. In the first quarter of 2023, amid high interest rates and a credit crunch, these percentages rose to 19.2% and 16.9%, respectively.
By the third quarter, following improvements in capital market conditions and the beginning of the monetary easing, the figure dropped to 14.5% among large companies, typically the first to show signs of improvement, indicating a potential return to 2020 levels. However, among medium-sized companies, the proportion of those unable to cover their financial expenses with cash generation remained high, at 20.7%.
“The expectation is that this index will continue to decline among large companies, but we have to wait and see, as there is considerable variation between sectors. Services, for instance, are still thriving, but industry and industrial retail continue to face challenges, unable to increase their margins,” notes the report.
Mr. Rocca anticipates a recovery in the availability of bank credit and debt securities in the capital market, coupled with expectations of relative stability in commodity prices and a decrease in financing costs from domestic and international sources. This trajectory is expected to continue with projections of a decrease in the Selic rate.
“We’re going to end the year with much lower interest rates and, by 2025, rates around 8%. This factor directly impacts a company’s results and is significant for cash generation,” said Daniel Lombardi, managing partner at G5 Partners. He notes that many companies have already restructured to reduce interest rates, while others are in the process of doing so this year. “The most uncertain factor is demand. We saw signs at the end of last year that things weren’t going well, with lower-than-expected sales on Black Friday and Christmas. However, demand should improve over the year,” Mr. Lombardi added.
Phillip de Macedo, partner and private credit portfolio manager, emphasizes that in this recovery scenario, the trend of turning to the capital markets is irreversible and increasing. “Last year was marked by credit events, and we started more cautiously. The credit scarcity eased over the year, and the crisis left clear lessons. Now, it’s a matter of calibration.”
ADNOC and Petrobras are expected to complete their processes within three weeks
02/16/2024
Sultan Al Jabber — Foto: Hollie Adams/Bloomberg
The two due diligences running in parallel at Braskem, one by the Abu Dhabi National Oil Company (ADNOC) and the other by Petrobras, have made progress and should be completed in two or three weeks, Valor has learned. As a result, the Braskem sale process could enter a new phase, according to sources.
The due diligence of Petrobras, the Brazilian petrochemical company’s second-largest shareholder with 36.1% of the total capital, started before that of ADNOC, but both “continue,” a source familiar with the matter said. This phase is expected to be completed by early March.
Before making its own bid for Braskem, ADNOC was in competition with management company Apollo for the asset, and a preliminary due diligence was even launched. Apollo withdrew from the negotiations between August and September last year after encountering opposition to its participation in the deal.
The audit process was discussed at a meeting this week between Petrobras CEO Jean Paul Prates and ADNOC President Sultan Al Jabber, who is also the United Arab Emirates Minister of Industry and Technology. Mr. Prates was in Abu Dhabi, the capital of the United Arab Emirates.
On the social network X, Mr. Prates said Thursday (15) that the meeting with Mr. Al Jabber was a “continuation of the negotiations that began last year” for the joint analysis of opportunities in offshore natural gas exploration and production, refining, petrochemicals and fuels, as well as the analysis of Braskem’s accounts.
While Petrobras evaluates whether to stay in the petrochemical company, increase its stake, or sell its shares, ADNOC made a new non-binding offer in November to buy control of Braskem held by the former Odebrecht for R$37.29 per share, or R$10.5 billion. Novonor’s total stake is 38.3%.
The proposal was also presented to the parent company’s creditors—Bradesco, Itaú Unibanco, Santander, Banco do Brasil, and Brazilian Development Bank (BNDES)—who hold Braskem shares as collateral for debts of around R$14 billion.
For the sale of the petrochemical company to proceed, ADNOC must submit a binding offer (with a commitment to buy) after due diligence. At that point, Petrobras will be able to indicate its position in the transaction. ADNOC and Novonor declined to comment.
In another post on X, Mr. Prates said the visit to the Arabian Gulf countries will end in the next two days in Qatar, where the Petrobras delegation will meet with Qatar Energy and visit one of the largest liquefied natural gas (LNG) terminals in the world.
Petrobras has been negotiating with the Mubadala Fund for the re-entry of the Mataripe refinery, a step that the market sees as a revision of the opening of the fuel market. It has also commented on a possible return to fuel distribution, without implying a buyout of Vibra Energia, formerly BR Distribuidora.
Earlier in the day, Mr. Prates met with executives from Aramco, where Petrobras executives discussed the possibility of joining forces “in designing a new vision for the fuel and lubricants retailing and distribution market.” According to Mr. Prates, after meeting with Aramco President Amin Nasser, agreements and visits between Petrobras and Aramco will be scheduled by March.
*Por Stella Fontes, Fábio Couto — São Paulo, Rio de Janeiro
Local investors expected to gain ground in 2024 amid capital market reaction
02/16/2024
Daniel Wainstein — Foto: Carol Carquejeiro/Valor
The share of foreign capital in mergers and acquisitions (M&A) in Brazil increased last year, reaching the highest percentage in at least seven years.
In 2023, cross-border transactions accounted for 50.1% of a total of 371 operations, according to a survey carried out by Seneca Evercore for Valor. In the second half of the year alone, the share was 54.5%—out of a total of 156 operations—the highest half-yearly proportion since 2016. According to the study, since 2014 there have been 5,061 M&A deals in Brazil, 47% of which involved foreign buyers.
Investment bankers point out that the larger share reflects an improvement in Brazil’s risk perception, especially when compared to its emerging peers, which has also resulted in a greater number of mandates in the first weeks this year.
The trend should continue in 2024, although Brazilian buyers are also expected to show more strength this year, driven by a more functional capital market and the return of initial public offerings.
“We believe that, based on what we observe in the market and our own pipeline, the first half of 2024 will be even stronger than the last half of 2023 and should reveal even greater predominance of international investors,” said Daniel Wainstein, a partner at Seneca Evercore.
According to the executive, the increased participation of foreigners in M&A deals in the country is a consequence of the improvement in Brazil’s risk perception after the fall seen last year. “That is combined with a relatively low unemployment rate, inflation under control so far, a decrease in Brazilian interest rates and a downward trend in the U.S. likewise, and Ibovespa [Brazil’s benchmark stock index] at record highs,” he notes.
According to Dealogic, a consultancy that tracks financial market data worldwide, the same trend is observed in an analysis by financial volume. Last year, of a total of $37.9 billion in transactions, $17.8 billion came from cross-border operations, or some 47%, the largest share over the recent years.
The strength observed last year was driven by large-scale operations, such as the sale of shares of Vale’s base-metals unit, AESOP, and The Body Shop, the last two carried out by Natura as part of its business restructuring. In all three cases, the operations occurred largely abroad, but are included in the local M&A volume as they involve domestic companies.
The same trend has been observed in the investment bank sector, with foreign investors actively seeking assets in Brazil. “At the beginning of the year, we saw foreign investors interested in learning about transactions in Brazil, including the Arab and Chinese. But we have mandates at both ends, not only from foreigners wanting to invest in Brazil, but also from foreign companies leaving the country due to strategic decision,” said Leonardo Cabral, head of Santander’s investment bank in Brazil.
Fabio Medeiros, the head of Morgan Stanley’s investment bank in the country, points out that the participation of foreign investors last year is even clearer in transactions worth more than $100 million. In this section, 70% of the total were cross-border transactions. “It is the highest number since official records began, and the same as in 2016,” he said. According to the executive, that can be explained by Brazil’s attractiveness compared to its emerging peers. “Each country has its own challenges. We have our own, but they don’t scare foreigners so much.”
For this year, Mr. Medeiros believes that local transactions will gain traction again and will share the M&A pie with the foreign capital. Such expectation is also based on the forecast of improvement in the capital market in Brazil, with the expected return of IPOs in the local market. IPOs help fuel companies’ cash, boosting their interest in acquisitions.
Diogo Aragão, Brazil head of M&A at Bank of America, says the capital market is more functional this year, not only for equity, but also for local and international debt, which helps take operations off the drawing board. “The scenario has made companies feel more comfortable in starting a transaction,” he notes. According to him, new transactions are arriving at the negotiation table, while others, previously on hold, are taking up again.
“When you look abroad, Brazil is well positioned. Falling interest rates and stability in the exchange rate and in the political scenario create conditions for investors to take the country more seriously,” the BofA executive said.
Roderick Greenlees, global head of investment banking at Itaú BBA, says that, in general, operations involving foreign capital are large and have a long-term horizon. According to him, several conversations are underway, with new mandates at the beginning of the year, including the participation of foreign investors.
Rise in service prices gains attention but shouldn’t affect monetary easing
02/13/2024
Carla Argenta — Foto: Claudio Belli/Valor
Brazil’s official inflation, measured by the Broad National Consumer Price Index (IPCA), was higher than analysts expected in January but did not change the scenario of prices slowing down this year.
The indicator opened 2024 with a rise of 0.42%, according to the Brazilian Institute of Geography and Statistics (IBGE). The rate exceeded the median captured by Valor Data, which had predicted a rise of 0.36%. In January 2023, the rate was 0.53%.
The increase surprised some economists, who expressed concerns about the possibility of the heated labor market pressuring inflation in the services sector. However, experts emphasize that the result will not prompt revisions to estimates that suggest the continuation of the disinflationary process. In the 12 months leading to January, the IPCA increased by 4.51%, compared to 4.62% in December.
“The magnitude of the [monthly] increase is out of line with expectations and can be alarming if you look at the composition without considering seasonality,” said Carla Argenta, chief economist at CM Capital.
She cites the food and beverage inflation of 1.38% as an example. Although this was the highest increase for this group since April 2022 (2.06%), the figure was less impacted than expected by the El Niño weather pattern. “El Niño’s effect is on a subgroup that primarily includes rice and beans, as well as fruits and vegetables. But while it has driven up food inflation at home [1.81%], it doesn’t seem to be a concern for the coming months. The effects were mostly felt last year.”
Sicredi’s chief economist, André Nunes de Nunes, reiterated that the impact of climatic events in November and December 2023 may have begun to dissipate, favoring the January 2024 result of the food group—the 1.38% increase was below the projection of 1.55%. Food at home was also below the expectations of Sicredi’s economic team, which had anticipated a rise of 1.99%.
Laiz Carvalho, an economist for Brazil at BNP Paribas, points out that the higher-than-expected IPCA in January doesn’t change the outlook. “We still think that this year’s IPCA will close at 3.5%. It will be largely driven by goods and food at home in the next few observations. We’re already seeing a reversal of these increases in other indices.”
The 0.65% drop in transportation costs also helped economists maintain the scenario. After successive rises since September 2023, the price of airline tickets fell by 15.22%. Fuel prices also decreased by 0.39% in January compared to December.
However, the main point of attention for the disinflationary process, according to Itaú Unibanco economist Luciana Rabelo, is services inflation, especially those most pressured by labor adjustments. Core services inflation rose by 0.76%.
“It’s a little worrying, especially if the services sector comes under more pressure over the year due to the heated labor market,” she said. On the other hand, she comments that the rise seen in January “was already accounted for” and does not impact the bank’s projection that the IPCA will be 3.6% at the end of 2024.
Julio Hegedus, chief economist at Mirae Asset, also points to services inflation as an element that should be closely monitored in the upcoming measurements. “We have to keep an eye on the food and drink, personal expenses, and services groups. The economy is heating up in low-income services. It’s going to be an impact factor,” he said. “There may be some demand pressure over the year, not least because the diffusion data remains high.” The diffusion index, which measures the proportion of goods and activities that have increased in price, stayed at 65.3% last month, the same as in December.
Despite the warning, there is a consensus among economists that none of the data released Thursday by the IBGE will create obstacles to the continuation of the interest rate cut cycle by the Central Bank.
“The result for underlying services in January is not something to worry about. We need to see if the movement will be repeated over the next few months,” said the chief economist at CM Capital. “At the moment, it has absolutely nothing to do with monetary policy. Inflationary inertia is proving to be increasingly smaller, and the impact on adjustments to regulated prices has also been lower. What made it different were seasonal issues that should be reversed soon,” said Ms. Argenta, who expects successive cuts of 50 basis points in the Selic policy rate until the interest rate falls to 8.5% by the end of 2024.
*Por Rafael Vazquez, Rafael Rosas, Luiz Fernando Figliagi, Ívina Garcia — São Paulo, Rio and Manaus
Carmakers face competition from abroad both in the domestic market and in exports
02/13/2024
Márcio de Lima Leite — Foto: Marcelo Camargo/Agência Brasil
Despite successive months of growth in car sales in Brazil, the industry’s production is not advancing. In 2023, while the domestic market grew by 9.7%, production fell by 1.9%. Now in January, again: domestic sales increased by 13% compared to the same month in 2023, but the number of vehicles leaving Brazilian factories was exactly the same as a year ago. The local industry is losing ground both in exports to neighboring countries and in the domestic market, because competitors from other countries are advancing on both fronts.
The speed of the decline in exports began to attract attention in the second half of 2023. The sector closed the year with 403,900 vehicles shipped, a decline of 16% compared to 2022, a year marked by a recovery in foreign trade after the peak of the pandemic. Last month, 19,000 vehicles were exported, 43% less than in January 2023.
Announcing the performance of the first month of the year on Thursday (8), the National Association of Motor Vehicle Manufacturers (Anfavea) pointed to the weakening of economic activity in neighboring countries such as Argentina and Chile as the main factor behind the drop in shipments.
To this must be added the loss of space to competitors from other countries, an issue raised by the same organization a few months ago.
For some time now, the Brazilian automotive industry has been facing strong competition, especially from Asia. This can be seen throughout South America, which used to rely on Brazilian factories as its main source of vehicle supply. Chinese brands are taking advantage of the region’s growing consumer interest in hybrid and electric models to make inroads in the region with new products in this segment. The Brazilian industry has a small supply of these products, limited to a few hybrids and no electrics.
In Colombia, for example, where local vehicle production is low, the share of hybrids and fully electric car in the local market rose to 16.9% last year from 10.6%, according to the National Association for Sustainable Mobility (Andemos). Total vehicle sales in the country fell by 28.9% during the same period. Brazil’s vehicle exports to Argentina and Mexico fell 19% in January, according to Anfavea president Márcio de Lima Leite. For Colombia and Chile, the decline was 79% and 60%, respectively.
Foreign competition is also on the rise in Brazil’s domestic market, the largest in the region and the eighth largest in the world. Foreign brands are taking advantage of the increase in demand for cars, largely due to the drop in interest rates.
In January, 161,100 vehicles were registered across the country, an increase of 13.1% compared to the same month last year. The car segment drove this growth with 152,200 units, 16.5% more than in January 2023.
A year ago, imported cars accounted for 14.3% of the new car market in Brazil. Last month, they reached 19.5%. As a result, the pace of production in Brazilian factories is not keeping pace with the growth in demand.
The president of Anfavea is concerned about the advance of foreign brands that don’t produce in the country. “Imports must be at a level that doesn’t harm the industry,” said Mr. Leite.
The Chinese are leading this foreign race. In the last four years, Argentina’s share of the Brazilian import market—from where the carmakers themselves import, taking advantage of the free trade agreement—has fallen to 46% from 63%. Mexico’s share also fell, to 11% from 15%. But China’s share jumped to 25% from 2%.
Anfavea sees the increase in imports in January as a result of the increase in sales of hybrid and electric models, which are largely produced abroad. According to the organization, among the cars imported in January, 14% were electric and 19% were hybrids.
Chinese brands stocked up on these models, taking advantage of increased demand from consumers who wanted to make a decision before the increase in import tax.
In January, the import tax on fully electric cars, which had been exempt since 2016, came back into effect, along with an increase in the rates for hybrids, which had been reduced during the same period. Most brands maintained their prices in January, due to the inventory accumulated before the tax increase.
According to the Brazilian Association of Electric Vehicles (ABVE), last month was the best January and the second-best month since the organization’s record began. Sales of hybrid and electric vehicles totaled 12,020 units, an increase of 167% over the same month last year. The import tax will increase gradually, starting at rates of 10% to 12% in January and rising to 35% in July 2026. Time will tell whether the tax hike will restore the competitiveness of the local industry.
Meanwhile, carmakers with factories in the country are moving to revamp their product lineups and expand the range of electrified models. A few days ago, Volkswagen announced a new investment of R$9 billion for the 2024-2028 period, revealing that most of the funds will go towards a new platform developed specifically for use in hybrid models that can be fueled with ethanol. Last week, Valor reported that the volume of investments announced by the automotive industry in the country since 2021 for the current decade totals R$41.4 billion.
Grain production is now expected to total 299.7 million tonnes, 20 million tonnes less than in the 2022/23 cycle
02/12/2024
The weather didn’t help, and as producers are already seeing in the fields, the 2023/24 grain crop will be smaller than originally expected. On Thursday, the National Supply Company (CONAB) again lowered its production estimate, mainly due to losses in soybeans and corn. The grain harvest is now expected to total 299.7 million tonnes, 2.2% less than the January forecast and 6.3% less than the 2022/23 harvest. That’s 20 million tonnes less between one crop and the next.
“The delay in the start of the rains in the Central-West, Southeast, and Matopiba regions, followed by irregular and poorly distributed rains, with records of summer rains lasting more than 20 days, as well as high temperatures, are having a negative impact on crop performance,” said CONAB in its 5th Crop Survey report.
The lack of rain and the high temperatures due to the El Niño climate pattern have damaged the soybean and corn crops of the first harvest since planting. Soybean planting has been delayed, which should also affect the second corn crop, according to CONAB.
Soybean production, the flagship of Brazil’s agribusiness, is now expected to be 149.4 million tonnes, 3.4% less than the previous harvest. Compared to the initial forecast of 162 million tonnes, this represents a 7.8% decline. Production of less than 150 million tonnes had already been expected by market analysts.
For corn, CONAB estimated total production at 113.7 million tonnes, 13.8% less than in the 2022/23 cycle. This figure includes three crops. “The first crop, which accounts for 20.8% of total production, faced adverse situations such as high rainfall in the south of the country and low rainfall in the Central West, accompanied by high temperatures,” CONAB noted.
The bean crop estimate fell slightly, but was still close to 3 million tonnes, taking into account the three harvests. In rice, although El Niño initially affected the crop, no losses are expected for the time being. CONAB estimated production at 10.8 million tonnes, 7.6% higher than the 2022/23 crop.
CONAB’s survey was not all negative. The country is expected to see a new record in cotton production, with 3.3 million tonnes of lint. According to the agency, the price and marketing prospects have stimulated an increase in plantings, which grew by 12.8% over the 2022/23 crop.
On Thursday, CONAB also released its first estimate for the winter crop, forecasting a harvest of 10.2 million tonnes of wheat. This figure is 26% higher than the 2022/23 crop. Planting begins this month in the Central-West and will gain momentum in mid-April in Paraná and in May in Rio Grande do Sul, states that account for 82.7% of the country’s wheat production.
With the updated soybean production estimate, CONAB also lowered its export forecast for this crop by 4.29 million tonnes to 94.16 million. Corn shipments were also lowered by 3 million tonnes. As a result, they should total 32 million tonnes.
On Thursday, the Brazilian Institute of Geography and Statistics (IBGE) also released a lower estimate for the 2024 grain harvest, but the drop wasn’t as significant as CONAB’s. The agency lowered its estimate by 1% to 94.5 million tonnes. The agency lowered its estimate by 1% to 303.4 million tonnes. Compared to last season, this represents a decline of 3.8%.
Contrary to Brazilian estimates, the U.S. Department of Agriculture (USDA) on Thursday projected a still robust soybean crop in Brazil for the 2023/24 crop year in its monthly World Agricultural Supply and Demand Estimates report. The agency’s forecast calls for production of 156 million tonnes, 1 million tonnes less than the January forecast.
Analysts had expected a more aggressive cut from the USDA of at least 3 million tonnes. Nonetheless, March soybean contracts on the Chicago exchange closed up a modest 0.38% at $11.9350 per bushel.
For Ronaldo Fernandes, an analyst at Royal Rural, the USDA failed to take into account the fact that 2023 was the hottest year on record and that soybeans developed under such conditions. “There is no productivity or acreage to justify a 156-million-tonne crop. Given that, the market knows that soybean production is much more likely to be below 150 million than above that volume,” he said.
(Paulo Santos and Rafael Rosas contributed reporting.)
Fund made up of more than 60 individuals is now calling the shots
02/12/2024
The fund paid R$15 million for the asset and took on a debt of R$45 million — Foto: Silvia Costanti/Valor
SouthRock asset manager took Eataly out of the court-supervised reorganization process at the end of last year and has now decided on the sale of the business. Pipeline, Valor’s business website, learned that the Wings fund has taken over the operation and is now renegotiating with suppliers and other creditors.
As it was reported by the website when conversations began, the fund is comprised of just over 60 individuals, including physicians, advertisers, and accountants, and now also a multi-family office. With no experience in the food industry, Wings investors brought to Eataly’s management Marcos Calazans, an executive who had previously tried to acquire the asset.
Panza&Co, then the owner of Café Suplicy, Fifties and P.F. Chang’s, submitted the acquisition of Eataly to antitrust regulator CADE in February 2022, but was overrun by SouthRock in the final stretch, while it was structuring the transaction. In August of that year, SouthRock’s CEO Ken Pope announced the acquisition. (Due to the pandemic, Panza&Co closed the other brands’ operations.)
Mr. Calazans took over as the CEO of the operation, which was then held by Luis Felipe Campos. The negotiations around the sale were carried out by SouthRock’s CFO, partner Fabio Rohr—Mr. Pope did not participate in the conversations, even though he signed all the paperwork, according to a person familiar with the matter.
The fund paid R$15 million for the asset and took on a debt of R$45 million. The size of the debt is impressive, considering that it is only store in Brazil. But, according to sources, only around R$15 million refers directly to the operation, as its inventory.
The total amount also includes outstanding taxes and royalty payments to the Italian parent company, which the new owners must renegotiate. Bank loans, with institutions such as Pine and Santander, have already been paid off. A source close to the fund says there is a lot of work to be done to recover and expand the store, but that there are issues, and several initiatives have been identified for the action plan.
One of the obstacles that the new owners will have to overcome is that the company has filed for bankruptcy, as reported by Valor. According to a source close to the fund, Winebrands is one of the smallest creditors among beverage suppliers, with around R$80,000—Mistral, for example, would have R$500,000—, but an agreement is expected. However, Winebrands states in the documents that Eataly has 634 notarial protests and recent debts with suppliers alone totaling R$8 million.
At the end of 2022, there was also a change in Eataly’s headquarters. European private equity fund Investindustrial bought control of the operation from founders, the Farinetti family.
In Brazil, the sale by SouthRock was signed before the approval of the court-supervised reorganization of the controlling company and other companies in the group. Although Eataly was not part of the process, the bankruptcy trustee defined, after approval, that the companies under reorganization could not sell shares.
The main asset in SouthRock’s reorganization process are the Starbucks stores—the U.S. brand has terminated its contract, but open units continue to carry the brand’s name.
The original story in Portuguese was first published on Valor’s business news website Pipeline.
*Por Maria Luíza Filgueiras, Adriana Mattos — São Paulo
Rise in service prices gains attention but shouldn’t affect monetary easing
09/02/2024
Carla Argenta — Foto: Claudio Belli/Valor
Brazil’s official inflation, measured by the Broad National Consumer Price Index (IPCA), was higher than analysts expected in January but did not change the scenario of prices slowing down this year.
The indicator opened 2024 with a rise of 0.42%, according to the Brazilian Institute of Geography and Statistics (IBGE). The rate exceeded the median captured by Valor Data, which had predicted a rise of 0.36%. In January 2023, the rate was 0.53%.
The increase surprised some economists, who expressed concerns about the possibility of the heated labor market pressuring inflation in the services sector. However, experts emphasize that the result will not prompt revisions to estimates that suggest the continuation of the disinflationary process. In the 12 months leading to January, the IPCA increased by 4.51%, compared to 4.62% in December.
“The magnitude of the [monthly] increase is out of line with expectations and can be alarming if you look at the composition without considering seasonality,” said Carla Argenta, chief economist at CM Capital.
She cites the food and beverage inflation of 1.38% as an example. Although this was the highest increase for this group since April 2022 (2.06%), the figure was less impacted than expected by the El Niño weather pattern. “El Niño’s effect is on a subgroup that primarily includes rice and beans, as well as fruits and vegetables. But while it has driven up food inflation at home [1.81%], it doesn’t seem to be a concern for the coming months. The effects were mostly felt last year.”
Sicredi’s chief economist, André Nunes de Nunes, reiterated that the impact of climatic events in November and December 2023 may have begun to dissipate, favoring the January 2024 result of the food group—the 1.38% increase was below the projection of 1.55%. Food at home was also below the expectations of Sicredi’s economic team, which had anticipated a rise of 1.99%.
Laiz Carvalho, an economist for Brazil at BNP Paribas, points out that the higher-than-expected IPCA in January doesn’t change the outlook. “We still think that this year’s IPCA will close at 3.5%. It will be largely driven by goods and food at home in the next few observations. We’re already seeing a reversal of these increases in other indices.”
The 0.65% drop in transportation costs also helped economists maintain the scenario. After successive rises since September 2023, the price of airline tickets fell by 15.22%. Fuel prices also decreased by 0.39% in January compared to December.
However, the main point of attention for the disinflationary process, according to Itaú Unibanco economist Luciana Rabelo, is services inflation, especially those most pressured by labor adjustments. Core services inflation rose by 0.76%.
“It’s a little worrying, especially if the services sector comes under more pressure over the year due to the heated labor market,” she said. On the other hand, she comments that the rise seen in January “was already accounted for” and does not impact the bank’s projection that the IPCA will be 3.6% at the end of 2024.
Julio Hegedus, chief economist at Mirae Asset, also points to services inflation as an element that should be closely monitored in the upcoming measurements. “We have to keep an eye on the food and drink, personal expenses, and services groups. The economy is heating up in low-income services. It’s going to be an impact factor,” he said. “There may be some demand pressure over the year, not least because the diffusion data remains high.” The diffusion index, which measures the proportion of goods and activities that have increased in price, stayed at 65.3% last month, the same as in December.
Despite the warning, there is a consensus among economists that none of the data released Thursday by the IBGE will create obstacles to the continuation of the interest rate cut cycle by the Central Bank.
“The result for underlying services in January is not something to worry about. We need to see if the movement will be repeated over the next few months,” said the chief economist at CM Capital. “At the moment, it has absolutely nothing to do with monetary policy. Inflationary inertia is proving to be increasingly smaller, and the impact on adjustments to regulated prices has also been lower. What made it different were seasonal issues that should be reversed soon,” said Ms. Argenta, who expects successive cuts of 50 basis points in the Selic policy rate until the interest rate falls to 8.5% by the end of 2024.
*Por Rafael Vazquez, Rafael Rosas, Luiz Fernando Figliagi, Ívina Garcia — São Paulo, Rio and Manaus
Ministers Alexandre Silveira (Mines and Energy) and Mauro Vieira (Foreign Affairs) traveled to Asunción to discuss with local leaders
02/07/2024
Alexandre Silveira — Foto: Marcelo Camargo/Agência Brasil
The Brazilian government informed Paraguayan officials on Monday (5) that it will not increase the tariff for electricity produced at the Itaipu Binacional hydroelectric power plant. Energy Minister Alexandre Silveira and Foreign Minister Mauro Vieira had traveled to Asunción to discuss the matter with local leaders.
As Valor learned, the argument expressed to the neighboring leaders is that the Lula administration is concerned about the effects of a possible tariff hike on the electricity bills for the neediest population in Brazil. Messrs. Silveira and Vieira also pointed out that higher power costs could harm the industrial activity and Brazil’s economic development.
The tug of war over tariffs led the president of Paraguay, Santiago Peña, to Brasília two weeks ago for a face-to-face meeting with President Lula. At that time, the Brazilian leader became upset with his aides for failing to provide sufficient information on the matter.
At first, the Brazilian president acknowledged that the two countries had differences regarding the tariff, but promised to negotiate a solution. Shortly after, the government tightened its stance and showed signs that it would not agree with the price hike.
In April 2023, Itaipu’s board of directors approved the price of $16.71 per kilowatt after Brazilians and Paraguayans reached a consensus. Elected as the president of Paraguay shortly after with the promise to renegotiate the agreement, Mr. Peña has been pushing for the increase.
Paraguay wants an increase in tariff to around $20.75 per kilowatt. The price of energy fell after the debt resulting from the construction of the plant was paid off. On Monday, in Asunción, the two ministers delivered the message that Brazil would not “compromise” with the price of energy.
The increase is pivotal for Paraguay, as the neighboring country receives payment from Brazil for the surplus of unused energy from the plant. Under the Treaty of Itaipu, each country is entitled to 50% of the electricity generated by the hydropower plant, but Paraguayans never reached such amount, since the country consumes less than 20% of the total.
In 2022, for example, the neighboring country used 17% of the power generated by the plant. The remaining 33% of the Paraguayan part was purchased by Brazil for around $1 billion.
Enio Verri, the managing director at the Brazilian side, confirmed last week that discussions around the tariff had turned into “a diplomatic problem” and that the solution would come “in the timing of foreign affairs.”
Fueled by calculations made by the Ministry of Mines and Energy, Brazil’s Foreign Affairs Ministry started negotiating an agreement with Paraguay. Valor has learned that the possibility of increasing the tariff was not considered by the Brazilian side, which fears the effects on the economy.
The impasse resulted in halting the approval of the plant’s budget for 2024, which led to delays in payments of vacation plans and year-end bonus to employees. Without an approved budget, Itaipu could not make any payments for the 2024 financial year.
In response to the Foz do Iguaçu Electricity Trade Union (Sinefi), the Regional Labor Court of the 9th Region issued a provisional measure ordering the plant to make payments to employees on the Brazilian side. The decision did not include workers in the neighboring country.
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