mobilizing capital to scale responsible expansion of crop livestock in brazil

BOSTON CONSULTING GROUP 17 Financing recovery of degraded pastures requires innovative financial mechanisms appropriate to handle the following elements: • Risk profile of producers, many of them being of small and medium size with low traceability, especially in the cattle sector; • Time horizon of financing, typically between 7 and 10 years, unusual for borrowers with limited financial strength and based on spot commercial relations; • Production performance risk for such a long tenor, due to potential climatic events and lack of technical knowledge of smaller producers to properly implement the recovery of the pastures; • Forex risk, as a large amount of loans will need to be in BRL for the producers, which can add an additional layer of complexity for foreign lenders. Blended finance models play a pivotal role in advancing this agenda by enabling co-investors to de-risk and incentivize investments. In that sense, catalytic capital with subordinated debt at affordable rates will be a must to establish a track record of innovative financings suitable for the agenda. Considering the size of the agenda, the participation of DFIs in providing this catalytic capital is key, while also considering other providers such as companies from the supply chain, philanthropy and also private banks with a strong culture of innovation. Similar to the renewable energy sector 15 to 20 years ago, we are currently in the initial stages of accelerating lending and investment for the transition towards low-carbon and DCF agriculture. Lending tenor: A specificity of this agenda This agenda calls for patient capital with extended grace periods as a drop in yield and cash flow is expected within the first 3 to 5 years of the transition with the application of various recovery techniques. The payback periods depend on the commodities and other factors, but in general, the agenda requires financing of 7 to 10 years, including a 3-year grace period in order the land to generate relevant cash flows. TimeThe period varies according to techniquesExpected gap to solveGrower yields with sustainable agriculture Farm cashflowIllustrative average expected cash flows