Requests for judicial financial recovery by Brazilian large farms: Financial distress or moral hazard?

20 October 2021

Brazil has significantly boosted its agricultural production over the past decades entering the list of the world’s top five agricultural producers by 2008. In a new policy context supporting entrepreneurial freedom and competition, large-scale farming has developed countrywide. The number of farms operating over 1,000 hectares rose from 47,000 to 51,000 in 2006 – 2017 while the total farmland operated by these enterprises grew from 150.14 million hectares to 167.23 million hectares within the same period. 

However, in the past few years, numerous Brazilian large farms have declared themselves in severe financial distress and applied for restructuring proceedings - Judicial Financial Recovery (JFR). An upward trend in the number of these cases has raised public concerns regarding the drivers and rationales behind them. The following peculiarities of doing agribusiness in Brazil might play an important role in the analysis of the situation: Brazilian individual farmers are not requested to prepare financial reports on an accrual basis; there is no consolidated data on farmers’ debt burdens at Brazil’s Central Bank; farm annual revenues are generated within only a few weeks a year allowing farmers under Judicial Recovery to continue their activities after cancelling previous debts; farmers under Judicial Recovery have been lately authorized by banks to release the assets from collateralized loans. 

Accordingly, financial institutions might misinterpret farmers’ financial situation due to incomplete reporting while farmers might tend to file for JFR prematurely to free recently harvested commodities from previous financial and commercial commitments. Although filing for JFR can be triggered by some degree of financial distress, moral hazard might be present in some cases. Overall, a tendency among agricultural producers to prematurely apply for government debt waiver programs might have negative consequences for all stakeholders of Brazil’s agricultural lending market.

A recent article on propensity for premature filing for Judicial Financial Recovery among Brazilian large-scale farmers co-authored by Antonio Carlos Ortiz, Henrique Monaco, Vitor Machado, and Michael Boehlje aims to verify the hypothesis that the loose legal requirements in combination with seasonal revenue generation create incentives for large-scale farmers to prematurely apply for recovery programs to reduce their debts as well as to free working capital and collateral amid manageable financial distress. The article has been published in the special issue of International Food and Agribusiness Management Review (IFAMR).


The study is based on a data sample of 807 large farms with the average size of 8,750 hectares (from 320 hectares to 389,000 hectares) engaged in cash crop production in the Midwest region of Brazil with no separation between ownership and management. Of them, 18 farms have filed for JFR from 2016 to 2018.

To verify their hypothesis, the authors have analyzed three key financial indices (liquidity, balance sheet leverage, and operating leverage) of 18 farms that have filed for JFR in the studied period and compared them to the respective figures of the rest of the companies that have not filed for JFR. In their analysis, the authors have addressed two questions with respect to farms that filed for JFR: 

- Were these farms in poorer financial condition as compared to the rest of the farms from the sample? 
- Did these farms file for JFR right after harvesting their main crop?


Analyzing selected financial indices and their relationship with JFR cases

Overall, the statistical analysis shows a weak relationship between the level of selected financial indices and the propensity to file for JFR. The financial indices of the affected farms in the years before filing for JFR did not significantly differ from the rest of the farms in the sample. In particular, balance sheet leverage showed no statistical significance in the years analyzed. In some years, however, the levels of liquidity and operating leverage correlated with filing for JFR. Most persistent relationship was demonstrated by liquidity indicator: lower liquidity ratios showed correlation to the propensity of filing for Judicial Recovery in 2016 and 2017. These results might point to some degree of financial distress faced by these farmers. At the same time, it is important to mention that a set of indices analyzed in the study is limited and not sufficient to properly access a firm’s financial condition.

Analyzing the timing of JFR cases and its relationship with the crop cycle

The results of the analysis show that the farmers used to file for JFR either at the start or at the end of the harvesting period. At this point, they were able to free collateral and pre-sales contracts from the previous financial and commercial commitments. These findings might indicate moral hazard behavior of the studied farms.

The authors stress that the results of their analysis are preliminary and based on limited available information about the farms under JFR as well as their financial figures. Given the importance of Brazil’s large-scale farming for national economy and the impact that continuing cases of JFR might have on the agri-food sector, there is potential for further research on the topic.

By Anna Feshchenko