Propensity for premature filing for judicial financial recovery in large-scale agriculture in Brazil

Abstract

In the Brazilian agricultural space, numerous cases of large farmers have declared themselves in severe financial distress and filed for Judicial Financial Recovery (JFR) in the past few years. Our statistical analysis, although preliminary and based on limited available data, indicates that these operations have shown financial indices at levels that, in general, did not significantly differ from a sample of other larger farmers’. Only ‘liquidity’ presented a more persistent relationship with the cases of Judicial Recovery. Therefore, it seems that farmers may be resorting to the JFR route prematurely. Within a limited subsample of cases of farmers who filed for JFR, data also shows a pattern with indications that farmers may tend to time their filing to coincide with having their main crops ready for commercialization immediately preceding or after harvesting. This suggests that these farmers might be seeking to free their most recent crop from previous financial and commercial commitments by pursuing a favorable court decision to their JFR. Some factors may be driving this behavior: (1) most farmers in Brazil do not produce a complete set of financial statements on accrual bases, which may lead to errors and incomplete information; (2) not all farmers’ debt is registered at the Central Bank, making debt consolidation a challenging discovery process to lenders, who may overleverage clients; (3) farm revenues are concentrated in only a few weeks of the year, allowing farmers that file for Judicial Recovery to carry on with their business, if the courts halt service of previous debt; (4) courts have also allowed these farmers to release assets from collateralized loans. In sum, there may be inaccurate interpretation of the farmers’ financial condition due to incomplete information, and a component of moral hazard motivating large farmers filing prematurely for JFR in Brazil. The number and magnitude of these cases may generate negative consequences to agricultural credit costs and availability in the future.