SAO PAULO, May 14 (Reuters) - China’s Hunan Dakang found itself hemorrhaging money soon after it bought Brazilian grain company Fiagril in 2016, but it has turned around its subsidiary by focusing on selling farm inputs instead of grain origination, an executive said.
Fiagril’s troubles expose the challenges for newcomers operating in Brazilian agriculture at a time when traders’ margins remain narrow due to abundant harvests and fiercer competition.
The company turned a profit in 2018 after losing money the prior year, thanks to shifting away from competing head-to-head with major grain firms in origination, Chief Executive Luiz Gustavo Silva told Reuters in an interview.
“Our focus is on the distribution of farm inputs, which we exchange for soybeans,” he said. Fiagril still exports grains, but the real gain is on the farm input side, he said.
Fiagril has recently secured more capital to continue with the turnaround. This year, China Development Bank approved a $300 million revolving loan, which will provide working capital for three years, Silva said.
The company also received an equity injection of 180 million reais ($45.35 million) from its backers in April. The cash infusion was proportionally split by majority-owner Dakang and partners to avoid diluting any investors, he said.
Shenzhen-listed Hunan Dakang International Food & Agriculture Co Ltd operates in Brazil through a subsidiary and is owned by Chinese conglomerate Shanghai Pengxin Group Co.
Dakang made what are seen as some of the largest acquisitions in Brazil’s farm sector: Fiagril, whose value was not disclosed, and Belagricola, which majority owner Dakang bought for $253 million.
Fiagril is based in Mato Grosso, Brazil’s largest soy state, with similarly positioned Belagricola based in No. 2 producer Paraná.
CULTURE SHIFT Dakang bought Fiagril with the intention to buy soybeans to meet China’s booming food demand.
But while sales totaled 3.2 billion reais ($806 million)in 2017, the company lost money. Dakang sent Chinese managers to figure out why.
Dakang realized it had bought a firm that also sells farm inputs and processes biofuels, which turned out to be more profitable than trading in grains.
Silva said he convinced Fiagril’s owners to focus on the sale of farm inputs and biofuels. While sales fell to 2.7 billion reais in 2018, it returned the company to profit.
“Nowadays there are no Chinese managers at Fiagril,” Silva said. “We are down to a board meeting every three months.” ($1 = 3.9691 reais) (Reporting by Ana Mano; Editing by Jake Spring and Dan Grebler)