Chain Reaction Research Report: SLC Agrícola: Cerrado Deforestation Poses Risks to Revenue and Farmland Assets
SLC Agrícola is Brazil’s largest publicly traded farming company, founded in 1977. It operates 15 large farms, spread across six Brazilian states – Mato Grosso, Goiás, Bahia, Piauí, Maranhão and Mato Grosso do Sul. This includes activities in the Matopiba region (comprising of the states of Maranhão, Tocantins, Piauí and Bahia), sometimes referred to as the “newest agricultural frontier” in Brazil. It actively purchases, clears and transforms land in the Cerrado biome for industrialized soy, corn and cotton production. The Cerrado biome, a vast tropical savanna, is an environmentally sensitive area where deforestation rates are high. WWF and others recognize the Cerrado as the biologically richest savanna in the world, home to hundreds of endangered species and traditional communities. As the source of rivers and waterways, the Cerrado functions as a vital source of water for many of Brazil’s largest cities.
- SLC Agrícola has a diversified business model, that aims to produce value from both commodity production and land appreciation. SLC Agrícola owns 323,000 hectares (ha), of which 86,765 ha is held through its real estate joint venture SLC LandCo. SLC LandCo’s business model includes a focus on acquisition and transformation of Cerrado savanna into productive farmland. The transformation process requires the clearing of Cerrado forests.
- Since 2011, SLC Agrícola has expanded its landbank with 99,531 ha. SLC Agrícola purchased and expanded farms in the Matopiba region. These farms contained large strands of undeveloped Cerrado savanna. In line with its strategy of real estate gain, SLC Agrícola transformed undeveloped land into farmland.
- From 2011 to 2017, SLC Agrícola cleared a total of 39,887 ha of land of its original vegetation. For over 30,000 ha, this vegetation is classified as Cerrado forest by Brazil’s Ministry of Environment. These areas have also been recognized for their high biodiversity value by the Round Table on Responsible Soy (RTRS). SLC indicates that another 42,000 ha is still to be developed. SLC farms are located in areas where illegal land grabbing (‘grilagem’) is common, and SLC Agrícola’s business partners have faced legal charges.
- SLC faces potential risk of losing access to clients and an overvaluation of its land portfolio resulting from its sustainability impacts. At least 20 percent of SLC Agrícola’s revenue comes from clients with public zero-deforestation commitments. While market appetite for commodities from recently deforested land is reduced, vegetation cover does not appear to be a factor in land valuation models.
- SLC risks losing half of its profits if its main customers put pressure on deforestation issues. However, SLC Agrícola’s share price, which now has a 49 percent discount versus the Net Asset Value, has upside potential from increasing confidence should the company commit to zero-deforestation.
For more information, please contact Tim Steinweg.