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SLC Agricola hails retreat from Brazil's drought-prone north east

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SLC Agricola revealed it had cut below 25% its exposure to north eastern Brazilian states once touted as part of a new agricultural frontier, but whose tendency to drought has hurt agricultural returns.

The Brazilian farm operator, which controls 460,000 hectares of land, an area nearly twice the size of Luxembourg, revealed it had cut to 95,436 hectares its cultivated area in the states of Piaui and Bahia states.

That was equivalent to 23% of the group's planted area – down from 34% four years ago, and was undertaken under a plan to "reduce exposure to areas considered to have higher volatility".

SLC Agricola had sowings totalling 115,323 hectares in the two states in 2013-14.

'Water stress'

Indeed, Piaui and Bahia are two of the four states, with Maranhão and Tocantins, which form Brazil's north eastern so-called Mapitoba region –an acronym formed of the first two letters of the states – which was earlier in the decade viewed as a promising area for agricultural expansion.

SLC Agricola in 2011 made a series of purchases in Mapitoba, which Brazil's farm ministry, Mapa, estimated that Mapitoba had some 20m hectares of farmland available, an area twice the size of Hungary or Portugal.

However, the group has suffered a series of setbacks in the north east, notably in Bahia, where its Panorama farm recorded rains of 698mm in 2015-16, the lowest since at least the 1980s, and well below the 1,000mm deemed the "sufficiency level".

"Water stress" in the region "significantly reduced pod weight and consequently crop yields," SLC Agricola said at the time.

Exit and irrigation

The group has achieved its retreat through measures including leasing out its 12,000-hectare Paineira farm in Piaui, as well as part of its 16,000-hectare Palmares property in Bahia.

The group is also not, from this year, renewing a lease on 5,000 hectares of Bahia, while elsewhere in the state, SLC is attempting to reduce the vulnerability of the 25m-hectare Piratini farm to drought by developing irrigation.

At Piratini, "we are implementing irrigation on approximately 6,000 hectares and we recently obtained a permit to withdraw water and drill wells, with the latter action already under way", SLC said.

Crop price rises

The comments came as SLC Agricola unveiled earnings of R$78.19m for the April-to-June quarter, compared with a loss of R$74.53m a year before.

Revenues gained 9.0% to R$459.1m, helped crop sales prices which SLC said "improved significantly" year on year.

"The soybean price increased 12.7%, while the cotton price rose 54%, reflecting the higher international prices in dollars," besides a favourable currency hedge.

The group also raised its estimates for the recovery in yields achieved in 2016-17, from the drought-hit 2015-16 levels, now seeing the soybean result at 3.28 tonnes per hectare, a rise of 27% year on year, and up from a previous forecast of 3.08 tonnes per hectare.

The estimate for first crop cotton was lifted by 0.12 tonnes per hectare to 1.74 tonnes per hectare, a rise of 39% year on year.

Market reaction

The results were termed "strong" by Bradesco BBI, which restated a neutral rating on SLC shares, introducing a 2018 target price for the stock of R$24.00.

"Despite SLC's strong fundamentals, its valuation has become even more demanding," given a rally in the shares, which in the last session touched a nine-year high of R$22.83 in Sao Paulo, but stood at R$22.07 in late deals on Thursday a drop of 0.1% on the day.

The sentiment was echoed by BTG Pactual, which said that while SLC Agricola was "on track for a record year", such an outcome was already "priced-in" to the shares.

BTG Pactual restated a "neutral" rating on the shares, with a 12-month price target of R$23.00.

By Mike Verdin

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