20-F 1 f20f2021_brasilagro.htm ANNUAL REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2021

 

OR

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-35723

 

BRASILAGRO – COMPANHIA BRASILEIRA DE
PROPRIEDADES AGRÍCOLAS

(Exact name of Registrant as specified in its charter)

 

BrasilAgro – Brazilian Agricultural Real Estate Company

(Translation of Registrant’s name into English)

 

The Federative Republic of Brazil

(Jurisdiction of incorporation or organization)

 

Av. Brigadeiro Faria Lima, 1309, 5th floor, São Paulo, SP 01452-002, Brazil

(Address of principal executive offices)

 

Gustavo Javier Lopez

Chief Administrative Officer and Investor Relations Officer

Tel.: +55 11 3035 5350 – E-mail: ri@brasil-agro.com

Av. Brigadeiro Faria Lima, 1309, 5th floor
São Paulo, SP 01452-002, Brazil

(Name, Telephone, E-mail or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
American Depositary Shares, each representing one ordinary share, no par value   LND   New York Stock Exchange
         
Ordinary Shares*     New York Stock Exchange*

 

*Not for trading, but only in connection with the registration of American Depositary Shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

Ordinary shares, no par value   102,377,008 

 

 

 

  

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐   No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐  No ☐ (Note: None required for registrant)

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ☐ Accelerated filer Non-accelerated filer ☐
    Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ☐

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

Other ☐

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐  Item 18 ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
Part I 1
   
INTRODUCTION 1
   
ITEM 1—IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 4
ITEM 2—OFFER STATISTICS AND EXPECTED TIMETABLE 4
ITEM 3—KEY INFORMATION 4
ITEM 4—INFORMATION ON THE COMPANY 25
ITEM 4A—UNRESOLVED STAFF COMMENTS 49
ITEM 5—OPERATING AND FINANCIAL REVIEW AND PROSPECTS 49
ITEM 6—DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 78
ITEM 7—MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 88
ITEM 8—FINANCIAL INFORMATION 92
ITEM 9—THE OFFER AND LISTING 98
ITEM 10—ADDITIONAL INFORMATION 101
ITEM 11—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 132
ITEM 12— DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 133
   
Part II 135
   
ITEM 13—DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 135
ITEM 14—MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 135
ITEM 15—CONTROLS AND PROCEDURES 135
ITEM 16A—AUDIT COMMITTEE FINANCIAL EXPERT 136
ITEM 16B—CODE OF ETHICS 136
ITEM 16C—PRINCIPAL ACCOUNTANT FEES AND SERVICES 136
ITEM 16D—EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 137
ITEM 16E—PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 137
ITEM 16F—CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 138
ITEM 16G—CORPORATE GOVERNANCE 138
ITEM 16H—MINE SAFETY DISCLOSURE 140
   
Part III 141
   
ITEM 17—FINANCIAL STATEMENTS 141
ITEM 18—FINANCIAL STATEMENTS 141
ITEM 19—EXHIBITS 142

  

i

 

 

Part I

 

INTRODUCTION

 

Unless the context otherwise requires, the term “BrasilAgro” refers to BrasilAgro – Companhia Brasileira de Propriedades Agrícolas and its consolidated subsidiaries; and unless indicated otherwise, the terms “we,” the “Company,” “our” or “us” refer to BrasilAgro. The term “Brazil” refers to The Federative Republic of Brazil.

 

Presentation of Financial Information

 

All references in this annual report to “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “dollars” or “US$” are to U.S. dollars, the official currency of the United States of America.

 

On June 30, 2021, the end of our last fiscal year, the exchange rate for reais into U.S. dollars was R$5.0022 to US$1.00, based on the selling rate as reported by the Central Bank of Brazil (Banco Central do Brasil), or the Central Bank. On June 30, 2020, the selling rate was R$5.4760 to US$1.00. The selling rate was R$3.8322 to US$1.00 on June 30, 2019, R$3.8552 to US$1.00 on June 30, 2018 and R$3.3082 to US$1.00 on June 30, 2017, in each case, as reported by the Central Bank. The real/U.S. dollar exchange rate fluctuates widely, and the selling rate on June 30, 2021 may not be indicative of future exchange rates. On September 30, 2021, the selling rate was R$5.4394 to US$1.00 and, on October 27, 2021, the selling rate was R$5.5667 to US$1.00, as reported by the Central Bank.

Exchange Rates

 

Our dividends, when paid in cash, are denominated in reais. As a result, exchange rate fluctuations have affected and will affect the U.S. dollar amounts received by holders of ADSs on conversion of such dividends by The Bank of New York, as the ADS depositary. The Bank of New York converts dividends it receives from reais into U.S. dollars upon receipt, by sale or such other manner as it has determined, and distributes such U.S. dollars to holders of ADSs, net of The Bank of New York’s expenses of conversion, any applicable taxes and other governmental charges. Exchange rate fluctuations may also affect the U.S. dollar price of the ADSs.

 

The Brazilian government may impose temporary restrictions on the conversion of reais into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Brazil. Brazilian law permits the government to impose these restrictions whenever it determines there is an imbalance in Brazil’s balance of payments or reason to expect that one will occur.

 

On June 30, 2021, the end of our last fiscal year, the exchange rate for reais into U.S. dollars was R$5.0022 to US$1.00, based on the selling rate as reported by the Central Bank. On September 30, 2021, the selling rate was R$5.4394 to US$1.00 and, on October 27, 2021, the selling rate was R$5.5667 to US$1.00, as reported by the Central Bank.

 

Financial Statements

 

The Brazilian real is our functional currency and that of our subsidiaries located in Brazil, and is also the currency used for the preparation and presentation of our consolidated financial statements. Our fiscal year is from July 1 of each year to June 30 of the following year.

 

We prepare our annual consolidated financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB.

 

The selected financial information should be read together with our audited consolidated financial statements, including the notes thereto, included elsewhere in this annual report.

 

1

 

 

Crop Year, Harvest and Planting Season

 

Our agricultural production is based on the crop year, which varies according to each crop. The crop year for sugarcane is from January 1 to December 31 of each year, and the crop year for grains is from July 1 of each year to June 30 of the following year. We also make reference in this annual report to the planting season and the harvest season, or harvest period. In Brazil, the planting season for grains is from September to December of each year, and the planting season for sugarcane is from February to May of each year. The harvest period in Brazil for grains is from February to July of each year, and such period for sugarcane is from April to November of each year.

 

Market Information

 

The market information included in this annual report concerning the Brazilian economy and the domestic and international agriculture industry was obtained from market research, publicly available information and industry publications from established public sources, such as the Central Bank, the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or the IBGE, the Brazilian Food Supply Company (Companhia Nacional de Abastecimento), or Conab, which is a state-owned company, the Brazilian Ministry of Agriculture, Livestock and Food Supply (Ministério da Agricultura, Pecuária e Abastecimento), or MAPA, the U.S. Department of Agriculture, or USDA, the U.S. Food and Agriculture Organization, or FAO, the United Nations, and the Organization for Economic Cooperation and Development, or OECD, as well as from other public institutions and independent sources as indicated throughout this annual report. We believe that such information is true and accurate as of the date it was made available, although we have not independently verified it.

 

Rounding

 

Certain percentages and amounts included in this annual report have been rounded for ease of presentation. Accordingly, figures shown as totals in certain tables may not be arithmetic aggregations of the figures that precede them.

 

Emerging Growth Company Status

 

We are an “emerging growth company,” as defined in Section 3(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Therefore, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, or any Public Company Accounting Oversight Board, or “PCAOB,” rules, which, if adopted in the future, would require mandatory audit firm rotation and auditor discussion and analysis pursuant to any future audit rule promulgated by the PCAOB (unless the U.S. Securities and Exchange Commission, or the SEC, determines otherwise). We take advantage of the exemption from providing an auditor’s attestation report and may decide to rely on other exemptions in the future, such as compliance with certain PCAOB rules. We do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may become more volatile.

 

We could remain an “emerging growth company” until the earliest of (a) the last day of the first fiscal year in which our annual gross revenue exceeds US$1.07 billion, (b) the last day of our fiscal year following the fifth anniversary of the date of our first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended, or the Securities Act, (c) the date on which we have issued more than US$1 billion in non-convertible debt during the preceding three-year period, or (d) the date on which we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter.

 

2

 

 

Forward-Looking Statements

 

This annual report includes statements that constitute forward-looking statements. These statements are based on the beliefs and assumptions of our management and on information available to our management at the time such statements were made. Forward-looking statements include, but are not limited to: (a) information concerning possible or assumed future results of our operations, earnings, industry conditions, demand and pricing for our services and other aspects of our business described under “Item 4—Information on the Company,” “Item 5—Operating and Financial Review and Prospects” and “Item 11—Quantitative and Qualitative Disclosures About Market Risk”; and (b) statements that are preceded or followed by, or include, the words “believes,” “expects,” “anticipates,” “intends,” “is confident,” “plans,” “estimates,” “may,” “might,” “could,” “will,” “would,” the negatives of such terms or similar expressions.

 

The forward-looking statements included in this annual report relate to, among other factors:

 

  our business prospects and future results of operations;

 

  weather and other natural phenomena;

 

  the length and severity of the recent novel coronavirus (COVID-19) pandemic, or the COVID-19 pandemic;

 

  developments in, or changes to, the laws, regulations and governmental policies governing our business, including limitations on ownership of farmland by foreign entities in certain jurisdiction in which we operate, environmental laws and regulations;

 

  the implementation of our business strategy;

 

  our plans relating to acquisitions, joint ventures, strategic alliances or divestitures;

 

  the implementation of our financing strategy and capital expenditure plan;

 

  the maintenance of relationships with our customers;
     
  the competitive nature of the industry in which we operate;

 

  the cost and availability of financing;

 

  future demand for the commodities we produce;

 

  international prices for commodities;

 

  the condition of our land holdings;

 

  the development of the logistics and infrastructure for transportation of our products in the countries where we operate;

 

  the performance of the Brazilian and world economies;

 

  the relative value of the Brazilian real compared to other currencies; and

 

  the factors discussed under “Item 3—Key Information—3.D. Risk Factors” in this annual report.

 

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Many of the factors that will determine these results are beyond our ability to control or predict.

 

Any of the risk factors described under “Item 3—Key Information—Risk Factors” and those described elsewhere in this annual report or in our other filings with the SEC, among other things, could cause our results to differ from any results or conditions that might be projected, forecasted or estimated by us in any such forward-looking statements.

 

We undertake no obligation to publicly update any forward-looking statement, whether because of new information, future events or otherwise, except as required by applicable law or stock exchange regulation. Investors are cautioned not to put undue reliance on any forward-looking statements. 

 

3

 

 

ITEM 1—IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2—OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3—KEY INFORMATION

 

A.(Reserved)

 

Not applicable.

 

B.Capitalization and Indebtedness

 

Not applicable.

 

C.Reasons for the offer and use of proceeds

 

Not applicable.

 

D.Risk Factors

 

Risks Relating to our Business and Industry

 

We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations.

 

In December 2019, a novel strain of coronavirus known as COVID-19 surfaced in Wuhan, China. The outbreak was declared a global pandemic by the World Health Organization on March 11, 2020. The speed and extent of the spread of COVID-19, and the duration and intensity of resulting business disruption and related financial and social impact are uncertain. We cannot foresee the extent, duration and the impacts of the measures adopted by the Brazilian or other governments to control the spread of the COVID-19 pandemic. There are no recent comparable events that may guide us. Outbreaks of contagious diseases could have an adverse effect on our business and operations.

 

In March 2020, we developed and implemented a plan comprised of certain measures to protect the health of our employees, prevent the spread of COVID-19 at our facilities and mitigate its effects on our operations. These measures included:

 

  the creation of a Prevention and Risk Committee to assess the overall situation, propose and revise preventive measures and actions to minimize risks, and coordinate the implementation of action plans;

 

  the adoption of a remote work policy for employees who are in certain risk groups or who work at our corporate headquarters in São Paulo;

 

  the implementation of certain measures and protocols to protect the safety of all persons involved in our operations, pursuant to the guidelines of the Brazilian Ministry of Health (Ministério da Saúde); and

 

  the adoption of contingency plans to prevent disruption in our operations.

 

Our operations in Brazil, Bolivia and Paraguay continued normally and, to date, we have not had any material impact on our business and operations arising out of the COVID-19 pandemic.

 

4

 

 

However, the COVID-19 pandemic could affect our operations if a significant portion of our workforce is unable to work due to the spread of the virus, quarantines, government actions, the shutdown of facilities or other restrictions. Part of our revenue is generated by the sale of commodities to local customers, but the global market for such commodities relies on an extensive logistics and supply chain, including ports, distribution centers and suppliers. In addition, the high volatility of the Brazilian real/U.S. dollar exchange rate and the prices of commodities as a result of the impact of the COVID-19 pandemic could result in losses for us.

 

We have experienced strong demand for exports because of the appreciation of the U.S. dollar against the Brazilian real. We have not experienced any significant disruptions in our logistics and export operations, as well as in inbound shipments of raw materials and goods, most of which had been acquired prior to the imposition of quarantine restrictions in Brazil. We have also not experienced any material changes in commitments for the 2020/2021 crop year. Our management believes that we are well positioned to withstand the effects of the COVID-19 pandemic.

 

We have preserved our short-term and long-term liquidity, and changes in inbound and outbound shipments were scaled not to materially affect our financial position. We did not identify any significant risks with regard to our capacity to continue operating.

 

We are unable to determine the full extent to which the COVID-19 pandemic may impact our business or results of operations in the future, which will depend on future developments that are highly uncertain and cannot be predicted. See “—Risks Relating to Brazil—The measures taken or to be implemented by the Brazilian government in response to the COVID-19 pandemic may have an adverse effect on our business and operations.”

 

Our ability to implement our business strategy successfully may be adversely affected by numerous factors beyond our control, which may materially and adversely affect our business, financial condition and results of operations.

 

Our business strategy depends on our ability to acquire, develop, operate and sell our agricultural properties on a profitable basis. Our strategy is based on our ability to acquire agricultural properties at attractive prices, develop them into efficient and profitable operations and sell them at a profit in the medium and long term. These factors are essential for our prospects of success, but are subject to significant uncertainties, contingencies and risks within our economic, competitive, regulatory and operational environment, many of which are beyond our control. Our ability to execute our business strategy successfully is uncertain and may be adversely affected by any of the following factors, among others:

 

  failure to pursue our business strategy;

 

  failure or difficult to acquire and sell agricultural properties at attractive prices;

 

  changes in market conditions or failure to anticipate and adapt to new trends in Brazil’s rapidly evolving agricultural sector;

 

  inability to overcome certain limitations on the acquisition of land in Brazil by foreigners, as provided in the opinion of the Federal Attorney General, as further detailed in this annual report;

 

  failure to maintain the fiscal structure of our subsidiaries;

 

  inability to develop infrastructure and attract or retain personnel in a timely and effective manner;

  

  inability to identify service providers for our agricultural properties and projects;

 

  increased competition for suitable land from other agricultural real estate owners or developers, which increases our costs and adversely affects our profit margins;

 

  inability to develop and operate our agricultural properties profitably, which may result from inaccurate estimates regarding the cost of infrastructure, other investments or operating costs;

 

  failure, delays or difficulties in obtaining necessary environmental and regulatory permits;

 

5

 

 

  failure by purchasers of our properties to meet their payment obligations to us;

 

  increased operating costs, including the need for improvements to fixed assets, insurance premiums and property and utility taxes and fees that affect our profit margins;

 

  adverse climate conditions, such as global warming, which may contribute to the change of frequency of unpredictable or uncommon meteorological phenomena such as hurricanes and typhoons, as well as unpredictable and unusual patterns of rainfall, among others;

 

  unfavorable climate conditions in Brazil, Bolivia or Paraguay, particularly in the regions where we carry out our activities;

 

  the economic, political and business environment in Brazil, Bolivia or Paraguay, and specifically in the geographic regions where we invest and operate;

 

  inflation, fluctuating interest rates and exchange rates;

 

  disputes and litigation relating to our agricultural properties; and

 

  labor, environmental, civil and pension liabilities.

 

We may not be able to continue acquiring suitable agricultural properties on attractive terms, and our inability to do so could have a material adverse effect on us.

 

In recent years, investments in Brazil’s agriculture sector have increased substantially. As a result, demand and valuations for the kind of properties we seek to acquire have escalated significantly. We believe that prices for such properties are likely to continue to increase in the medium and long-term, perhaps significantly as demand is expected to remain high. We compete with local and foreign investors, many of whom are larger and have greater financial resources than we do. Such investors may be able to incur operating losses for a sustained period, retain their real estate investments for a longer period than we can or accept lower returns on such investments. As a result, such investors may be willing to pay substantially higher prices for agricultural properties than we are able or willing to, depriving us of opportunities to acquire the best agricultural properties or increasing our acquisition costs. As a result of the foregoing, we cannot assure you that we will be able to locate and acquire suitable investments on reasonable terms or at all, and our inability to do so could have a material adverse effect on us.

 

The imposition of restrictions on acquisitions of agricultural properties by foreign nationals may materially restrict the development of our business.

 

In August 2010, the then-president of Brazil approved the opinion of the Federal Attorney General affirming the constitutionality of Brazilian Law No. 5,709/71, which imposes important limitations on the acquisition and lease of land in Brazil by foreigners and by Brazilian companies controlled by foreigners. Pursuant to this legislation, companies that are majority-owned by foreigners are not allowed to acquire agricultural properties in excess of 100 indefinite exploration modules, or MEI (which are measurement units adopted by the National Institute of Agrarian Development (Instituto Nacional de Colonização e Reforma Agrária, or INCRA), within different Brazilian regions, and which range from five to 100 hectares) absent the prior approval of the Brazilian Congress, while the acquisition of areas measuring less than 100 MEIs by such companies requires the prior approval of INCRA. In addition, agricultural areas that are owned by foreigners or companies controlled by foreigners shall not exceed 25% of the surface area of the municipality, of which area up to 40% shall not belong to foreigners or companies controlled by foreigners of the same nationality, meaning that the sum of agricultural areas that belong to foreigners or companies controlled by foreigners of the same nationality shall not exceed 10% of the surface area of the relevant municipality. In addition, INCRA is also required to verify if the agricultural, cattle-raising, industrial or colonization projects to be developed in such areas were previously approved by the relevant authorities. After that analysis, INCRA will issue a certificate allowing the acquisition or rural lease of the property. The purchase and rural lease of agricultural properties that do not comply with the aforementioned requirements need to be authorized by the Brazilian Congress. In both cases, it is not possible to determine an estimated time frame for the approval procedure, since at the date of this annual report, there are no known cases on the grating of such certificates.

  

Recently, Brazilian Law No. 13,986, of April 7, 2020, amended Law No. 5,709/91 and provided that the limitations mentioned above do not apply (i) to the pledge of real estate as collateral (including the fiduciary transfer of real estate property); and (ii) to debt settlements arising from the execution of real estate collateral. Both exceptions favor Brazilian companies controlled by foreigners or foreign entities, which creates new business opportunities.

 

6

 

 

As of September 30, 2021, approximately 55.1% of our common shares were held by foreigners. Bearing that in mind, the implementation of Law No. 5,709/71 may impose on us additional procedures and approvals in connection with our future acquisitions of land, which may result in material delays and our inability to obtain required approvals. There is also a case pending on the Supreme Court (Supremo Tribunal Federal, or STF) on the Opinion No. 461/2012-E, issued by São Paulo’s General Controller of Justice (Corregedoria Geral de Justiça do Estado de São Paulo), which has established that entities providing notary and registrar services located in the State of São Paulo are exempt from observing certain restrictions and requirements imposed by Law No. 5,709/71 and Decree No. 74,965/74. Moreover, on April 16, 2015, the Brazilian Rural Society filed a claim for the acknowledgment of non-compliance with basic principles (ADPF) under certain provisions of the Brazilian Constitution with the Supreme Court in order to (i) rule that paragraph 1, article 1, of Law No. 5,709/71 was repealed by the 1988 Federal Constitution and (ii) reverse the opinion issued by the Federal Attorney General (AGU) of 2010. As of the date hereof, we are not able to provide an estimate of the timeframe for a final judgment to be issued by the STF in both cases.

 

Depending on the final decisions of these pending lawsuits, we may need to modify our business strategy and intended practices in order to be able to acquire agricultural properties. This might have the effect of increasing the number of transactions we must complete, which would increase our transaction costs. It might also require the execution of joint ventures or shareholder agreements, which increases the complexity and risks associated with such transactions.

 

Any regulatory limitations and restrictions could materially limit our ability to acquire agricultural properties, increase the investments, transaction costs or complexity of such transactions, or complicate the regulatory procedures required, any of which could materially and adversely affect us and our ability to successfully implement our business strategy. For more information, see “Item 4—Information on the Company—Business Overview—Ownership of Agricultural Land in Brazil by Foreigners.”

 

A substantial portion of our assets consists of illiquid agricultural properties that may affect our ability to carry out sales of properties timely and profitably, which could have a material adverse effect on us.

 

Our business strategy is based on the appreciation of the capital invested in our agricultural properties and the liquidity of those investments. We cannot assure you that the value of our agricultural properties will increase in the short-, medium- or long-term, or at all, or that we will be able to monetize our agricultural investments successfully. Agricultural real estate assets are, as a general rule, illiquid and volatile, and agricultural properties in Brazil are especially illiquid and volatile. As a result, it may be difficult for us to promptly adjust our portfolio of properties in response to changes in economic or business conditions, and we may be unable to find purchasers willing to acquire our agricultural properties at prices that are favorable to us. Lack of liquidity and volatility in local market conditions would adversely affect our ability to carry out sales of properties timely and profitably, which could have a material adverse effect on us.

   

Fluctuation in market prices for our agricultural products could adversely affect us.

 

We are not able to obtain hedging protection or minimum price guarantees for the entirety of our production and therefore we are exposed to significant risks associated with the level and volatility of crop prices. The prices we are able to obtain for our agricultural products from time to time will depend on many factors beyond our control, including:

 

  global commodity prices, which historically have been subject to significant fluctuations over relatively short periods of time, depending on worldwide food supply and demand as well as factors related to financial speculation;

 

  disruptions in commodity markets caused by global events, including the impact of the COVID-19 pandemic;

  

  weather conditions, or natural disasters in areas where agricultural products are cultivated;

 

  worldwide inventory levels (i.e., supply or stock of commodities carried over from year to year);

 

  the business strategies adopted by other major companies operating in the agricultural and agribusiness sectors;

 

7

 

 

  changes in agriculture subsidies with regard to certain important producers (mainly in the United States and the European Economic Community), trade barriers with regard to certain important consumer markets and the adoption of other government policies affecting market conditions and prices;

 

  available transportation methods and infrastructure development in the regions where we operate or in remote areas serving local markets and which affect the local prices of our crops; and

 

  cost of raw materials; and supply of and demand for competing commodities and substitutes.

 

Given the uncertainty around the extent and timing of the ongoing COVID-19 pandemic, we are unable to predict or anticipate its final effects on our business and results of operations. See “—We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations.”

 

In addition, we believe there is a close relationship between the value of our agricultural properties and market prices of the commodities we produce, which are affected by global economic and other conditions. A decline in the prices of grains, sugar or related by-products below their current levels for a sustained period of time would significantly reduce the value of our land holdings and materially and adversely affect our business, financial condition and results of operations.

 

Ethanol prices are correlated with the price of sugar and are also closely correlated with the price of oil, so that a decline in the price of any of these commodities may adversely affect our sugarcane business.

 

A vast majority of ethanol in Brazil is produced at sugarcane mills that produce both ethanol and sugar. Because sugarcane millers are able to alter their product mix in response to the relative prices of ethanol and sugar, the prices of both products are directly correlated, and the correlation between ethanol and sugar may increase over time. Sugar prices in Brazil are determined by prices in the world market, resulting in a correlation between Brazilian ethanol prices and world sugar prices.

 

In addition, gasoline prices in Brazil are influenced by the Brazilian government. Because flex-fuel vehicles, which have become popular in Brazil, allow consumers to choose between gasoline and ethanol at the pump, ethanol prices are correlated to gasoline prices and, consequently, oil prices.

 

Oil prices varied sharply in 2020 and also in 2021, with a record demand shock along with excess supply created by internal dispute among OPEC+ members. In March 2020, a dispute between Saudi Arabia and Russia sparked oil price volatility, which continued during 2021, as demand for oil surged, thereby bringing the oil price to its highest since 2014. In addition, the COVID-19 pandemic has led to unprecedented changes in demand for oil.

 

A decline in sugar prices could have an adverse effect on the financial performance of our sugarcane businesses.

 

Substantially all of our revenue is derived from a small number of customers, and, besides that, we currently face a risk of default by our main customer, which may adversely affect our business, financial condition and results of operations.

 

We currently sell a substantial portion of our total crop production to a small number of customers who have considerable bargaining power. For instance, in the year ended June 30, 2021, three of our customers were responsible for 49.2% of our revenue, and each of these three customers was responsible for at least 10% of our revenue. Of these three customers, two were responsible for 99% of our revenue in the sugarcane segment, and one was responsible for 24% of our revenue in the grains segment. Comparatively, in the year ended June 30, 2020, four of our customers were responsible for 72.8% of our revenue, and each of these four customers was responsible for at least 10% of our revenue. Of these four customers, two were responsible for 100% of our revenue in the sugarcane segment, and two were responsible for 61.2% of our revenue in the grains segment. See Note 20 to our financial statements included elsewhere in this annual report.

 

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Furthermore, we entered into a supply contract and a rural partnership agreement with Brenco – Companhia Brasileira de Energia Renovável – Em Recuperação Judicial (“Brenco”), which is controlled by Novonor S.A. – Em Recuperação Judicial (formerly known as Odebrecht S.A.), pursuant to which we currently supply them with 100% of our sugarcane production from Alto Taquari, Araucária and Partnership III farms. The term of this supply contract covers two full crop cycles, which consists of six crop years and five harvests, and therefore is scheduled to expire in crop year 2021/2022. The term of this rural partnership agreement covers a total area of 5,624 hectares, which we will explore and operate until March 31, 2026.

 

In addition, we entered into a supply contract and a rural partnership agreement with Agro Pecuária e Industrial Serra Grande Ltda. (“Agro Serra”), pursuant to which we currently supply them with 100% of our sugarcane production from São José farm. The term of this supply contract covers at least 15 crop years, and therefore is scheduled to expire no earlier than in crop year 2032/2033, and encompasses a total area of 14,900 hectares, which we will explore and operate.

 

In addition, the strong competition between a relatively fragmented sector of agricultural producers in the internal and external markets further increases the bargaining power of our highly concentrated customer base. Thus, we may not be able to maintain or form new relationships with customers, which could have a material adverse effect on our business, financial condition and results of operations.

 

Concentration among our customer base also increases the adverse consequences to us should we lose any of our customers or if any of our customers defaults on their obligations to us, either in the form of non-payment or through a breach of any contractual provision or obligation, such as shipping failure or delays. Delays in the shipment of our products could directly affect the planning of our harvest, which could generate losses and result in additional costs to us.

 

In the year ended June 30, 2021 and as of the date hereof, Brenco has not defaulted on the payment of any receivable. However, we currently run the risk of default by Brenco, our main customer, due to the fact that its controlling shareholder, Novonor S.A. – Em Recuperação Judicial, is being investigated for corruption in the operation called “Lava Jato” (Car Wash) and the fact that Brenco filed for reorganization bankruptcy in Brazil (recuperação judicial) in May 2019. Novonor’s former CEO has been arrested and the company has been facing the following issues: difficulties to access the credit market, decrease in its business activities, acceleration of debts, among others. Please see “Item 4—Information on the Company—Business Overview—Agricultural Activities and Products—Sugarcane” for a table presenting the aging of receivables from Brenco. Brenco’s controlling shareholder has been cutting costs, which can adversely affect Brenco, its business and its ability to meet its payments due to us. In addition, in May 2019, Brenco filed for reorganization bankruptcy in Brazil (recuperação judicial). As of the date hereof, we are unable to determine the impact, if any, that the reorganization bankruptcy of Brenco in Brazil may have on the payment of receivables due to us or on the general risk of default by Brenco on its obligations. As of June 30, 2021 and as of the date of this annual report, receivables from Brenco amounted to R$13.7 million and R$29.1 million, respectively. If Brenco fails to fulfill its payment obligations of their receivables to us it could have a material adverse effect on our business, financial condition and results of operations.

 

We are dependent on third-party service providers and subject to recent changes in the Brazilian labor legal framework.

 

In addition to our own personnel, we are highly dependent on third-party contractors to develop and cultivate our agricultural properties, and to provide the machinery and equipment needed for such purposes. As a result, our future success depends on the skill, experience, knowledge and efforts of our third-party service providers. We cannot assure you that we will be able to continue to hire the desired third-party service providers for our agricultural properties or that such providers will have the ability to ensure quality agricultural production in an efficient manner, and at competitive prices. Our failure to hire the desired service providers for our agricultural properties, or their failure to provide quality services, or the revocation or termination or our failure to renew our service contracts or negotiate new contracts with other service providers at comparable prices and terms would adversely affect us.

 

Our dependence on third-party contractors also subjects us to the risk of labor claims alleging that an employment relationship exists between us and our contractors’ personnel, and that, as a result, we are secondarily liable for our contractors’ labor and social security payment obligations, lease payments or other obligations.

 

Moreover, pursuant to Brazilian environmental law, we are jointly and severally liable, together with our contractors, for all environmental damage caused by our third-party contractors, irrespective of our fault. Such obligations or our costs for defending against any such claims may be significant and could have a material adverse effect on us if we were held liable.

 

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Changes in government policies involving biofuels may adversely affect our business, financial condition and results of operations.

 

Government policies for encouraging biofuels as a response to environmental concerns have had, and are likely to continue to have, an impact on commodities prices. The nature and scope of future legislation and regulations affecting our markets are unpredictable, and we cannot assure you that current concessions, prices or market protections involving biofuels will be maintained in their current form for any period of time. Any change in the support afforded to biofuels by the United States government or any other government may result in stagnation or decline in the market prices of certain agricultural commodities and consequently the price of our agricultural properties, which may adversely affect our business, financial condition and results of operations.

 

Because we are subject to extensive environmental regulation, our business, financial condition and results of operations could be adversely affected if we are held liable for breach of such regulation.

 

Our business activities in Brazil are subject to extensive federal, state and municipal laws and regulations concerning environmental protection, which impose on us various environmental obligations, such as environmental licensing requirements, minimum standards for the release of effluents, use of agrochemicals, management of solid waste, protection of certain areas (legal reserve and permanent preservation areas), and the need for a special authorization to use water, among others. The failure to comply with such laws and regulations may subject the violator to administrative fines, mandatory interruption of activities and criminal sanctions, in addition to the obligation to rectify damages and pay environmental and third-party damage compensation, without any caps. In addition, Brazilian environmental law adopts a joint and several and strict liability system for environmental damages, which makes the polluter liable even in cases where it is not negligent and would render us jointly and severally liable for the obligations of our contractors or off-takers. If we become subject to environmental liabilities, any costs we may incur to rectify possible environmental damage would lead to a reduction in our financial resources, which would otherwise remain at our disposal for current or future strategic investment, thus causing an adverse impact on our business, financial condition and results of operations.

 

As environmental laws and their enforcement become increasingly stricter, our expenses for complying with environmental requirements are likely to increase in the future. Furthermore, the possible implementation of new regulations, changes in existing regulations or the adoption of other measures could cause the amount and frequency of our expenditures on environmental preservation to vary significantly compared to present estimates or historical costs. Any unplanned future expenses could force us to reduce or forego strategic investments and as a result could materially and adversely affect our business, financial condition and results of operations.

 

If we fail to innovate and utilize modern agricultural technologies and techniques to enhance production and yields of our acquired agricultural properties, we may be adversely affected.

 

Our business model is focused on our acquiring underdeveloped or underutilized agricultural properties and improving them by applying evolving agricultural technologies and techniques. Therefore, our strategy depends to a large extent on our ability to obtain and apply modern agricultural techniques and technologies to enhance the value of the properties we acquire. If we are unable to apply in a timely manner the most advanced technologies and farming techniques required to add value to our agricultural properties and make our products competitive and attractive to local and international investors, our business, financial condition and results of operations would be adversely affected.

 

We may experience difficulties implementing our investment projects, which may affect our growth prospects.

 

Part of our strategy with regard to our agricultural properties consists of investing in support infrastructure in order to increase the value of such agricultural properties. In implementing our investment projects, we may face a number of challenges, including: (i) failures or delays in acquiring necessary equipment or services; (ii) higher costs than those originally estimated; (iii) difficulties securing the necessary environmental and government licenses; (iv) changes in market conditions, which could render the projects less profitable than originally estimated; (v) impossibility or delays in acquiring land at attractive prices, or an increase in the land prices on account of growing demand for land by our competitors; (vi) impossibility of, and delay in identifying and acquiring land that is in compliance with Brazilian real estate property laws; (vii) lack of capacity to develop infrastructure and attract qualified labor on a timely and efficient basis; (viii) disputes and litigation relating to the land we acquire; (ix) cultural challenges deriving from the integration of new management and employees in our organization; and (x) the need to update accounting systems, administrative data and human resources. Our inability to manage these risks would adversely affect us.

  

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Property prices in Brazil could decline significantly, which could adversely affect the value of our property holdings.

 

Real estate property prices in Brazil are influenced by a wide variety of factors beyond our control, and therefore we cannot assure you that property values will continue to increase or that property prices will not decline. A significant decline in property prices in Brazil could adversely affect the value of our property holdings.

 

Failure to retain and attract qualified personnel could harm our business.

 

We are highly dependent on the services of our technical and administrative staff. If we lose any of our senior management, or require additional management personnel, we will have to attract similarly qualified administrative and technical personnel. There is significant demand for high-level, technical personnel with the skills and know-how required to operate our business, and we compete for this talent in the global market. The availability of attractive opportunities in Brazil and other countries may adversely affect our ability to hire or retain highly-qualified personnel. If we fail to attract and retain the professionals we need to expand and manage our operations, our business may be materially and adversely affected.

  

Adverse weather conditions may have an adverse impact on our agricultural properties and products and, to a lesser extent, our cattle production.

 

The occurrence of severe weather conditions, including droughts, floods, heavy rainfall, hail, frost or extremely high temperatures is unpredictable and has had and could have in the future a potentially devastating impact on our agricultural properties or production and, to a lesser extent, our cattle production. Adverse weather conditions may be exacerbated by the effects of climate change. In recent years, different regions in Brazil have been affected by extreme weather conditions, and the regions where our properties are located have also experienced high temperatures and severe drought in recent years. The effect of severe weather conditions may materially reduce the productivity of our farms, impairing our revenue and cash flow, and requiring higher levels of investment or significant increases in our operating costs, any of which could have a material and adverse impact on us.

 

Diseases may affect our crops and cattle, potentially destroying all or part of our production.

 

The occurrence and effect of diseases can be unpredictable and devastating on crops, potentially rendering useless all or a significant portion of the affected crops. The cost of preventing and treating crop disease tends to be high. For example, diseases, such as Asian soybean rust (Phakopsora pachyrhizi) and pests, like corn earworm (Helicoverpa zea) and cotton bollworm (Helicoverpa armigera), can spread and may result in lower crop yields and higher operating costs. Currently, Asian soybean rust, corn earworm and cotton bollworm can only be controlled, not eliminated.

 

Diseases affecting our cattle herds, such as tuberculosis, brucellosis and foot-and-mouth disease, can render cows unable to produce meat for human consumption. Outbreaks of cattle diseases may also result in the closure of certain important markets for our cattle products, such as the United States. Although we abide by national veterinary health guidelines, which include laboratory analyses and vaccination, to control diseases among the herds, especially foot-and-mouth disease, we cannot assure that future outbreaks of cattle diseases will not occur. A future outbreak of diseases among our cattle herds may adversely affect our cattle sales which could adversely affect our financial condition and results of operation.

 

The origination and spread of diseases may occur for many reasons beyond our control, including the failure of other producers to comply with applicable health and environmental regulations. The appearance of new diseases or the mutation or proliferation of existing diseases could damage or completely destroy our crops and cattle herds, which would materially and adversely affect our business, financial condition and results of operations.

 

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Fires and other accidents may affect our agricultural properties and adversely affect us.

 

Our operations are subject to various risks affecting our agricultural properties and agricultural installations, including destruction of farms and crops by fire and other natural disasters or events, and theft or other unexpected loss of grains or fertilizers and supplies. We could be materially and adversely affected if any of these risks were to occur.

 

Widespread uncertainties and fraud involving ownership of real estate in Brazil may adversely affect us.

 

Under Brazilian law, ownership of real estate is conveyed only upon proper registration and filing of the relevant public deeds with the Real Estate Registry Office with jurisdiction where the property is located. In certain locations in Brazil, it is frequent to come across real estate registry errors, including duplicate or fraudulent certificates of enrollment and legal challenges. Lawsuits concerning the lawful title of real estate are prevalent in Brazil and, as a result, there is a risk that such errors, fraud or challenges adversely affect our business, financial condition and results of operations, thereby causing the loss of all or substantially all of our agricultural properties.

 

We depend on international trade and economic and other conditions in our key export markets.

 

Brazil’s current agricultural production capacity is greater than the demands of its domestic agricultural market. Agriculture exports account for an increasingly significant portion of our revenue, especially as our rehabilitated farm properties gain crop production capabilities and increased yield. Therefore, our results of operations increasingly depend on political, economic and regulatory conditions in our principal export markets. The ability of our products to effectively compete in these export markets may be adversely affected by a number of factors beyond our control, including the deterioration of macroeconomic conditions, the volatility of exchange rates, the imposition of tariffs or other trade barriers or other factors in those markets such as regulations relating to the chemical content of agricultural products and safety and health regulations.

 

Due to the growing market share of Brazilian agricultural and beef products in the international markets, Brazilian exporters are increasingly being affected by tariffs and other barriers imposed by importing countries, in order to, among other things, protect local producers by limiting access of Brazilian companies to their markets. For example, the European Union imposes protective tariffs designed to mitigate the effects of Brazil’s lower production costs on local European producers. Developed countries also use direct and indirect subsidies to enhance the competitiveness of their producers in other markets.

 

Additionally, due to the ongoing COVID-19 pandemic, governments and other authorities have established certain restrictions on the freedom of movement of individuals and business operations, including travel bans, which led to supply chain disruptions and border closures. Other measures, such as the restriction on imports or closures of ports, airports or any ports of entry, or border closures may have a material adverse effect on our business and results of operations. See “—We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations.”

 

The adoption of measures by a given country or region, such as restrictions, import quotas or suspension of imports could substantially affect the export volume of agricultural products and, consequently, our results of operations.

 

In July 2018, the U.S. and China began imposing tariffs on approximately $34 billion of each other’s exports. Subsequently, the U.S. imposed tariffs on an additional $216 billion in Chinese goods, and China imposed tariffs on an additional $76 billion worth of U.S goods. Negotiations to resolve the trade dispute are currently ongoing. Continued global trade tensions may lead to the imposition of further tariffs or other future geopolitical economic developments. Future actions of the U.S. administration or other countries, including China, with respect to tariffs or international trade agreements and policies remain currently unclear. We are unable at this time to predict the outcome of the trade tensions between the United States and China. The escalation of such trade tensions between the United States and China, and the imposition of tariffs, retaliatory tariffs or other trade restrictions may result in a rebalancing of global export flows in our key export markets and an increase in global competition, which in turn could adversely affect our business, financial condition and results of operations.

 

If the competitiveness of our products in one or more of our significant markets were to be affected by any one of these events, we may not be able to reallocate our products to other markets on comparable terms, which could therefore adversely affect our business, financial condition and results of operations.

 

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A worldwide economic downturn could weaken demand for our products and lead to lower prices.

 

Demand for our products may be affected by international, national and local economic conditions that are beyond our control. Adverse changes in the perceived or actual economic conditions, such as higher fuel prices, higher interest rates, stock and real estate market declines and associated volatility, more restrictive credit markets, higher taxes, and changes in governmental policies could reduce the level of demand for, or the prices of, our products. We cannot predict the duration or magnitude of a downturn or the timing or strength of economic recovery following the adverse effects of the COVID-19 pandemic. If a downturn were to continue for an extended period of time or worsen, we could experience a prolonged period of decreased demand and prices. In addition, economic downturns may adversely affect our suppliers, which can result in disruptions to our operations and financial losses. Moreover, the deterioration of global economic conditions, particularly in relevant economies, such as the United States, China and Europe, as a result of the COVID-19 pandemic, may ultimately decrease the demand for our products and have a material adverse effect on our financial condition and results of operations. See “—We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations.”

 

Fluctuations in the value of the Brazilian real in relation to the U.S. dollar could adversely affect us.

 

Foreign exchange fluctuations, particularly of the Brazilian real against the U.S. dollar, may significantly affect our results of operations given that: (1) our products and the basic supplies used in our production are traded internationally; (2) soybean prices are defined based on prices prevalent on the Chicago Board of Trade, or CBOT; and (3) most markets are served by several suppliers from different countries, and competitiveness of farm products abroad may increase in relation to ours in light of the appreciation of the Brazilian currency in relation to the U.S. dollar. Fluctuations in the value of the real in relation to the U.S. dollar could impact our export revenue, our sales in U.S. dollars in the Brazilian market and our financial expenses and operating costs, which may adversely affect our business, financial condition and results of operations.

   

The real has suffered frequent depreciations and appreciations in relation to the U.S. dollar and other foreign currencies during the past decade. The Brazilian government has in the past utilized different exchange rate regimes, including sudden devaluations, periodic mini devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. Since 1999, Brazil has adopted a floating exchange rate system with interventions by the Central Bank in buying or selling foreign currency. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian real and the U.S. dollar and other currencies. The devaluations in more recent periods resulted in significant fluctuations in the exchange rates of the real against the U.S. dollar and other currencies.

 

In 2017, the real depreciated by 1.5% against the U.S. dollar, and the real/U.S. dollar exchange rate was R$3.3080 on December 31, 2017. In 2018, the real depreciated by 17.1% against the U.S. dollar, and on December 31, 2018, the real/U.S. dollar exchange rate was R$3.8748. In 2019, the real depreciated by 0.6% against the U.S. dollar, and on December 31, 2019, the real/U.S. dollar exchange rate was R$4.0307. In 2020, the real depreciated by 29.2% against the U.S. dollar, and on December 31, 2020, the real/U.S. dollar exchange rate was R$5.1967. In 2021 (until September 30, 2021), the real depreciated by 4.7% against the U.S. dollar, and the real/U.S. dollar exchange rate was R$5.4394 per US$1.00 on September 30, 2021. There can be no assurance that the real will not depreciate or appreciate against the U.S. dollar in the future.

 

We also hold derivative financial instruments to hedge risks relating to revenue from exports and operating costs denominated in foreign currencies. If we fail to manage these instruments properly, we may be adversely affected by our exposure to these risks, which may have a material adverse effect on our financial condition and results of operations.

 

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Our business is seasonal, and our revenue may fluctuate significantly depending on the growing cycle of our crops.

 

Agribusiness operations are predominantly seasonal in nature. In Brazil, the harvest of soybean and corn generally occurs from February to June. The annual sugarcane harvest period in Brazil normally begins in April and ends in November of each year. Therefore, our results of operations are likely to continue to significantly fluctuate between the planting and harvest periods of each crop, which cause fluctuations in our cash flows as a result of disparities between our revenue stream and our fixed expenses. In addition, seasonality creates limited windows of opportunity for our producers to complete required tasks at each stage of crop cultivation. Should events such as adverse weather conditions (including deluges of rain as has recently been the case throughout Brazil) or transportation interruptions occur during these seasonal windows, we may face reduced revenue without an opportunity to recover until the following crop’s planting. Finally, because of the effects of seasonality, our quarterly results may not be indicative of our annual results.

 

Our growth plan will require additional capital, which may not be available on terms and conditions acceptable to us, or at all.

 

Our operations require a significant amount of capital. We may need to seek additional capital by issuing shares or debt instruments, or by incurring indebtedness. Our ability to raise capital will depend on our future profitability, which is currently uncertain, and on political and economic conditions in Brazil and the international agricultural and real estate markets. Depending on these and other factors, many of which are beyond our control, additional capital may not be available at all or on conditions that are favorable or acceptable to us. If we are required to finance our activities through indebtedness, it is likely that the terms of that debt will impose upon us obligations or covenants, financial or otherwise, that could restrict our operational flexibility. Should we fail to raise additional capital under conditions that are acceptable to us, our business, financial condition and results of operations could be adversely affected.

 

We plan to continue to use financial derivative instruments, which may result in substantial losses.

 

We plan to continue to use derivative financial instruments, mainly commodity hedge derivatives, foreign exchange derivatives and exchange rate swaps. If we enter into such hedging agreements and future prices of the underlying commodities differ from our expectations, we may incur substantial losses which could have an adverse effect on our financial condition and results of operations.

 

Furthermore, our hedging strategies may not properly take account of the effects of foreign exchange or commodity variations on our financial position. On entering into forward exchange and commodity agreements, we will be subject to the risk that our counterparties could fail to meet the conditions of such agreements. We may not be able to receive compensation for losses and damages from any defaulting counterparty through legal remedies, on account of laws protecting against bankruptcy or other similar protections for insolvent debtors, foreign laws restricting cross-border legal remedies, or for other reasons, which may adversely affect our business, financial condition and results of operations.

  

We may not be successful in our future partnerships and strategic relationships.

 

We have entered into strategic partnerships and alliances in order to benefit from certain business opportunities. We cannot predict if such strategic partnerships and alliances will be successful or if more partnerships and alliances will take place. Our ability to successfully expand our business by means of strategic partnerships and alliances depends on various factors, including our ability to negotiate favorable conditions for such partnerships and alliances, in addition to factors beyond our control, such as our partners’ compliance with obligations arising from the partnership. Furthermore, our expectations regarding the benefits of these partnerships may not materialize. If we are unable to develop successful strategic partnerships and alliances, we could also be adversely affected.

 

Cresud, our controlling shareholder, and certain members of our board of directors may have interests that differ from those of our other shareholders.

 

As of September 30, 2021, Cresud held 39.0% of our common shares. Cresud has other numerous investments and may have other priorities that may conflict with those of our other shareholders, and as a result thereof, significant conflicts of interest may arise between Cresud and our other shareholders. In addition, five of our nine directors have been nominated by Cresud and certain members of our management, including our Chief Administrative Officer and Investor Relation Officer, were previously employed by Cresud. This situation may give rise to actual or apparent conflicts of interest as such directors and officers may have fiduciary duties or other interests owed to both us and Cresud or any of its affiliates. It may also limit the ability of such directors and officers to participate in certain matters.

 

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In addition, as a result of Cresud’s ownership interest in us, conflicts of interest could arise with respect to transactions involving our ongoing business activities, and the resolution of these conflicts may not be favorable to us. Specifically, business opportunities, including but not limited to potential targets for rural property acquisitions, may be attractive to both Cresud and us. We may not be able to resolve any potential conflicts and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.

  

Increases in the price of raw materials and oil may adversely affect us.

 

Our agricultural properties are located in Brazil’s savannah region, a location where the soil is mostly acidic and not very fertile, requiring the use of lime and fertilizers. Our operations require other raw materials such as pesticides and seeds which we acquire from local and international suppliers. We do not have long-term supply contracts for these raw materials and therefore are exposed to the risk of cost increases. A significant increase in the price of lime, fertilizers or other raw materials we use would likely reduce our profitability or otherwise adversely affect our business operations as these are not costs that can readily be passed on to our customers. In addition, certain of our production costs, including fertilizers and the cost of leasing agricultural machinery, are linked to the international price of oil and its derivatives. Therefore, if the price of oil increases significantly, our results of operations could be adversely affected.

 

Delays or failures in the delivery of raw materials used by us and our suppliers could have an adverse effect on us.

 

We depend on suppliers to provide us with fertilizers, seeds, other raw materials and machinery services. Possible delays in the delivery of such items may delay our planting efforts until we are able to establish agreements with other suppliers, or may delay our harvest in case of delay in delivery of machinery. Accordingly, any delays, failures or defects in the delivery of raw materials or inputs or with regard to the provision of services to us by our suppliers could adversely affect our business and results of operations. See “—Our business, financial condition and results of operations may be adversely affected by lack of transportation, storage and processing infrastructure in Brazil, which represents an important challenge for the Brazilian agricultural and agricultural real estate sectors.”

 

Certain of our agricultural products contain genetically modified organisms (GMOs), and risks associated with GMOs remain uncertain, which may result in increased regulatory scrutiny and harm our business and financial condition.

 

The totality of our products, including soybean and corn, contain genetically modified organisms, or GMOs in varying proportions depending on the crop year. Production and consumption of GMOs remain controversial, and adverse publicity and consumer resistance have led to the adoption of certain governmental regulations limiting sales of GMO products in important markets including the European Union. If GMOs were determined to present risks to human health or to the environment, demand for our GMO products could collapse, and we could face potentially significant liability for harm caused by such products, all of which could materially and adversely affect our business, financial condition and results of operations.

 

In 2018, a Brazilian trial court ruled that new products containing “glyphosate” – a herbicide widely used in soybeans and others crops – were prohibited from being registered in Brazil, and existing registrations would be suspended until the government re-evaluates their toxicity. This decision also suspended the registration of others chemicals, such as the insecticide abamectin and the fungicide thiram. According to the Brazilian Agriculture Minister, this decision would be a disaster for the agricultural industry and, for this reason, the decision was subject to multiple appeals. On September 3, 2018, a court of appeals reversed the trial court’s decision. Currently, the use of glyphosate is permitted. However, we are unable to guarantee that it will continue to be allowed.

 

The prohibition of the use of glyphosate to control weed infestation could compromise no-till farming, which is important for productivity and sustainability, and lead to increased use of other products for pest control. Currently, there is no alternative in Brazil to replace glyphosate. Similar products have a high cost and are not readily available to meet the demand for glyphosate. As a result, our production costs could increase, and our productivity could be significantly impacted, which could result in lower production margins.

 

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Our business, financial condition and results of operations may be adversely affected by lack of transportation, storage and processing infrastructure in Brazil, which represents an important challenge for the Brazilian agricultural and agricultural real estate sectors.

 

We depend on efficient access to transportation and port infrastructure for the growth of Brazilian agriculture and our operations. We may decide to acquire agricultural properties in areas where existing transportation infrastructure is inadequate and where improvements may be required to make our agricultural production more accessible to export centers at competitive prices. A substantial portion of Brazilian agricultural production is currently transported by trucks, which is significantly more expensive than transportation by rail cars. Given that our dependence on road transportation prevents us from being considered a low-cost producer, our ability to compete on the world market may be impaired, especially as the price of fuel increases. As a result, we may not be able to secure efficient transportation for our production to reach major markets in a cost-efficient manner or at all, which may adversely affect our business, financial condition and results of operations.

 

In addition, in May 2018, Brazil faced a widespread truck drivers’ strike, which caused a nationwide transportation paralysis, highway blockades, cargo delays, shortages of food, supplies and fuel in Brazil. If a widespread strike or similar disruptive event happens again, it could adversely affect the logistics sector as whole and our business, financial condition and results of operations.

 

Disruptions may also be caused by the spread of infectious disease, such as COVID-19, or by a deterioration in labor or union relations, disputes or work stoppages or other labor-related developments affecting us and our suppliers and distributors. See “—We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations.”

 

Competition in the markets for our products may materially and adversely affect us.

 

We face significant domestic and international competition in each of our markets and in many of our production lines. The global market for agricultural products is highly competitive and sensitive to changes in industrial capacity, product inventories and cyclical changes in the world economy, any one or more of which may affect to a significant degree the selling price of our products and therefore our profitability. Since many of our products are agricultural commodities, such products compete in international markets almost exclusively based on price. Many other producers of these commodities are larger than us and have more significant financial and other resources. Furthermore, many other producers receive subsidies in their respective countries that generally are not available in Brazil. Such subsidies may afford producers lower production costs or enable them to operate in an environment with sharp price reductions, constrained margins and operating losses for longer periods. Any increased competitive pressure with respect to our products could materially and adversely affect our business, financial condition and results of operations.

 

Social movements may affect the use of our agricultural properties or cause damage to them.

 

Social movements such as the Landless Rural Workers’ Movement (Movimento dos Trabalhadores Rurais Sem Terra) and the Pastoral Land Commission (Comissão Pastoral da Terra) are active in Brazil and advocate land reform and property redistribution by the Brazilian government.

 

Invasion and occupation of agricultural land by large numbers of people is a common practice among the members of such movements and, in certain regions, including those where we currently invest, remedies such as police protection or eviction procedures are inadequate or non-existent. As a result, we cannot assure you that our agricultural properties will not be subject to invasion or occupation by any social movement. Any invasion or occupation may materially impair the use of our lands and adversely affect our business, financial condition and results of operations.

 

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We made investments in farmland in Bolivia and Paraguay, and we may possibly make investments in other countries in and outside Latin America, in which case we would be subject to the associated economic, legal, political and regulatory risks.

 

Currently, we conduct our activities in Brazil, Bolivia and Paraguay. We are considering expanding into other countries in and outside Latin America, but currently have no definitive commitments or specific plans with respect thereto. In the future, we may expand our activities into other countries in Latin America or elsewhere if we decide that international expansion would be appropriate to achieve our objectives. The success in other countries of our business strategy and business model that we apply in Brazil would be subject to a high level of uncertainty and depend on numerous factors beyond our control. Therefore, we cannot assure you that any such expansion would be profitable or enable us to obtain the expected returns on our investments, or even recover our investments. Any international expansion of our activities would be subject to political, economic and regulatory risks in the relevant country and to risks inherent to the management of a transnational company, including:

 

  challenges posed by distance, language, local business practices and cultural differences (i.e. lack of financing; longer payment cycles in the relevant country; difficulties in forming partnerships or strategic alliances with local parties; conflicting or redundant practices in respect to tax, regulatory, legal and administrative aspects);

 

  negative effects of currency fluctuations or the imposition of exchange controls or restrictions on repatriation of capital;

 

  adverse changes in laws and local policies, particularly those relating to import tariffs, labor practices, environment, investment, acquisition of agricultural property by foreign companies or companies controlled by foreigners;

 

  difficulty of enforcement of contracts and collection or enforcement of debts, or difficulties or restrictions imposed by local courts;

 

  expropriation and imposition of legal or administrative limitations to the exercise of property rights as a result of changes in laws or applicable regulations;

 

  difficulty in obtaining licenses, permits or other approvals from local government authorities;

 

  political disputes, social unrest and deteriorating local economic conditions;

 

  transnational conflicts or disputes involving Brazil and the relevant country; and

 

  terrorism or military conflicts; and natural disasters, epidemics, riots and insurrections.
     

Our inability to recognize and respond to these differences, challenges and risks could adversely affect any operations we may undertake in markets outside of Brazil, which could have a material adverse effect on our business, financial condition and results of operations.

 

Unauthorized disclosure, or loss of intellectual property or other sensitive business or personal information, or disruption in information technology by cyber-attacks, as well as our failure to comply with existing and future laws and regulations relating to data privacy and data security can subject us to penalties or liability and can adversely affect our operations, reputation and financial results.

 

We collect, store, process and use certain confidential information and other user data in connection with our business operations. We must ensure that any processing, collection, use, storage, dissemination, transfer and disposal of data for which we are responsible complies with relevant data protection and privacy laws. We rely on commercially available systems, software, tools and monitoring to provide secure processing, transmission and storage of confidential information, such as customer, employee, company and other personal information.

 

Data protection and privacy laws are developing to take into account the changes in cultural and consumer attitudes towards the protection of personal data. For example, on August 14, 2018, Brazil enacted Law No. 13,709/2018 (Lei Geral de Proteção de Dados, or the LGPD), a comprehensive data protection law establishing general principles and obligations that apply across multiple economic sectors and contractual relationships. The LGPD establishes detailed rules for the collection, use, processing and storage of personal data and will affect all economic sectors, including the relationship between customers and suppliers of goods and services, employers and employees, and other relationships in which personal data is collected, whether in a digital or physical manner. The LGPD entered into force on September 18, 2020.

 

As we seek to expand our business and operations, we expect that we will be increasingly subject to laws and regulations relating to the collection, use, retention, security, and transfer of information, including the personally identifiable information of our employees and customers. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that will materially and adversely affect our business. If there are breaches of the LGPD obligations, or of other data privacy laws and regulations, as the case may be, we could face significant administrative and monetary sanctions as well as reputational damage, which could have a material adverse effect on our operations, financial condition and prospects.

 

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In addition, despite the security measures that we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events.

 

See also “—We were the target of a cybersecurity incident that disrupted our systems”.

 

We were the target of a cybersecurity incident that disrupted our systems.

 

In October 2019, we experienced a cybersecurity incident, in which certain of our network and computer systems and data became temporarily unavailable. We have no reason to believe that such incident resulted in the unauthorized disclosure of confidential information. Any security incident, or any perceived failure involving the misappropriation, loss or other unauthorized disclosure of confidential information, as well as any failure or perceived failure to comply with laws, policies, legal obligations or industry standards regarding data privacy and protection, whether by us or our service providers, could damage our reputation, expose us to litigation risk and liability, subject us to negative publicity, disrupt our operations and harm our business. We cannot assure you that our security measures, or those put in place by our service providers, will be sufficient to prevent future security breaches or incidents, which may directly or indirectly affect us, or that our failure to prevent them will not have a material adverse effect on our business, results of operations or financial condition.

  

Cyber-attacks or security breaches could compromise confidential, business and other critical information, cause a disruption in our operations or harm our reputation, as certain of our operations are dependent on information technology and telecommunication systems and services. Information assets, including intellectual property, personal data and other business-sensitive critical information are an attractive asset to cyber criminals, cyberterrorism or other external agents. A significant cyber-attack, a human error, including from our employees and partners, or obsolescence of technology could result in the loss of critical business information and adversely affect our operations and results of operations.

 

We continuously monitor and develop our information technology networks and infrastructure. We also conduct annual tests to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a material impact on us. However, we cannot assure you that these measures will be effective in protecting us against future cyberattacks and other related breaches of our information technology systems.

 

Our risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As cyber threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities that are discovered in the future. In addition, cyber-attacks could result in important remediation costs, increased cyber security costs, lost revenues due to disruption of activities, litigation and reputational harm affecting customer and investor confidence, which ultimately could materially adversely affect our business, financial condition and results of operations.

 

Risks Relating to Brazil

 

The measures taken or to be implemented by the Brazilian government in response to the COVID-19 pandemic may have an adverse effect on our business and operations.

 

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Brazilian federal, state and municipal governments and other authorities have adopted a number of measures to address the potential impacts of the COVID-19 pandemic, including:

 

  to contain or delay the spread of COVID-19, the Brazilian Ministry of Health (Ministério da Saúde), as well as several state and municipal authorities have adopted or recommended social distancing measures;

 

  in March 2020, the Brazilian federal government created a Crisis Committee to Monitor the Impacts of COVID-19 in Brazil. Since then, it has announced several measures to adress the effects of the COVID-19 pandemic in Brazil

 

  the Brazilian National Congress has held discussions regarding several measures to increase the Brazilian government’s revenues, such as imposing new taxes, revoking tax benefits and increasing the rates of current taxes; and

 

  a revision of tax benefits and increase of the rates of current taxes;

 

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It is also possible that our commercial agreements, including rural partnership agreements, could be affected by the adverse impacts derived from the COVID-19 pandemic, since the parties thereto may be unable to comply with their contractual obligations. The COVID-19 pandemic would most likely be considered as an act of God or force majeure event by Brazilian courts. If our agreements are litigated, parties thereto could try to justify nonperformance and request: (i) termination without penalties; (ii) adjustment or release from contractual obligations; (iii) adjustment or release from the effects of arrears; and (iv) adjustment or release from penalties for breach of contract, which, could have a material adverse effect on our business and operations.

 

In addition, there is considerable uncertainty regarding the possible outcomes of the COVID-19 pandemic. We cannot predict what other measures will be implemented to mitigate the impacts of COVID-19 and whether they will lead to restrictions or limitations that could affect our business operations. The deterioration of global economic conditions as a result of the COVID-19 pandemic may decrease demand for our products and have a material adverse effect on our business, financial condition and results of operations. The COVID-19 pandemic may also heighten several of the other risk factors described in this annual report.

  

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy, which, together with Brazilian political and economic conditions, may adversely affect us.

 

We may be adversely affected by the following factors, as well as the Brazilian federal government’s response to these factors:

 

  economic and social instability;

 

  increase in interest rates;

 

  exchange controls and restrictions on remittances abroad;

 

  restrictions and taxes on agricultural exports;

 

  exchange rate fluctuations;

 

  inflation;

 

  volatility and liquidity in domestic capital and credit markets;

 

  expansion or contraction of the Brazilian economy, as measured by GDP growth rates;

 

  allegations of corruption against political parties, elected officials or other public officials, including allegations made in relation to the Lava Jato investigation;

 

 

government measures aimed at controlling the COVID-19 pandemic;

 

  government policies related to our sector; and

 

  fiscal or monetary policy and amendments to tax legislation; and other political, diplomatic, social or economic developments in or affecting Brazil.

 

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Historically, the Brazilian government has frequently intervened in the Brazilian economy and has occasionally made significant changes in economic policies and regulations, including, among others, the enactment of new tax laws, changes in monetary, fiscal and tax policies, currency devaluations, capital controls and limits on imports.

 

The Brazilian economy has been experiencing a slowdown. The Brazilian GDP decreased 3.6% in 2016, increased 1.0% in 2017, increased 1.1% in 2018, increased 1.1% in 2019, decreased 4.1% in 2020 and increased 6.4% in the first six months of 2021.

 

Inflation, unemployment and interest rates have increased more recently, and the Brazilian real has weakened significantly in relation to the U.S. dollar. The market expectations for 2021 are that the Brazilian economy will grow, partially recovering from the contraction observed during 2020 as a consequence of the COVID-19 pandemic. Adverse economic conditions in Brazil may materially and adversely affect our business, financial condition and results of operations.

 

As a result of investigations carried out in connection with the Lava Jato (Car Wash) operation into corruption in Brazil, a number of senior politicians, including congressmen, and executive officers of certain of the major state-owned companies in Brazil have resigned or been arrested, while others are being investigated for allegations of unethical and illegal conduct. The matters that have come, and may continue to come, to light as a result of, or in connection with, the Lava Jato operation and other similar operations have adversely affected, and we expect that they will continue to adversely affect, the Brazilian economy, markets and trading prices of securities issued by Brazilian issuers in the near future.

 

The ultimate outcome of these investigations is uncertain, but they have already had an adverse effect on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy, the political environment and the Brazilian capital markets. The development of these investigations has affected and may continue to adversely affect us. We cannot predict if these investigations will bring further political or economic instability to Brazil, or if new allegations will be raised against high-level members of the Brazilian federal government. In addition, we cannot predict the results of these investigations, nor their effects on the Brazilian economy.

 

The ongoing economic uncertainty and political instability in Brazil may adversely affect the Brazilian economy, our business, and the market price of our shares and ADSs.

 

Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.

 

In recent years, there has been significant political turmoil in connection with the impeachment of the former president (who was removed from office in August 2016) and ongoing investigations of her successor (who left office in January 2019) as part of the ongoing “Lava Jato” investigations. Presidential elections were held in Brazil in October 2018. We cannot predict which policies the new President of Brazil, who assumed office on January 1, 2019, may adopt or change during his mandate or the effect that any such policies might have on our business and on the Brazilian economy. Any such new policies or changes to current policies may have a material adverse effect on us. The political uncertainty resulting from the presidential elections and the transition to a new government may have an adverse effect on our business, results of operations and financial condition and the price of our shares and ADSs.

 

Furthermore, Brazil’s federal budget has been in deficit since 2014. Similarly, the governments of Brazil’s constituent states are also facing fiscal concerns due to their high debt burdens, declining revenues and inflexible expenditures. While the Brazilian Congress has approved a ceiling on government spending that will limit primary public expenditure growth to the prior year’s inflation for a period of at least 10 years, local and foreign investors believe that fiscal reforms, and in particular a reform of Brazil’s pension system, will be critical for Brazil to comply with the spending limit. As of the date of this annual report, discussions in the Brazilian Congress relating to such reforms remain ongoing. Diminished confidence in the Brazilian government’s budgetary condition and fiscal stance could result in downgrades of Brazil’s sovereign debt by credit rating agencies, negatively impact Brazil’s economy, lead to further depreciation of the real and an increase in inflation and interest rates, thus adversely affecting our business, results of operations and financial condition.

 

Uncertainty about the Brazilian government’s implementation of changes in policies or regulations that affect such implementation may contribute to economic instability in Brazil and increase the volatility of securities issued abroad by Brazilian companies, including our securities. Any of the above factors may create additional political uncertainty, adversely affect the Brazilian economy, our business, financial condition, results of operations and the market price of our shares and ADSs. 

 

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Inflation, coupled with the Brazilian government’s measures to fight inflation, may hinder Brazilian economic growth and increase interest rates, which could have a material adverse effect on us.

 

Brazil has in the past experienced significantly high rates of inflation. As a result, the Brazilian government adopted monetary policies that resulted in Brazilian interest rates being among the highest in the world. The Central Bank’s Monetary Policy Committee (Comitê de Política Monetária do Banco Central, or COPOM), establishes an official interest rate target for the Brazilian financial system based on the level of economic growth, inflation rate and other economic indicators in Brazil. Between 2004 and 2010, the official Brazilian interest rate varied from 19.75% to 8.75% per year. In response to an increase in inflation in 2010, the Brazilian government increased the official Brazilian interest rate, the SELIC rate, which was 10.75% per year as or December 31, 2010. The SELIC rate has increased and decreased since then and, as of June 30, 2019, it was 6.50% per year. The inflation rates, as measured by the General Market Price Index (Índice Geral de Preços–Mercado), or IGP-M, and calculated by Fundação Getúlio Vargas, or FGV, were (0.52)% in 2017, 7.54% in 2018, 7.30% in 2019 and 23.14% in 2020. Cumulative inflation in the first six months of 2021, calculated by the same index, was 15.08%. The inflation rates, as measured by the broad consumer price index (Índice de Preços ao Consumidor Amplo), or IPCA, published by IBGE were (0.23)% in 2017, 1.26% in 2018, 0.01% in 2019 and 0.26% in 2020. Cumulative inflation in the first six months of 2021, calculated by the same index, was 3.77%.

 

Inflation and the government measures to fight inflation have had and may continue to have significant effects on the Brazilian economy and our business. In addition, the Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and slowing economic growth. On the other hand, an easing of monetary policies of the Brazilian government may trigger increases in inflation. In the event of an increase in inflation, we may not be able to adjust our daily rates to offset the effects of inflation on our cost structure, which may materially and adversely affect us.

 

An increase in interest rates may have a significant adverse effect on us. In addition, as of June 30, 2021, certain of our loans were subject to interest rate fluctuations, such as the Brazilian long-term interest rate (Taxa de Juros de Longo Prazo, or TJLP), and the interbank deposit rate (Certificados de Depósitos Interbancários), or CDI. In the event of an abrupt increase in interest rates, our ability to comply with our financial obligations may be materially and adversely affected.

 

A deterioration in general economic and market conditions or the perception of risk in other countries, principally in emerging countries or the United States, may have a negative impact on the Brazilian economy and us.

 

Economic and market conditions in other countries, including United States and Latin American and other emerging market countries, may affect the Brazilian economy and the market for securities issued by Brazilian companies. Although economic conditions in these countries may differ significantly from those in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises in other emerging market countries could dampen investor enthusiasm for securities of Brazilian issuers, including ours, which could adversely affect the market price of our common shares. In the past, the adverse development of economic conditions in emerging markets resulted in a significant flow of funds out of the country and a decrease in the quantity of foreign capital invested in Brazil. Changes in the prices of securities of public companies, lack of available credit, reductions in spending, general slowdown of the global economy, exchange rate instability and inflationary pressure may adversely affect, directly or indirectly, the Brazilian economy and securities market. Global economic downturns and related instability in the international financial system have had, and may continue to have, a negative effect on economic growth in Brazil. Global economic downturns reduce the availability of liquidity and credit to fund the continuation and expansion of business operations worldwide.

 

In addition, the Brazilian economy is affected by international economic and market conditions generally, especially economic conditions in the United States. Share prices on B3 S.A. – Brasil, Bolsa, Balcão, or B3, for example, have historically been sensitive to fluctuations in U.S. interest rates and the behavior of the major U.S. stock indexes. An increase in interest rates in other countries, especially the United States, may reduce global liquidity and investors’ interest in the Brazilian capital markets, adversely affecting the price of our common shares.

 

21

 

 

Risks Relating to our American Depositary Shares and Common Shares

 

A holder of our American Depositary Shares may face disadvantages compared to a holder of our common shares when attempting to exercise voting rights.

 

Holders of our American Depositary Shares, or ADSs, may instruct the depositary to vote the common shares underlying the ADSs. For the depositary to follow the voting instructions, it must receive them on or before the date specified in our voting materials. The depositary must try, as far as practical, subject to Brazilian law and our articles of association, to vote the common shares as instructed. In most cases, if the ADS holder does not give instructions to the depositary, it may vote the common shares in favor of proposals supported by our board of directors, or, when practicable and permitted, give a discretionary proxy to a person designated by us. We cannot be certain that ADS holders will receive voting materials in time to ensure that they can instruct the depositary to vote the underlying common shares. Also, the depositary is not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that ADS holders may not be able to exercise their right to vote and there may be nothing they can do if their common shares or other deposited securities are not voted as requested.

  

Holders of our common shares or ADSs may not receive any dividends or interest on shareholders’ equity.

 

According to our bylaws, we must pay our shareholders at least 25% of our annual net income as dividends or interest on shareholders’ equity, as calculated and adjusted under Brazilian corporate law. This adjusted net income may be capitalized, used to absorb losses or otherwise retained as allowed under Brazilian corporate law and may not be available to be paid as dividends or interest on shareholders’ equity.

 

Additionally, Brazilian corporate law allows a publicly-traded company like ours to suspend the mandatory distribution of dividends in any particular year if our board of directors informs our shareholders that such distributions would be inadvisable in view of our financial condition or cash availability. Holders of our common shares or ADSs may not receive any dividends or interest on shareholders’ equity in any given year if our board of directors makes such a determination or if our operations fail to generate net income.

 

Holders of our common shares or ADSs in the United States may not be entitled to the same preemptive rights as Brazilian shareholders, pursuant to Brazilian law, in the subscription of shares resulting from capital increases made by us.

 

Under Brazilian law, if we issue new shares in exchange for cash or assets as part of a capital increase, subject to certain exceptions, we must grant our shareholders preemptive rights at the time of the subscription of shares, corresponding to their respective interest in our share capital, allowing them to maintain their existing shareholding percentage. We may not legally be permitted to allow holders of our common shares or ADSs in the United States to exercise any preemptive rights in any future capital increase unless (i) we file a registration statement for an offering of shares resulting from the capital increase with the SEC, or (ii) the offering of shares resulting from the capital increase qualifies for an exemption from the registration requirements of the Securities Act. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement for an offering of shares with the SEC and any other factors that we consider important in determining whether to file such a registration statement. We cannot assure the holders of our common shares or ADSs in the United States that we will file a registration statement with the SEC to allow them to participate in any of our capital increases. As a result, the equity interest of such holders in our company may be diluted.

 

If holders of our ADSs exchange them for common shares, they may risk temporarily losing, or being limited in, the ability to remit foreign currency abroad and certain Brazilian tax advantages.

 

The Brazilian custodian for the common shares underlying our ADSs must obtain an electronic registration number with the Central Bank to allow the depositary to remit U.S. dollars abroad. ADS holders benefit from the electronic certificate of foreign capital registration from the Central Bank obtained by the custodian for the depositary, which permits it to convert dividends and other distributions with respect to the common shares into U.S. dollars and remit the proceeds of such conversion abroad. If holders of our ADSs decide to exchange them for the underlying common shares, they will only be entitled to rely on the custodian’s certificate of registration with the Central Bank for five business days after the date of the exchange. Thereafter, they will be unable to remit U.S. dollars abroad unless they obtain a new electronic certificate of foreign capital registration in connection with the common shares, which may result in expenses and may cause delays in receiving distributions. See “Item 10—Additional Information—Exchange Controls.”

 

Also, if holders of our ADSs that exchange them for our common shares do not qualify under the foreign investment regulations, they will generally be subject to less favorable tax treatment of dividends and distribution on, and the proceeds from any sale of, our common shares. See “Item 10—Additional Information—Exchange Controls” and “Item 10—Additional Information—Taxation—Brazilian Tax Considerations.”

 

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Holders of our ADSs may face difficulties in protecting their interests because, as a Brazilian company, we are subject to different corporate rules and regulations and our shareholders may have fewer and less well-defined rights.

 

Holders of our ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our bylaws and Brazilian corporate law.

 

Our corporate affairs are governed by our bylaws and Brazilian corporate law, which differ from the requirements that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Even if a holder of our ADSs surrenders its ADSs and becomes a direct shareholder, its rights as a holder of our common shares under Brazilian corporate law to protect its interests relative to actions by our board of directors may be fewer and less well-defined than under the laws of those other jurisdictions.

 

Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

 

We are organized under the laws of Brazil, and certain of our executive officers and our independent registered public accountants reside or are based in Brazil. Most of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of our ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. In addition, because substantially all of our assets and all of our directors and officers reside outside the United States, any judgment obtained in the United States against us or any of our directors or officers may not be collectible within the United States. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our board of directors or executive officers than would shareholders of a U.S. corporation.

 

In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our common shares and ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than those of a public company in the United States or in certain other countries.

 

Our status as a foreign private issuer allows us to follow local corporate governance practices, which may limit the protections afforded to investors.

 

We are a foreign private issuer, as defined by the SEC for purposes of the Exchange Act. As a result, for so long as we remain a foreign private issuer, we will be exempt from most of the corporate governance requirements of stock exchanges located in the United States; accordingly, you will not be provided with the benefits or have the same protections afforded to shareholders of U.S. public companies.

 

The standards applicable to us are considerably different from the standards applied to U.S. domestic issuers. Although Rule 10A-3 under the Exchange Act generally requires that a listed company have an audit committee of its board of directors composed solely of independent directors, as a foreign private issuer, we are relying on a general exemption from this requirement that is available to us as a result of the features of Brazilian law applicable to our fiscal council. In addition, we are not required to, among other things:

 

  have a majority of independent members on our board of directors;

 

  have a compensation committee or a nominating/corporate governance committee of our board of directors; and

 

  have regularly scheduled executive sessions with only non-management directors; or have at least one executive session of solely independent directors each year.

 

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We are an emerging growth company within the meaning of the Exchange Act and, if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

 

We are an “emerging growth company” within the meaning of the rules under the Exchange Act. We are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with any PCAOB rules, that, if adopted in the future, would require mandatory audit firm rotation and auditor discussion and analysis pursuant to any future audit rule promulgated by the PCAOB (unless the U.S. Securities and Exchange Commission, or the SEC, determines otherwise). In addition, we are not subject to the additional level of review of our internal control over financial reporting as may occur when outside auditors attest as to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important. We will remain an emerging growth company for up to five years from the date of our initial public offering of securities under an effective registration statement under the Securities Act, though we may cease to be an emerging growth company earlier under certain circumstances.

 

We take advantage of the exemption from the auditor attestation report requirement and may decide to rely on other exemptions in the future. We do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock, and our stock price may be more volatile.

 

Brazilian tax laws may have an adverse impact on the taxes applicable to the disposition of our common shares and ADSs.

 

Under Law No. 10,833/2003, the gain on the disposition or sale of assets located in Brazil by a non-Brazilian resident, whether to another non-Brazilian resident or to a Brazilian resident, may be subject to income tax withholding in Brazil. With respect to the disposition of our common shares, as they are assets located in Brazil, a non-Brazilian resident should be subject to income tax on the gains assessed, regardless of whether the transactions are conducted in Brazil or with a Brazilian resident. With respect to our ADSs, although the matter is not entirely clear, arguably the gains realized by a non-Brazilian resident upon the disposition of ADSs to another non-Brazilian resident will not be taxed in Brazil, on the basis that ADSs are not “assets located in Brazil” for the purposes of Law No. 10,833/2003. We cannot assure you, however, that the Brazilian tax authorities or the Brazilian courts will agree with this interpretation. As a result, gains on a disposition of ADSs by a non-Brazilian resident to a Brazilian resident, or even to a non-Brazilian resident, in the event that courts determine that ADSs would constitute assets located in Brazil, may be subject to income tax in Brazil. See “Item 10—Additional Information—Taxation—Brazilian Tax Considerations.” 

 

The imposition of IOF taxes may indirectly influence the price and volatility of our ADSs and our common shares.

 

Brazilian law imposes the Tax on Foreign Exchange Transactions, or the IOF/Exchange tax, on the conversion of reais into foreign currency and on the conversion of foreign currency into reais. Brazilian law also imposes the Tax on Transactions Involving Bonds and Securities, or the IOF/Securities tax, due on transactions involving bonds and securities, including those carried out on a Brazilian stock exchange.

 

The IOF/Exchange tax was raised from zero to 6% on October 20, 2009. As of December 1, 2011, certain investments were excluded from the 6% tax and subject instead to a 2% IOF/Exchange tax. In 2009, the IOF/Securities tax was increased from zero to 1.5% on shares issued by a Brazilian company and listed on a Brazilian stock exchange for the purpose of allowing depositary receipts traded outside Brazil to be issued. In 2011, the IOF/Securities tax was increased from zero to 1% on currency-related derivative transactions resulting in an increase of the short position exposure in foreign currency or in a decrease of the long position in foreign currency. Since June 30, 2013, the IOF/Exchange tax and the IOF/Securities tax rates have been zero.

 

The imposition of these taxes may discourage foreign investment in shares of Brazilian companies, including our company, due to higher transaction costs, and may negatively impact the price and volatility of our ADSs and common shares if they become listed on a stock exchange in the United States, as well as on the B3.

 

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We may be classified as a passive foreign investment company, which could result in adverse U.S. tax consequences for U.S. investors.

 

We may be classified as a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences to you if you are a U.S. Holder (as defined in “Item 10—Additional Information—Taxation—U.S. Federal Income Tax Considerations”) of our common shares or ADSs. For example, if we are a PFIC, U.S. Holders of our common shares or ADSs may become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, for any taxable year we will be classified as a PFIC for U.S. tax purposes if either (i) 75% or more of our gross income in that taxable year is passive income or (ii) the average percentage of our assets by value in that taxable year that produce or are held for the production of passive income is at least 50%. For this purpose, income from commodities transactions is generally considered passive unless such income is derived in the active conduct of a commodities business.

 

See “Item 10—Additional Information—Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company.”

 

ITEM 4—INFORMATION ON THE COMPANY

 

A. History and Development of the Company Overview

 

Our legal and commercial name is BrasilAgro—Companhia Brasileira de Propriedades Agrícolas. We are a corporation (sociedade por ações) organized under the laws of Brazil, and were incorporated on September 23, 2005. Our principal offices are located at Avenida Brigadeiro Faria Lima, 1309, 5th floor, São Paulo, SP 0145-002, Brazil, and our telephone number is +55 11 3035 5350.

 

We are focused on the acquisition, development and exploration of agricultural properties that we believe possess significant potential for cash flow generation and value appreciation. We seek to transform our acquired properties through investments in infrastructure and technologies which permit cultivation of high value-added crops (soybean, corn, sugarcane and others) and cattle raising and from time to time sell our developed properties in order to realize capital gains.

 

Since our initial public equity offering and listing in Brazil on the B3 stock exchange in April 2006, or the IPO, and the subsequent commencement of our operations until the date hereof, we acquired 16 agricultural properties in seven Brazilian states, aggregating 310,163 hectares, of which 206,241 hectares were arable but less than 15% of which were cultivated when acquired and 103,922 hectares were protected by environmental regulation. Since then, four of our agricultural properties were fully sold and six of our agricultural properties were partly sold, representing in the aggregate a total area of 94,908 hectares. As of the date hereof, we hold 267,002 hectares, including 51,747 hectares leased.

 

On November 22, 2019, we entered into a merger agreement (the “Merger Agreement”) with Agrifirma Holding S.A. (the “Merger Agreement”). Under the terms of the Merger Agreement, Agrifima Holding would be merged into us and we would receive all of its assets, rights and obligations, holding 100% of the equity capital of the subsidiary Agrifirma Agro Ltda. and its subsidiaries, in exchange for common shares and warrants (“Agrifirma Warrants”) issued by us to the selling shareholders of Agrifirma Holding (the “Merger”).

 

Agrifirma Agro Ltda. and its subsidiaries (“Agrifirma”) are engaged in the production, manufacture, storage and trading of agricultural products and the provision of agricultural services, as well as the management and commercial exploration of the properties that it owns. Since Agrifirma is engaged in operations in the same sector as us, we expect the following impacts by reason of the merger: operational, financial and commercial benefits, such as dilution of general and administrative expenses, capture of synergies and economies of scale in the operations and potential appreciation of undeveloped areas.

 

Agrifirma is comprised of its parent company (Agrifirma Agro Ltda.) and four subsidiaries, namely Agrifirma Bahia Agropecuária Ltda., I. A. Agro Ltda., GL Agropecuária Empreendimentos e Participações Ltda. and Agrifirma S.R.L.

 

The completion of the Merger was subject to certain requirements and conditions precedent, which were met on January 27, 2020, following which we obtained control of Agrifirma. The Merger was accounted for pursuant to IFRS 3 – Business Combinations. Please see Note 1.1 to the financial statements included in this annual report.

 

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Following the Merger, we added 28,930 hectares to our property portfolio, consisting of land located in the Western region of the State of Bahia, near our Jatobá and Chaparral farms, which are suitable for grain production and cattle raising. After the Merger, the total number of our outstanding shares was 62,104,301.

 

On December 20, 2020, our controlling shareholder, Cresud, initiated a corporate reorganization under which we entered into a share purchase agreement to acquire 100% of the shares issued by the following Bolivian companies: (i) Agropecuaria Acres del Sud S.A.; (ii) Ombu Agropecuaria S.A.; (iii) Yatay Agropecuaria S.A.; and (iv) Yuchan Agropecuarian S.A. (collectively, “Acres del Sud”), all of which were indirectly controlled by Cresud. These properties have a total area of 9,875 hectares, will be used to cultivate grains and sugarcane, and distributed among the properties San Rafael, Las Londras and La Primavera.

 

On February 4, 2021, after the fulfillment of the conditions precedent negotiated under the Share Purchase Agreement, we assumed control of the aforementioned companies. The purchase price was negotiated at R$160.4 million, based on the estimated preliminary book value of net assets calculated as of June 30, 2020, which we paid in full in cash. The agreement set forth a price adjustment to reflect the net assets variation of the Bolivia-based companies from June 30, 2020 to the base date of the transaction, in accordance with the criteria established by the parties. The procedures for adjusting the price were concluded on March 21, 2021 and generated an additional payment obligation of R$5.4 million, which was paid and settled by us on April 30, 2021.

 

On February 3, 2021, the Company’s board of directors approved the price per common share of R$22.00 and an increase in the Company’s capital stock in the amount of R$440.0 million, through the issuance of 20,000,000 new common shares of the Company, in connection with the primary and secondary follow-on offering of commom shares. The selling shareholder in the offering sold an aggregate of 2,735,355 common shares issued by the Company.

 

The offering consisted of a restricted offering in Brazil, pursuant to Law No. 6,385, of December 7, 1976, as amended, and CVM Instruction No. 476, of January 16, 2009, as amended, and a private placement to (a) a limited number of qualified institutional buyers in the United States, as defined in Rule 144A under the Securities Act, and (b) institutional and other investors outside the United States and Brazil that are not U.S. persons, in reliance on Regulation S under the Securities Act. As a result of this offering, our capital stock was increased to R$1,139.8 million, divided into 82,104,301 common shares.

 

On May 14, 2021, our capital stock was increased by R$448.2 million through the issuance of 20,272,707 new common shares following the exercise of the First Series Warrants by Cape Town LLC, Cresud S.A.C.I.F.Y.A and Turismo Investment S.A.U. (“Subscribing Shareholders”). The First Series Warrants were issued on March 15, 2006 and granted to our founding shareholders in proportion to their respective interests in our capital stock on the issuance date. As a result of the exercise of the First Series Warrants, our capital stock was increased to R$1,588.0 million, divided into 102,377,008 common shares. See “Item 10—Additional Information—Description of Exercised and Expired Warrants.”

 

We invested more than R$1,204.5 million since our IPO to acquire, develop and transform agricultural properties.

 

We will continue the investments to develop and transform our agricultural properties in Brazil, Bolivia and Paraguay. In this regard, we will continue to apply for financing with government development banks.

 

From July 1, 2018 until the date hereof, we completed:

 

in October 2021, we sold an area of 3,723 hectares (2,694 arable hectares) in the Alto Taquari farm, located in Alto Taquari, in the State of Mato Grosso. The total amount of the sale was 1,100 soybean bags per arable hectare, or R$589.0 million (approximately R$218,641 per arable hectare);

 

in September 2021, we sold an area of 4,573 hectares (2,859 arable hectares) in the Rio do Meio Farm located in Correntina, in the State of Bahia. The total amount of the sale was 250 soybean bags per arable hectare, or R$130.1 million (approximately R$45,507 per arable hectare);

 

in May 2021, we sold an area of 1,654 hectares (1,250 arable hectares) in the Jatobá farm, located in Jaborandi, in the State of Bahia. The total amount of the sale was 300 soybean bags per arable hectare, or R$67.1 million (approximately R$53,640 per arable hectare);

 

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in May 2021, the Subscribing Shareholders exercised their first issue subscription warrants issued by us on March 15, 2006. As a result, our capital stock was increased by R$448,2 million through the issuance of 20,272,707 new common shares, as described above;

 

in May 2021, ISEC Securitizadora S.A., a Brazilian securitization company, issued agribusiness receivables certificates (Certificados de Recebíveis do Agronegócio) (CRA) in the aggregate amount of R$240.0 million. The CRAs are backed by debentures that were issued by us and are comprised of a single series in the aggregate amount of R$240.0 million. The debentures mature on April 12, 2028 and accrue interest based on the broad consumer price index (Índice de Preços ao Consumidor Amplo), or IPCA, plus 5.36% per year, payable in seven annual installments. Principal is payable in two installments, on April 13, 2027 and April 12, 2028. The debentures are secured by a fiduciary transfer of real estate properties owned by us and located in the city of Correntina, State of Bahia;

 

in February, 2021, we and our subsidiaries Agrifirma Agro Ltda. and Imobiliária Engenho de Maracajú Ltda. completed the acquisition of 100% of the shares issued by the following companies based in Bolivia: (a) Agropecuaria Acres del Sud S.A.; (b) Ombu Agropecuaria S.A.; (c) Yatay Agropecuaria S.A.; and (d) Yuchan Agropecuarian S.A. The aggregate amount of the acquisition was R$165.8 million. The acquisition consists of a total area of approximately 9.9 thousand hectares, which are already developed and will be used for grain and sugarcane cultivation. The properties are located in the core region of Bolivia and are suitable for planting second crop;

 

in February 2021, we completed a primary and secondary follow-on offering of our common shares in the aggregate amount of R$440.0 million, with the issuance of 20,000,000 new common shares, as described above;

 

during the 2020/2021 crop year, we developed 6,800 hectares of our 143,355 hectares of arable land through the cultivation of soybeans and other value-added crops;

 

in August. 2020, we sold an area of 133 arable hectares in the Jatobá farm, located in Jaborandi, in the State of Bahia, for R$3.8 million;

 

in July 2020, we recognized the sale with a zero profit or loss effect, of an area of 2,160 hectares (1,714 arable hectares) in the Bananal X farm, located in Luís Eduardo Magalhães, in the State of Bahia. The sale agreement was executed on March 22, 2019 for a fixed price of R$28,000. On the closing date, we received R$7.5 million, and the remaining balance of R$20.5 million will be paid by the buyer in three annual instalments through 2023;

 

in June 2020, we sold an area of 1,875 hectares (1,500 arable hectares) in the Jatobá farm, located in Jaborandi, in the State of Bahia. The total amount of the sale was 300 soybean bags per arable hectare, or R$45.0 million (approximately R$30,010 per arable hectare);

 

in April 2020, we acquired the Serra Grande farm, located in the municipality of Baixa Grande do Ribeiro, in the State of Piauí. The Serra Grande farm has an area of 4,489 hectares, 2,904 hectares of which are arable to be developed, suitable for the cultivation of grains. The acquisition price was approximately R$25.0 million (R$8,600 per arable hectare);

 

  in May 2020, we sold an area of 105 hectares (105 arable hectares) in the Alto Taquari farm, located in Alto Taquari, in the State of Mato Grosso. The total amount of the sale was 1,100 soybean bags per arable hectare, or R$11.0 million (approximately R$105,000 per arable hectare);

 

  in January 2020, we concluded the merger of Agrifirma into us, which added 28,930 hectares to our property portfolio;

 

  in October 2019, we made an investment of US$ 1.0 million in Ag-Fintech Agrofy, or Agrofy, which represented a 1.8% stake in the share capital of Agrofy. Agrofy is an online marketplace that offers a complete range of e-commerce solutions customized to meet the needs of retailers and their partners, seeking an alternative way of connecting farmers and suppliers;

 

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  in October 2019, we sold an area of 85 hectares (65 arable hectares) in the Alto Taquari farm, located in Alto Taquari, in the State of Mato Grosso. The total amount of the sale was 1,100 soybean bags per arable hectare, or R$5.5 million (approximately R$84,817 per arable hectare);

 

  in August 2019, we sold an area of 1,134 hectares (893 arable hectares) in the Jatobá farm, located in Jaborandi, in the State of Bahia. The total amount of the sale was 302 soybean bags per arable hectare, or R$23.2 million (approximately R$25,961 per arable hectare);

 

  during the 2019/2020 crop year, we developed 2,000 hectares of our 215,330 hectares of arable land through the cultivation of soybeans and other value-added crops;

 

  in June 2019, we sold an area of 3,124 hectares (2,473 arable hectares) in the Jatobá farm, located in Jaborandi, in the State of Bahia. The total amount of the sale was 285 soybean bags per arable hectare, or R$58.1 million (approximately R$23,500 per arable hectare);

 

  in November 2018, we sold an area of 103 hectares (103 arable hectares) in the Alto Taquari farm, located in Alto Taquari, in the State of Mato Grosso. The total amount of the sale was 1,100 soybean bags per arable hectare, or R$8.0 million (approximately R$77,690 per arable hectare);

 

  during the 2018/2019 crop year, we developed 2,000 hectares of our 169,270 hectares of arable land through the cultivation of soybeans and other value-added crops;

 

  on August 28, 2018, we leased an area of 23,568 hectares, located in the municipality of São Félix do Araguaia, in the State of Mato Grosso. The new farm was named Partnership V. The lease agreement has a term of up to 10 years and was followed market prices practiced in the region;

   

  in July 2018, we sold an area of 9,784 hectares (7,485 arable hectares) in the Jatobá farm, located in Jaborandi, State of Bahia. The total amount of the sale was 285 soybean bags per arable hectare, or R$164.8 million (approximately R$22,018 per arable hectare);

  

  during the 2017/2018 crop year, we developed 2,000 hectares of our 172,032 hectares of arable land through the cultivation of soybeans and other value-added crops;

  

  in May 2018, we sold an area of 956 hectares (660 arable hectares) in the Araucária farm, located in Mineiros, State of Goiás. The total amount of the sale was 1,208 soybean bags per arable hectare, or R$52.4 million (approximately R$79,393 per arable hectare);

   

  in May 2018, CIBRASEC – Companhia Brasileira de Securitização, a Brazilian securitization company, issued agribusiness receivables certificates (Certificados de Recebíveis do Agronegócio) (CRA) in the aggregate amount of R$142.2 million. The CRAs are secured by debentures that were issued by us and are comprised of two series, the first in the amount of R$85.2 million, and the second in the amount of R$57 million. The first series of debentures mature on August 1, 2022 and are payable in three annual installments starting on July 30, 2020, and accrues interest at 106.5% of the DI rate, payable on July 30 of each year. The second series of debentures matures on July 31, 2023 and is payable in four annual installments starting on July 30, 2020, and accrues interest at 110.0% of the DI rate, payable on July 30 of each year;

 

  on February 9, 2018, the re-distribution of assets and liabilities of Cresca was concluded and the portion of assets and liabilities attributed to us was transferred to the wholly-owned subsidiary Moroti. As of June 30, 2021, Moroti owned 59,585 hectares, of which 34,673 were arable;

 

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The table below indicates the location of our agricultural properties, their arable areas and their current or intended production activities as of September 30, 2021:

 

Property  Location  Acquisition/Lease
Date
  Total Area   Arable Area   Project  Ownership
         (ha)   (ha)       
Jatobá Farm  Jaborandi/BA  March 2007   13,276    10,208   Grains and Pasture  Owned
Alto Taquari Farm  Alto Taquari/MT  August 2007   1,380    0,809   Sugarcane  Owned
Araucária Farm  Mineiros/GO  April 2007   5,534    4,051   Sugarcane  Owned
Chaparral Farm  Correntina/BA  November 2007   37,182    26,444   Grains and Cotton  Owned
Nova Buriti Farm  Januaria/MG  December 2007   24,212    17,846   Forest  Owned
Preferência Farm  Barreiras/BA  September 2008   17,799    12,410   Grains and Pasture  Owned
Moroti Farm  Boqueron/ Paraguay  February 2018   59,585    34,673   Grains and Pasture  Owned
Partnership II Farm(1)  Ribeiro Gonçalves/PI  November 2013   7,500    7,500   Grains  Leased
Partnership III Farm(2)  Alto Taquari/MT  May 2015   5,624    5,624   Sugarcane  Leased
Partnership IV Farm(3)  São Raimundo das Mangabeiras/MA  February 2017   15,000    15,000   Sugarcane  Leased
São José Farm  São Raimundo das Mangabeiras/MA  February 2017   17,566    10,137   Grains and Sugarcane  Owned
Partnership V Farm(4)  São Félix do Araguáia/MT  August 2018   17,150    17,150   Grains  Leased
Arrojadinho Farm(5)  Jaborandi/BA  January 2020   16,642    10,306   Grains  Owned
Rio do Meio Farm(6)  Jaborandi/BA  January 2020   7,715    5,642   Grains  Owned
Serra Grande Farm  Baixa Grande do Ribeiro/PI  April 2020   4,489    2,904   Grains  Owned
Partnership VII Farm(7)  Baixa Grande do Ribeiro/PI  December 2019   5,473    5,473   Grains  Leased
Acres del Sud  Santa Cruz / Bolivia  February 2021   9,875    7,925   Grains and Sugarcane  Owned
Partnership VIII Farm(8)  Santa Cruz / Bolivia  December 2020   1,000    0,640   Grains  Leased
Total         267,002    194,742       

 

(1) We entered into an agricultural exploration partnership with respect to the Partnership II Farm for a term of up to 11 harvest years.
(2) We entered into an agricultural exploration partnership with respect to the Partnership III Farm with a term valid until March 31, 2026.

(3) We entered into an agricultural exploration partnership with respect to the Partnership IV Farm for a term of 15 years for planting sugarcane, with an option to renew for another 15 years.

(4)We entered into an agricultural exploration partnership with respect to the Partnership V Farm for a term of up to 10 years.

(5)Previously referred to as Partnership VI, the farm was acquired through the Merger of Agrifirma.

(6) Farm acquired through the Merger of Agrifirma.

(7)We entered into an agricultural exploration partnership with respect to the Partnership VII Farm for a term of up to 10 years.

(8)We entered into an agricultural exploration partnership with respect to the Partnership VIII Farm.

 

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We have a policy of performing annual appraisals of the fair market value of our agricultural properties. We estimate the market value of our agricultural properties based on each property’s level of development, soil quality and maturity and agricultural potential. For more information concerning our estimates of the fair market value of our agricultural properties, see Note 10 to our financial statements for the fiscal year ended June 30, 2021.

 

Our estimates of the market value of our agricultural properties are based on several assumptions, methodologies, estimates and subjective judgments, all of which are inherently subject to significant commercial, economic, competitive and operational uncertainties, most of which are beyond our control and unforeseeable and therefore no assurance can be given that they are correct. Furthermore, market values of real estate are subject to significant fluctuations and are also subject to significant commercial, economic and competitive uncertainties, most of which are beyond our control, and thus such estimates should not be considered as indicative of the values that we will or may be able to receive in exchange for such properties. For more information on the risks we are exposed to, see “Item 3—Key Information—Risk Factors.” The table below indicates the historical cost of acquisition of the land and of subsequent improvements, as well as the estimated fair market value, with respect to our agricultural properties, as of June 30, 2021.

 

The SEC maintains an internet website at www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file or furnish documents electronically to the SEC, including us. Our internet website is www.brasil-agro.com. The information included on our internet website or the information that might be accessed through such website is not included in this annual report and is not incorporated into this annual report by reference.

 

Property  Location  Acquisition/Lease Date  Total Area   Land and
Improvement
Cost as of
June 30,
2021 (1)
   Estimated Fair
Market
Value as of
June 30,
2021 (2)
   Appreciation (3) 
         (ha)   (R$ millions)   (R$ millions)     
Jatobá Farm  Jaborandi/BA  March 2007   13,276    29.6    386.4    1205%
Alto Taquari Farm  Alto Taquari/MT  August 2007   5,103    33.5    304.7    810%
Araucária Farm  Mineiros/GO  April 2007   5,534    46.2    333.2    621%
Chaparral Farm  Correntina/BA  November 2007   37,182    91.7    767.00    736%
Nova Buriti Farm  Januaria/MG  December 2007   24,212    23.4    33.8    44%
Preferência Farm  Barreiras/BA  September 2008   17,799    28.4    89.4    215%
Moroti Farm  Boqueron/ Paraguay  February 2018   59,585    211.4    449.6    113%
São José Farm  São Raimundo das Mangabeiras/MA  February 2017   17,566    112.5    407.00    262%
Arrojadinho Farm  Jaborandi/BA  January 2020   16,642    96.1    214.2    123%
Rio do Meio Farm  Jaborandi/BA  January 2020   12,288    117.9    252.3    114%
Serra Grande Farm  Baixa Grande do Ribeiro/PI  April 2020   4,489    36.7    71.8    96%
Acres del Sud  Santa Cruz/ Bolivia  February 2021   9,875    124.7    209.4    68%
Total         223,551    952.1    3518.8    270%

 

(1)Consists of land and capital expenditures, including buildings, infrastructure and other improvements to the property, net of depreciation expenses.

(2)Appraisal from indepent firm Deloitte Touche Tohmatsu Consultores Ltda

(3)Appreciation includes the impact of inflation since the acquisition date.

 

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B. Business Overview

 

We are focused on the acquisition, development and exploration of agricultural properties that we believe possess significant potential for cash flow generation and value appreciation. We seek to transform our acquired properties through investments in infrastructure and technologies which permit cultivation of high value-added crops (soybean, corn, sugarcane and other) and cattle raising and from time to time sell our developed properties in order to realize capital gains. We are currently involved in several farming activities, including grains and sugarcane production and cattle raising.

 

Effects of the COVID-19 Pandemic

 

Government measures in Brazil

 

In light of the COVID-19 pandemic outbreak, the Brazilian government created a crisis committee to monitor the impact of COVID-19 in March 2020. Since then, it has announced several measures (tax and others) to address the effects of COVID-19. In this regard, the Brazilian health authorities, as well as several state and municipal authorities have adopted or recommended social distancing measures. Likewise, the Brazilian Congress is currently discussing several measures to increase the Brazilian government’s revenues, such as imposing new taxes, revoking tax benefits and increasing the rates of current taxes, including revoking the tax exemption granted to dividend distributions paid by Brazilian companies, which could affect the return of our investments, as well as of our shareholders.

 

In Brazil, states and municipalities may also revoke tax benefits and increase the rates of current taxes to increase their revenues

 

Company measures

 

In order to guarantee the hygiene and safety conditions established by the Brazilian Ministry of Health (Ministério da Saúde) and to preserve the health of our employees, we have adopted a plan with several measures established especifically for this purpose.

 

Key initiatives were the creation of a Prevention and Risk Committee, implementing remote work arrangements and the adoption of several measures and protocols to preserve the safety of all people involved in our operations, following the guidelines established by the Brazilian Ministry of Health (Ministério da Saúde).

 

Measures were also taken to support our operations and preserve cash, such as:

 

  contracting new lines of credit, such as financing for agricultural cost, sugarcane and for working capital purposes;

 

  early delivery of inputs; and

 

  anticipating sales of agricultural products to ensure greater storage capacity.

 

Additionally, as of June 30, 2021, although we did not record material losses or gains in our 2021 financial results directly related to the pandemic, we continue to monitor possible future impacts due to:

 

  exchange rate volatility, in connection with derivative operations related to currency operations and operations with commodities that we enter into to guarantee production margins in financial operations. For more information, see “Item 5—Operating and Financial Review and Prospects—Results of Operations.”

 

  volatility in sugar and ethanol prices and the consequent impact on sugarcane demand and prices;

 

  changes in the expected sugarcane payment cycle arising from negotiations with our customers; as of June 30, 2021 none of our customers had missed payments; and

 

  volatility in other commodity prices.

 

Our operations in Brazil, Bolivia and Paraguay continue without any material changes. Most of our business operations have not experienced any major disruption.

 

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Agricultural Activities and Products

 

Independent Production

 

As of June 30, 2021, we were the operators with respect to our entire portfolio of agricultural properties. In the context of our independent operations, we maintain exclusive control over our production and exclusive responsibility for the acquisition of inputs, raw materials and equipment, hiring and oversight of employees, and infrastructure investment. We currently sell a substantial portion of our production to a small number of import/export companies or customers who have substantial bargaining power. Our net revenue was R$663.0 million for the year ended June 30, 2021 and R$487.6 million for the year ended June 30, 2020. All of our sales are to customers located in Brazil, Bolivia and Paraguay.

 

We enter into short-term contractual arrangements with third-party contractors, at all stages of the production process, for the provision of services (including our workforce), equipment, and infrastructure needs. We believe that this allows us to be more agile in adapting to market conditions as they unfold.

 

Our agricultural properties are managed by local managers, either on a regional level or for specific properties, depending on the location and size of each property. As of October 25, 2021, we had one director for all of our farms, one production manager for the Maranhão, Piaui and Midwest regions and for the Bolivian farms, one manager at the São José and Partnership IV farms, one manager at the Serra Grande and Partership VII farms, one manager at the Avarandado farms (Partnership II farms), one manager at the Arrojadinho farm, one manager at the Chaparral and Rio do Meio farms, one manager at the Preferência Farm, one manager at the Partnership V farm, one manager at the Araucária, Alto Taquari and Partnership III farms, one manager at the Moroti Farm and one manager at the Acres del Sud Farm.

 

Leases

 

As an alternative to independent production, we have leased 22,200 hectares of our agricultural properties to third parties.

 

Generally, our leases are subject to different obligations depending on the stage of development of the subject property. With respect to leases of our properties on which the land is undeveloped, lessees are subject to several terms and conditions, including requirements to invest and to use the techniques and equipment that we believe are necessary and appropriate for the preparation and correction of the soil in order to facilitate agricultural production. In addition to leases of land, we may also lease individual farmhouses or warehouses to lessees, pursuant to which we receive a portion of the agricultural production, in kind, produced by the lessee. Our leases generally last between three to ten years. Under Brazilian law, lessees have a right of first refusal to purchase farms when they are leased by them.

 

Grains

 

The planting season for grains runs from September to December, and harvest occurs between February and May of each year. During the planting season for our 2020/2021 crop year, we planted 89,571 hectares of grains at our grain farms in Brazil, Bolivia and Paraguay. For the years ended June 30, 2021 and 2020, net revenue from sale of grains accounted for 49.8% and 47.9% of our net revenue, respectively.

 

All distribution of production from the farms is made through road transportation. We enter into third-party service contracts to transport production from our farms to our storage facilities or to our customers.

 

Sugarcane

 

The sugarcane planting season runs from February to May of each year, and harvest occurs between April and November of each year. On June 30, 2021, we had 27,831 hectares planted with sugarcane at our Araucária, Alto Taquari, São José Farm, Partnership III and Partnership IV farms.

 

We entered into a supply contract with Brenco, pursuant to which we currently supply the entirety of our sugarcane production from our Alto Taquari, Araucária, and Partnership III farms to them. The term of this supply contract covers two full crop cycles, which consists of six crop years and five harvests, and is scheduled to expire in 2021/2022. In the year ended June 30, 2021 and as of the date hereof, Brenco has not defaulted on the payment of any receivable. We currently run the risk of default by Brenco, our main customer, associated with the fact that its controlling shareholder, Novonor S.A. – Em Recuperação Judicial, is being investigated by the Brazilian Federal Police for corruption in the operation called “Lava Jato” (Car Wash) and the fact that Brenco filed for reorganization bankruptcy in Brazil (recuperação judicial) in May 2019.

 

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In the table below, we present the aging of the receivables from Brenco, based on contractual terms.

 

  

As of

June 30,

2021

 
Falling due:  (in R$ thousands) 
     
Up to 30 days   12,271 
30 to 90 days    
91 to 180 days    
181 to 360 days   1,410 
Total   13,681 

  

On May 8, 2015, we entered into a lease agreement with respect to a property located in the municipalities of Alto Taquari and Alto Araguaia, in the state of Mato Grosso (“Partnership III”), pursuant to which we have the right to operate an area of 4,263 hectares by March 31, 2026. The properties are close to Alto Taquari Farm, a region that has had excellent sugarcane production results. This transaction allows us to make use of the operational structure and team already present in the region and ensure greater property management flexibility.

 

We entered into a supply contract with Agro Serra, pursuant to which we currently supply the entirety of our sugarcane production from our Partnership IV farm to them. The term of this supply contract is 15 years, renewable for another 15 years.

 

For the years ended June 30, 2021 and 2020, net revenue from the sale of sugarcane accounted for 40.0% and 39.6% of our net revenue, respectively.

 

Our farm output is distributed through road transportation. We enter into third-party service contracts with trucking companies to transport production from our farms to our customers’ sugar and ethanol refineries.

 

Livestock

 

As of June 30, 2021, we had 14,805 head of cattle distributed over 9,636 hectares of active pasture.

 

For the years ended June 30, 2021 and 2020, net revenue from livestock sales accounted for 4.4% and 6.7% of our net revenue, respectively.

 

Cotton

 

The planting season for cotton runs from September to December of each year, and the harvest occurs between February and May of each year. During the planting season for our 2020/2021 crop year, we planted 1,313 hectares of cotton at our Chaparral farm.

 

For the years ended June 30, 2021 and 2020, net revenue from the sale of cotton accounted for 4.2% and 2.7% of our net revenue, respectively.

 

Others

 

As of June 30, 2021, we had 24,212 hectares of farmland at our Nova Buriti farm. We are currently in the process of obtaining the necessary permits in order to begin operations. Due to the difficulties we have been facing in regard to obtaining licenses for the farm, we are studying alternatives for the property. One such option is to sell the farm to offset the legal reserve, a mechanism contemplated in the environmental code pursuant to which holders of a legal reserve deficit can acquire another area to solve certain issues.

 

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Investment properties

 

As of June 30, 2021, the net book value of our investment properties was R$121.5 million, of which R$22.5 million represented land acquisition costs and R$99.0 million (net of accumulated depreciation) represented improvements, including building and infrastructure improvements and costs of clearing and preparing the land. For the years ended June 30, 2021 and 2020, gains on farm sales accounted for R$53.1 million and R$61.4 million, respectively.

 

Agricultural Properties

 

As of June 30, 2021, we owned twelve agricultural properties, totaling 275,298 hectares of arable land (not including environmental preservation areas in accordance with Brazilian, Bolivian and Paraguayan environmental law), including 51,747 hectares of leased area, located in the Brazilian States of Mato Grosso, Goiás, Minas Gerais, Maranhão, Bahia, Piauí, Bolivia and in Paraguay. During the planting season for our 2020/2021 crop year, we planted 62,077 hectares of soybean, 21,006 hectares of corn (1st and 2nd crops), 27,831 hectares of sugarcane, 29,624 hectares of other grains (sesame, sorghum and others and leased areas to third parties), 6,488 hectares of beans, 1,313 hectares of cotton and 12,720 hectares of pasture. Except for part of the Nova Buriti farm, we acquire and hold our agricultural properties through subsidiaries, a structure we believe will simplify the future sale of such properties in accordance with Brazilian law. In addition, we entered into rural partnerships to operate agricultural properties, the Partnerships II, III, IV, V, VII and VIII farms.

 

São José Farm: As of June 30, 2021, the São José farm had an area of 17,566 hectares. The São José farm was acquired by our subsidiary Imobiliária Ceibo Ltda. in February 2017 for R$100.0 million. The property is located in the State of Maranhão, in the Northeastern region of Brazil. 

 

We acquired 17,566 hectares, 10,137 hectares of which are arable and have already been developed, and will be used for the planting of grain crops. The other 7,429 hectares are permanent preservation and legal reserve areas. The acquisition price is R$100.0 million (R$10 thousand/arable hectare).

 

The agricultural partnership consists of 15,000 hectares of arable and developed land, already planted mostly with sugarcane. The agricultural partnership has a term of 15 years, which may be extended for the same period.

 

Jatobá Farm: As of June 30, 2021, the Jatobá farm had an area of 13,276 hectares. The Jatobá farm was acquired by us, in partnership with Grupo Maeda, in 2007, for R$33.0 million. On May 12, 2012, we acquired Grupo Maeda’s partnership stake and became 100% owners of the Jatobá farm, through our subsidiary Jaborandi Propriedades Agrícolas. The property is located in the Municipality of Jaborandi, State of Bahia, in the Northeastern region of Brazil, which we believe to be advantageous for export purposes due to the presence of the Port of Candeias in the State of Bahia.

 

On June 30, 2017, we sold 625 hectares of our Jatobá farm, 500 of which are arable, for a total sale price of R$10.1 million, equivalent to 300 soybean bags per arable hectare. In July 2018, we sold 9,784 hectares of our Jatobá farm, 7,485 of which are arable, for a total sale price of R$164.8 million, equivalent to 285 soybean bags per arable hectare. In June 2019, we sold 3,124 hectares of our Jatobá farm, 2,473 of which are arable, for a total sale price of R$58.1 million, equivalent to 285 soybean bags per arable hectare. In September 2019, we sold 1,134 hectares of our Jatobá farm, 893 of which are arable, for a total sale price of R$23.2 million, equivalent to 302 soybean bags per arable hectare. In June 2020, we sold 1,875 hectares of our Jatobá farm, 1,500 of which are arable, for a total sale price of R$45.0 million, equivalent to 300 soybean bags per arable hectare. In August 2020, we sold 133 arable hectares, for a total sale price of R$3.8 million. In May 2021, we sold 1,654 hectares of our Jatobá farm, 1,250 of which are arable, for R$67.1 million, equivalent to 300 soybean bags per arable hectare.

 

Alto Taquari Farm: As of June 30, 2021, the Alto Taquari farm had an area of 5,103 hectares. The Alto Taquari farm was acquired by our subsidiary Imobiliária Mogno in August 2007 for R$33.2 million. The deed was granted in September 2015 after we paid the outstanding balance of R$27.4 million. The 2009/2010 crop year marked the beginning of our obligations in compliance with our supply contract with Brenco, under which we supply the entirety of our sugarcane production from the Alto Taquari farm to them for a term of two complete crop cycles (six crop years and five harvests), which is expected to end in 2023. The property is located in the Municipality of Alto Taquari, State of Mato Grosso.

 

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In November 2018, we sold 103 hectares of our Alto Taquari farm, all of which are arable, for a total sale price of R$8.0 million, equivalent to 1,100 soybean bags per arable hectare. In October 2019, we sold 85 hectares of our Alto Taquari farm, 65 of which are arable, for a total sale price of R$5.5 million, equivalent to 1,100 soybean bags per arable hectare. In May 2020, we sold 105 hectares of our Alto Taquari farm, all of which are arable, for a total sale price of R$11.0 million, equivalent to 1,100 soybean bags per arable hectare.

 

On October 7, 2021, we entered into an agreement to sell an area comprised of 3,723 hectares (2,694 arable hectares) in the Alto Taquari Farm. The sale price was R$589.0 million (approximately R$218,641/arable hectare) or 1,100 soybean bags per arable hectare. Part of such price corresponding to R$16.5 million was paid in October 2021 and an additional payment of R$31.4 million shall be made by November 2021. The remaining balance is indexed in soybean bags and will be paid in eight annual installments, starting in May 2022. The delivery of the area will occur in two phases, the first occurred in October 2021, consisting of 2,566 hectares (1,537 arable hectares), in the amount of approximately R$336.0 million, and the second will occur in September 2024, consisting of 1,157 arable hectares, in the amount of approximately R$253.0 million. We intend to continue to explore and operate the areas that were sold until completion of each delivery phase.

 

Considering this sale, the of Alto Taquari Farm area in the portfolio is 1,380 hectares (809 arable hectares).

 

Araucária Farm: As of June 30, 2021, the Araucária farm had an area of 5,534 hectares. The Araucária farm was acquired by our subsidiary Imobiliária Araucária in April 2007, in partnership with Brenco, in the proportion of 75% and 25%, respectively, for the total amount of R$80.0 million. The deed for Araucária farm was granted on November 20, 2008, and it was registered on November 24, 2008, upon which our partnership with Brenco was terminated and we remained the sole owners of 9,682 hectares of the Araucária farm, equivalent to R$70.7 million. The property is located in the Municipality of Mineiros, in the State of Goiás, and is primarily used for the cultivation of sugarcane and grain.

  

On May 2018, we sold 956 hectares of our Araucária Farm, 660 of which are arable (for a total sale price of R$52.4 million, equivalent to 1,208 soybean bags per arable hectare). On March 27, 2017, we sold 274 hectares of our Araucária Farm, 200 of which are arable, for a total sale price of R$12.5 million or (R$13.2 million nominal value, equivalent to 1,000 soybean bags). On May 30, 2017, we sold 1,360 hectares of our Araucária Farm, 918 of which are arable, for a total sale price of R$17.0 million, equivalent to 280 soybean bags. On April 25, 2013, we sold 394 hectares of our Araucária farm, 310 of which are arable, for a total sale price of R$10.3 million, equivalent to 48,000 soybean bags, and on June 27, 2014, we sold 1,164 hectares of our Araucária Farm, 913 of which are arable, for a total purchase price of R$41.3 million, equivalent to 735,000 soybean bags. After the sales, the area of Araucária farm held by us was 5,534 hectares, of which approximately 4,051 hectares are arable.

 

The 2009/2010 crop year marked the beginning of our obligations under our supply contract with Brenco to supply the entirety of our sugarcane production from the Araucária farm to them for a term of two complete crop cycles (six crop years and five harvests), which is expected to end in 2021/2022. The term of the agreement may be extended automatically for five additional sugarcane cycles.

 

Chaparral Farm: As of June 30, 2021, the Chaparral farm had an area of 37,182 hectares. The Chaparral farm was acquired by our subsidiary Imobiliária Cajueiro in November 2007 for R$47.9 million. The deed was granted on September 29, 2008 and was registered on December 12, 2008. The property is located in the Municipality of Correntina, State of Bahia.

 

Nova Buriti Farm: As of June 30, 2021, the Nova Buriti farm had an area of 24,212 hectares. The Nova Buriti farm was acquired in December 2007 for the total amount of R$22.0 million. The transfer of 3,064 hectares was made in May 2010 to our subsidiary Imobiliária Flamboyant Ltda. and the remaining 21,147 hectares was transferred to us in August 2017, upon the payment of the balance of the price of the amount of R$12.8 million, with the exclusion of the monetary correction as negotiated with the seller. Our subsidiary Imobiliária Flamboyant Ltda. holds a 13% interest in the property, and we hold the remaining 87%. The property is located in the municipality of Bonito de Minas and Cônego Marinho, State of Minas Gerais in the Southeastern region of Brazil, which is in close proximity to major iron producers who utilize large quantities of biofuel, especially from eucalyptus wood, to generate electricity.

 

We are currently in the process of obtaining the necessary permits in order to begin operations. Due to the difficulties we have been facing in regard to obtaining licenses for the farm, we are studying alternatives for the property. One such option is to sell the farm to offset the legal reserve, a mechanism contemplated in the environmental code pursuant to which holders of a legal reserve deficit can acquire another area to solve certain issues.

 

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Preferência Farm: As of June 30, 2021, the Preferência farm had an area of 17,799 hectares. The Preferência farm was acquired in September 2008 by our subsidiary Imobiliária Cajueiro for R$9.6 million. The deed was granted on September 4, 2009, and registration was made on February 24, 2010. The property is located in the Municipality of Barreiras, State of Bahia. We use the property for cattle raising and grain cultivation.

 

Partnership II: On October 11, 2013, we entered into a rural partnership agreement with respect to Partnership II farm for up to 11 harvests, which is expected to end in June 2024. The Partnership II farm is located in the municipality of Ribeiro Gonçalves, in the state of Piauí, which has had excellent grain production results. We operate an area up to 7,500 hectares, which is suitable for grain crops.

 

Partnership III: On May 8, 2015, we entered into a rural partnership agreement with respect to a property located in the municipalities of Alto Taquari and Alto Araguaia, in the state of Mato Grosso (“Partnership III”), pursuant to which we have the right to operate an area of up to 5,624 hectares until March 31, 2026. The properties are close to the Alto Taquari Farm, a region that has had excellent sugarcane production results. This transaction allows us to make use of the operational structure and team already present in the region and ensure greater property management flexibility.

 

Partnership IV: On January 11, 2017, we entered into a rural partnership agreement with respect to a property located in the municipalities of São Raimundo das Mangabeiras, in the state of Maranhão (“Partnership IV”), pursuant to which we have the right to operate an area of up to 15,000 hectares. The agricultural partnership is already planted mostly with sugarcane and has a term of 15 years, renewable for another 15 years.

 

Partnership V: On August 28, 2018, we entered into a rural partnership agreement with respect to a property located in São Felix do Araguaia, in the state of Mato Grosso (“Partnership V”), pursuant to which we have the right to operate an area of up to 20,138 hectares for up to 10 years. In August, 2018, the partnership agreement was amended in order to reduce our right to operate to an area of up to 17,150 hectares for up to 10 years. These areas are mature, with more than five years under production and are suitable for a second crop.

 

Serra Grande and Partnership VII: As of June 30, 2021, the Serra Grande farm had an area of 4.489 hectares In April 2020, we acquired the Serra Grande farm located in Baixa Grande do Ribeiro, in the State of Piauí. The acquisition consisted of an area of 4,489 hectares, 2,904 hectares of which are arable to be developed and are suitable for grains cultivation. The other 1,585 hectares are permanent preservation and legal reserve areas. The acquisition price was R$25.0 million, or R$8,600 per arable hectare. We made an initial payment of R$10.7 million and will make remaining payments in three equal annual installments.

 

In addition to the acquisition, the Company has an agricultural partnership in an area of 5,473 hectares of arable and developed land, already planted and operated by the Company during the 19/20 harvest (Partnership VII). This area is contiguous to the acquired area, has more than 5 years in average of production and high production potential. Partnership VII has a term up to 12 years, with a call option until 2024.

 

Cresca: Cresca is a company that invests in agricultural and cattle raising land in Paraguay. On December 12, 2013, we entered into an agreement with Cresud, our controlling shareholder, for: (i) the acquisition of its interest in Cresca S.A., representing a 50% interest of the company, (ii) the assumption of Cresud credits with Cresca, and (iii) the execution of an advisory service agreement, pursuant to which Cresud agreed to render services to Cresca in exchange for the payment of fees. The total consideration of the transaction was US$19.8 million.

 

On the purchase date, Cresca had approximately 81,000 hectares and had a contract for the right to purchase approximately 61,000 additional hectares of agricultural land in the region of Mariscal Estigarribia in Paraguay. Pursuant to this agreement, Cresca purchased 35,864 hectares on July 9, 2014, and the remaining 24,753 hectares on January 20, 2015.

 

On April 4, 2014, Cresca sold 24,624 hectares in Paraguay, 12,312 of which are arable, for a total price of US$14.8 million (US$600 per hectare). The purchaser made an initial payment of US$1.9 million and paid the first installment in the amount of US$4.3 million upon the execution of the property transfer deed and the sold area possession transfer. The purchaser made payments totaling the amount of US$3.7 million in 2015 and a final payment of US$4.9 million on July 20, 2016.

 

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On October 5, 2016, we entered into an agreement with Carlos Casado, our partner in Cresca at the time, pursuant to which we agreed to try to sell all the land that Cresca owned for a 120-day period as of the execution date of the aforementioned agreement. Further to the provisions of the agreement, we and Carlos Casado also agreed to split ownership of the land among us and Carlos Casado if either party failed to dispose of the totality of the land within the 120-day period.

 

As the properties were not sold to third-parties, on June 6 and June 8, 2017, we and Carlos Casado decided to proceed with the re-distribution of assets and liabilities of Cresca, whereby we would separate and divide the assets and liabilities of Cresca, and Cresca would re-distribute them to us and to Carlos Casado. As a result of this transaction, we now have the following two subsidiaries that received Cresca’s assets and liabilities: (i) Palmeiras, which was incorporated to operate the activities of the Company’s investment in Cresca and (ii) Moroti, a subsidiary that received, on February 9, 2018, upon conclusion of the process, all other assets and liabilities of Cresca attributed to us, including land and debts.

 

On February 9, 2018, the re-distribution of assets and liabilities of Cresca was concluded and the portion of assets and liabilities attributed to the Company was transferred to the wholly-owned subsidiary Moroti.

 

As part of the re-distribution of assets and liabilities, the Company and Carlos Casado, partners in the joint venture, decided to waive the interest for late payment on the intercompany loans taken by Cresca in the total amount of R$32.9 million, of which our share was R$16.6 million. See Note 1.6 to our financial statements for the fiscal year ended June 30, 2020.

 

As of June 30, 2021, Moroti owned 59,585 hectares of which 34,673 were arable.

 

Arrojadinho Farm: On November 22, 2019, we entered into a Merger Agreement with Agrifirma Holding. Under the terms of the Merger Agreement, Agrifima Holding would be merged into us and we would receive all of its assets, rights and obligations, holding 100% of the equity capital of the subsidiary Agrifirma Agro Ltda. and its subsidiaries, in exchange for common shares and Agrifirma Warrants issued by us to the selling shareholders of Agrifirma Holding.

 

Agrifirma and its subsidiaries are engaged in the production, manufacture, storage and trading of agricultural products and the provision of agricultural services, as well as the management and commercial exploration of the properties that it owns. Since Agrifirma is engaged in operations in the same sector as us, we expect the following impacts immediately after the merger: operational, financial and commercial benefits, such as dilution of general and administrative expenses, capture of synergies and economies of scale in the operations and potential appreciation of undeveloped areas.

 

Agrifirma is comprised of its parent company (Agrifirma Agro Ltda.) and four subsidiaries, namely Agrifirma Bahia Agropecuária Ltda., I. A. Agro Ltda., GL Agropecuária Empreendimentos e Participações Ltda. and Agrifirma S.R.L.

 

The completion of the Merger was subject to certain requirements and conditions precedent, which were met on January 27, 2020, following which we obtained control of Agrifirma. The Merger was accounted for pursuant to IFRS 3 – Business Combinations. Please see Note 1.1 to our financial statements for the fiscal year ended June 30, 2021.

 

Following the Merger, we added 28,930 hectares to our property portfolio, of which 16,642 hectares are on the Arrojadinho Farm, located in Jaborandi, in the State of Bahia. The Arrojadinho farm is suitable for grain production and cattle raising.

 

During the planting season for our 2020/2021 crop year, we planted 4,507 hectares of grains at the Arrojadinho farm.

 

Rio do Meio Farm: On November 22, 2019, we entered into a Merger Agreement with Agrifirma Holding. Under the terms of the Merger Agreement, Agrifima Holding would be merged into us and we would receive all of its assets, rights and obligations, holding 100% of the equity capital of the subsidiary Agrifirma Agro Ltda. and its subsidiaries, in exchange for common shares and Agrifirma Warrants issued by us to the selling shareholders of Agrifirma Holding.

 

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Agrifirma and its subsidiaries are engaged in the production, manufacture, storage and trading of agricultural products and the provision of agricultural services, as well as the management and commercial exploration of the properties that it owns. Since Agrifirma is engaged in operations in the same sector as us, we expect the following impacts immediately after the merger: operational, financial and commercial benefits, such as dilution of general and administrative expenses, capture of synergies and economies of scale in the operations and potential appreciation of undeveloped areas.

 

Agrifirma is comprised of its parent company (Agrifirma Agro Ltda.) and four subsidiaries, namely Agrifirma Bahia Agropecuária Ltda., I. A. Agro Ltda., GL Agropecuária Empreendimentos e Participações Ltda. and Agrifirma S.R.L.

 

The completion of the Merger was subject to certain requirements and conditions precedent, which were met on January 27, 2020, following which we obtained control of Agrifirma.

 

Following the Merger, we added 28,930 hectares to our property portfolio, of which 12,288 hectares are on the Rio do Meio Farm, located in Jaborandi, in the State of Bahia. The Rio do Meio farm is suitable for grain production and cattle raising.

 

On September 20, 2021, we entered into an agreement to sell an area comprised of 4,573 hectares (2,859 arable hectares) in the Rio do Meio Farm located in Correntina, in the State of Bahia. The sale price was R$130.1 million (approximately R$45,507/arable hectare) or 250 soybean bags per arable hectare, which was divided into seven annual installments, with an advance of R$5.3 million, which was already paid, and the first installment in the amount of R$10.6 million becoming due in 2021. The remaining balance will be paid in seven annual installments.

 

After the sale, Rio do Meio Farm remained on our portfolio, with a total area of 7,715 hectares.

 

Bananal X Farm: On March 22, 2019, we signed a purchase and sale agreement for a total area of 2,160 hectares (1,714 arable hectares) of the Bananal X Farm, located in Luís Eduardo Magalhães, in the State of Bahia. The agreement was for a fixed price of R$28.0 million to be paid in seven instalments. As of June 30, 2020, the farm was classified as a non-current asset held for sale due to a disagreement with the lessor of the farm that prevented the title transfer to the buyer. On July 31, 2020, the parties reached an agreement and we recognized the sale with a zero profit or loss effect, as the asset was recorded at its fair value, less selling expenses.

 

On the sale closing date, we received R$7.5 million, and the remaining balance of R$20.5 million will be paid by buyer in three annual instalments through 2023.

 

Acres del Sud: On December 20, 2020, our controlling shareholder, Cresud, initiated a corporate reorganization under which we entered into a share purchase agreement to acquire 100% of the shares issued by the following Bolivian companies: (i) Agropecuaria Acres del Sud S.A.; (ii) Ombu Agropecuaria S.A.; (iii) Yatay Agropecuaria S.A.; and (iv) Yuchan Agropecuarian S.A. (collectively, “Acres del Sud”), all of which were indirectly controlled by Cresud. These properties have a total area of 9,875 hectares, will be used to cultivate grains and sugarcane, and distributed among the properties San Rafael, Las Londras and La Primavera.

 

On February 4, 2021, after the fulfillment of the conditions precedent negotiated under the share purchase agreement, we assumed control of Acres del Sud. The purchase price was negotiated at R$160.4 million, based on the estimated preliminary net assets calculated as of June 30, 2020, which we paid for in full in cash. The agreement set forth a price adjustment to reflect the equity variation of the Bolivian companies from June 30, 2020 to the base date of the transaction, in accordance with the criteria established by the parties. The procedures for adjusting the price were concluded on March 21, 2021 and generated an additional payment obligation of R$5.4 million, which was paid for by us on April 30, 2021.

 

Partnership VIII: On December 9, 2020, we entered into a rural use and call option agreement up to October 31, 2021 with respect to a property located in the municipality of Pailón, Chiquitos Province, in Bolivia (“Partnership VIII”), pursuant to which we have the right to operate and purchase an area of 1,057.4528 hectares.

 

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Investment in Brenco – Companhia Brasileira de Energia Renovável

 

In March 2007, we acquired an indirect minority interest in Brenco, controlled by Novonor S.A. – Em Recuperação Judicial, through our 40.65% investment in Green Ethanol LLC (previously known as Tarpon All Equities Fund LLC), which we acquired for a purchase price of US$2.5 million. Green Ethanol LLC held 2.47% of the capital stock of Brenco, including 7,600,000 warrants issued by Brenco. In March 2008, we signed contracts for the exclusive supply to Brenco of the entirety of our sugarcane production over two full crop cycles. See “Item 4—Information On the Company—Material Agreements.”

 

In September 2008, Green Ethanol LLC decreased its shareholding in Brenco to 1.55% of Brenco’s capital stock, which percentage was subsequently increased to 3.80% in December 2008. In February 2010, ETH Bioenergia acquired substantially all of the capital stock of Brenco, thereby diluting our indirect ownership interest (held through Green Ethanol LLC) to 0.05% of Brenco’s capital stock as of December 31, 2010. As a result of the losses incurred by Brenco and of the significant level of debt, we carried out an impairment analysis of our investment interest in Brenco. As a result of such assessment, we recorded an impairment loss on our investment of R$6.6 million as of July 1, 2009.

 

Commodity Futures Contracts

 

We enter into sales contracts for the future sale and physical delivery of our agricultural commodities to international import/export companies. Such contracts are primarily with respect to soybean, but also include sugarcane in connection with our exclusive supply agreement with Brenco. In the case of soybean, we may contract a fixed price for all or part of the volume to be delivered. The price is determined according to a contractual formula based on the soybean quotation at the Chicago Board of Trade (CBOT). The price established in U.S. dollars is paid at the end of the commitment period, in reais, according to contractually defined exchange rates prevailing a few days before settlement. The terms of the agreements subject us to fines in the event that we fail to deliver the previously-committed volumes to the purchaser.

  

Material Agreements

 

Acres del Sud

 

On December 20, 2020, our controlling shareholder, Cresud, initiated a corporate reorganization under which we entered into a share purchase agreement to acquire 100% of the shares issued by the following Bolivian companies: (i) Agropecuaria Acres del Sud S.A.; (ii) Ombu Agropecuaria S.A.; (iii) Yatay Agropecuaria S.A.; and (iv) Yuchan Agropecuarian S.A. (collectively, “Acres del Sud”), all of which were indirectly controlled by Cresud. These properties have a total area of 9,875 hectares, will be used to cultivate grains and sugarcane, and distributed among the properties San Rafael, Las Londras and La Primavera.

 

On February 4, 2021, after the fulfillment of the conditions precedent negotiated under the share purchase agreement, we assumed control of Acres del Sud. The purchase price was negotiated at R$160.4 million, based on the estimated preliminary net assets calculated as of June 30, 2020, which we paid for in full in cash. The agreement set forth a price adjustment to reflect the equity variation of the Bolivian companies from June 30, 2020 to the base date of the transaction, in accordance with the criteria established by the parties. The procedures for adjusting the price were concluded on March 21, 2021 and generated an additional payment obligation of R$5.4 million, which was paid for by us on April 30, 2021.

 

Partnership VIII

 

On December 9, 2020, we entered into a rural use and call option agreement with respect to a property located in the municipality of Pailón, Chiquitos Province, in Bolivia (“Partnership VIII”), pursuant to which we have the right to operate and purchase an area of 1,057.4528 hectares.

 

Agrifirma

 

On November 22, 2019, we entered into a Merger Agreement with Agrifirma Holding. Under the terms of the Merger Agreement, Agrifima Holding would be merged into us and we would receive all of its assets, rights and obligations, holding 100% of the equity capital of the subsidiary Agrifirma Agro Ltda. and its subsidiaries, in exchange for common shares and Agrifirma Warrants issued by us to the selling shareholders of Agrifirma Holding.

 

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Agrifirma and its subsidiaries are engaged in the production, manufacture, storage and trading of agricultural products and the provision of agricultural services, as well as the management and commercial exploration of the properties that it owns. Since Agrifirma is engaged in operations in the same sector as us, we expect the following impacts immediately after the merger: operational, financial and commercial benefits, such as dilution of general and administrative expenses, capture of synergies and economies of scale in the operations and potential appreciation of undeveloped areas.

 

Agrifirma is comprised of its parent company (Agrifirma Agro Ltda.) and four subsidiaries, namely Agrifirma Bahia Agropecuária Ltda., I. A. Agro Ltda., GL Agropecuária Empreendimentos e Participações Ltda. and Agrifirma S.R.L.

 

The completion of the Merger was subject to certain requirements and conditions precedent, which were met on January 27, 2020, following which we obtained control of Agrifirma.

 

Based on the terms of the Merger Agreement, the consideration transferred in the form of shares was determined based on an initial exchange ratio (preliminary numbers), final exchange ratio (adjustment to exchange ratio) and adjustments due to indemnifications. The Merger Agreement also sets forth the minimum number of shares to be transferred at 5,392,872.

 

The parties agreed to define a first exchange ratio based on preliminary book values as of June 30, 2019, adjusted for the market value of the real estate held by us and Agrifirma Holding, according to an appraisal report issued by a specialized third party. In addition, part of the consideration was agreed to be issued by us in the form of subscription warrants. As a result, the number of shares and warrants to be issued to the shareholders of Agrifirma was set at 5,215,385 shares and 654,487 warrants.

 

Pursuant to the Merger Agreement, the initial exchange ratio was adjusted to reflect the changes in the assets described above on the preliminary balance sheet as of June 30, 2019 through the acquisition date, on January 27, 2020, which was the date of the consummation of the Merger Agreement.

 

On April 1, 2020, we notified the former shareholders of Agrifirma Holding that the final exchange ratio, based on the changes in net equity from June 30, 2019 to January 27, 2020, was determined and reached the minimum number established in the merger agreement, totaling 5,392,872 shares as the final consideration to be paid by us.

 

The Merger Agreement also sets forth certain obligations for the payment of compensation by us and the selling shareholders of Agrifirma if certain contractually indemnifiable losses occur within two years from the date of the Merger Agreement.

 

On June 18, 2020, we and the selling shareholders of Agrifirma signed a settlement agreement, pursuant to which the final exchange ratio was agreed at the minimum number of shares, totaling 5,392,872 shares. The parties also agreed that, given the resolution of a contingency by the date of the settlement agreement, the selling shareholders of Agrifirma agreed to return the amount of R$3.5 million in restricted shares and Agrifirma Warrants on January 27, 2022, which were calculated using the market price of our average share price during the 90 days prior to the settlement date.

 

The unrestricted shares issued for the consideration in connection with the acquisition of Agrifirma’s control are recognized as equity. The restricted shares, the Agrifirma Warrants and the Agrifirma Warrant dividends are recorded under “other liabilities” in the statement of financial position as their final amount may vary due to certain conditions set forth in the Merger Agreement and, for such reason, do not meet the definition of equity instrument in accordance with IAS 32 – Financial Instruments, and therefore are recognized as financial liabilities at fair value through profit or loss. The restricted shares are considered in the calculation of basic earnings per share, while the Agrifirma Warrants are considered potential common shares and as such included in the calculation of diluted earnings per share. See Note 1.1 to our financial statements for the fiscal year ended June 30, 2021.

 

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Serra Grande Farm Acquisition and Partnership VII

 

In April 2020, we acquired the Serra Grande farm located in Baixa Grande do Ribeiro, in the State of Piauí. The acquisition consisted of an area of 4,489 hectares, 2,904 hectares of which are arable to be developed and are suitable for grains cultivation. The other 1,585 hectares are permanent preservation and legal reserve areas. The acquisition price was set in R$25.0 million, or R$8,600 per arable hectare. We made an initial payment of R$10.7 million and the balance will be paid through three equal annual installments. 

 

In addition to the acquisition, the Company has an agricultural partnership in an area of 5,473 hectares of arable and developed land, already planted and operated by the Company during the 19/20 harvest (Partnership VII). This area is contiguous to the acquired area, has more than 5 years in average of production and high production potential. Partnership VII has a term up to 12 years, with a pre-fixed call option until 2024.

 

Partnership V (3SB Produtos Agrícolas S.A.)

 

On July 11, 2018, we entered into an agricultural rural partnership agreement with 3SB Produtos Agrícolas S.A. (“Brasilagro/3SB Partnership Agreement”), which was amended on August 28, 2018. The scope of 3SB Partnership Agreement involved a total of 11 rural properties, all located in the Municipality of São Felix do Araguaia, in the State of Mato Grosso, comprising a total agricultural area of 23,615 useful hectares. 3SB Produtos Agrícolas S.A. holds the rural properties under the Brasilagro/3SB Partnership Agreement by reason of rural lease agreements that it had previously entered into with the owners of such properties. For this reason, the term of the Brasilagro/3SB Partnership Agreement varies from property to property, according to the term of each rural lease agreement entered into with each the owners. On June 1, 2019, the total agricultural area of the Brasilagro/3SB Partnership Agreement was reduced by 3,242 useful hectares. On June 13, 2019, we entered into a new rural lease agreement with the owner of Fazenda Santa Luzia and Fazenda Jataí II (following the expiration of the rural lease agreements orignially entered into with 3SB Produtos Agrícolas S.A.). Considering both the Brasilagro/3SB Partnership Agreement and the agreements that we entered into with the owner of Fazenda Santa Luzia and Fazenda Jataí II, the total agricultural area currently occupied by us in São Felix do Araguaia, in the State of Mato Grosso, is 20,138 hectares.

 

Partnership IV (Agro Serra – Agro Pecuária e Industrial Serra Grande Ltda.)

 

On February 7, 2017, we entered into two agreements for an agricultural partnership in relation to a property in São Raimundo das Mangabeiras, state of Maranhão, or Partnership IV.

 

The first agreement under Partnership IV establishes an agricultural partnership with Agro Pecuária e Industrial Serra Grande Ltda. (“Serra Grande”), which consists of a sugarcane exploration agreement of an area of around 15,000 hectares. The agricultural partnership will last for 15 years from the date of the agreement and may be extended for the same period. The amount to be paid to Serra Grande corresponds to 10% of the entire production obtained in the area referred to in the agreement and the initial volume to be produced in the area during the first year of the agreement was established at 850,000 tons. After this period, spanning between one and five years, the minimum volume to be produced in the partnership areas is 4,500,000 tons of sugarcane, and from the sixth year onward until the expiration of the agreement, the minimum production volume is 1,250,000 tons of sugarcane per crop year.

 

The second agreement under Partnership IV governs the rights and obligations of the agricultural partners, through which we acquired sugarcane crops planted by the agricultural partner in the areas referred to in the partnership agreement described above. This agreement meets the definition of a finance lease. As consideration, we undertake to return, at the end of the agreement, the area referred to in the partnership agreement together with sugarcane stubble crops with the capacity to produce 850,000 tons of sugarcane in the crop year subsequent to the termination of the agricultural partnership agreement.

 

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Brenco – Companhia Brasileira de Energia Renovável

 

 In March 2008, we signed two contracts for the exclusive supply to Brenco of the entirety of our sugarcane production over two full crop cycles (for sugarcane, one full crop cycle consists of six agricultural years and five harvests). They are expected to expire in 2020, but are renewable upon the agreement of the parties. One of the contracts refers to our cultivation from an area of approximately 5,718 hectares at our Araucária farm and the other refers to approximately 3,669 hectares at our Alto Taquari farm. The price per ton, for the purpose of these agreements, is determined based on Total Recoverable Sugar, or ATR, price per ton of sugarcane effectively delivered, with ATR corresponding to the quantity of sugar available in the raw material, minus sugar content lost during the production process, multiplied by the market prices of sugar and ethanol sold by regional plants in the internal and external market, in each case, as determined by the Counsel of Sugarcane, Sugar and Alcohol Producers in São Paulo (Conselho de Produtores de Cana, Açúcar e Álcool de São Paulo, or CONSECANA). For the year ended June 30, 2021, net revenue of our sugarcane production to Brenco was R$87.7 million, representing 13.2% of our total net revenue. The purpose of the contracts is not to secure a more favorable price than the market price, since we expect that the ATR price as determined by CONSECANA will be generally equivalent to the market price, but rather to secure the sale of our sugarcane production over the long term. We believe this gives us the predictability that makes it practicable for us to grow and commercialize sugarcane, given that sugarcane crops have a productive cycle lasting six years from the first harvest. However, Brenco is facing financial difficulties and may not comply with its contractual obligations.

 

On May 8, 2015, we executed three agreements with Brenco:

  

The first agreement consists of a rural sub partnership to operate nine farms located in the municipalities of Alto Araguaia and Alto Taquari, in the state of Mato Grosso. The sub partnership started at the date of its signature and is estimated to end on March 31, 2026. The areas are to be used for the plantation and cultivation of sugarcane, which cannot exceed the duration of the contract. This contractual partnership meets the definition of an operating lease. The payment must always be in kind (tons of sugarcane) and delivered at the mill owned by Brenco, which is located in the vicinity of the farms, during the harvest period of the product. The quantity to be paid for the duration of the contract shall be established in tons per hectare and varies according to the area being explored. According to this contract, the quantity to be paid in the long term corresponds to 529,975 tons of sugarcane, of which 174,929 tons will be paid within one to five years and 355,046 tons will be paid after more than five years up to the expiration of the agreement.

 

The second agreement relates to the regulation of rights and obligations between agricultural partners from whom we acquired the crops of sugarcane planted by Brenco in the properties subject to the sub partnership agreement described above. This contract meets the definition of a financial leasing. The payment must always be in kind (tons of sugarcane) and delivered at the mill owned by Brenco during the harvest period of the product. According to this contract, the quantity to be paid in the long term corresponds to 53,845 tons of sugarcane, of which 18,604 tons will be paid within one year and 35,241 tons will be paid within one to five years.

 

In the year ended June 30, 2021, we delivered a total of 840,625 million tons of sugarcane pursuant to the agreements described above.

 

The third agreement regulates the exclusive supply to Brenco of the total sugarcane production in the properties included in the sub partnership agreement for two crop cycles, one cycle shall be effective until the depletion of the already existing sugarcane crops and the other cycle consists of the sugarcane being planted by us.

 

In the year ended June 30, 2021 and as of the date hereof, Brenco has not defaulted on the payment of any receivable. However, we currently run the risk of default by Brenco, our main customer, associated with the fact that its controlling shareholder, Novonor S.A. – Em Recuperação Judicial, is being investigated for corruption in the operation called “Lava Jato” (Car Wash) and the fact that Brenco filed for reorganization bankruptcy in Brazil (recuperação judicial) in May 2019. Novonor’s CEO has been arrested and the company has been facing the following issues: difficulties to access the credit market, decrease in its business activities, early maturity of debts, among others. Therefore, Brenco’ controlling shareholder has been cutting costs, which can adversely affect Brenco, its business and its ability to meet its payments due to us.

 

Cresca

 

On October 5, 2016, we entered into an agreement with Carlos Casado, our partner in Cresca at the time, pursuant to which we agreed to try to sell all the land that Cresca owned for a 120-day period as of the execution date of the aforementioned agreement. Further to the provisions of the agreement, we and Carlos Casado also agreed to split ownership of the land among us and Carlos Casado if either party failed to dispose of the totality of the land within the 120-day period.

 

As the properties were not sold to third-parties, on June 6 and June 8, 2017, we and Carlos Casado decided to proceed with the re-distribution of assets and liabilities of Cresca, whereby we would separate and divide the assets and liabilities of Cresca, and Cresca would distribute them to us and to Carlos Casado.

 

As a result of this transaction, we now have the following two subsidiaries that received Cresca’s assets and liabilities: (i) Palmeiras, which was incorporated to operate the activities of our investment in Cresca and (ii) Moroti, a subsidiary that has received, on February 9, 2018, upon conclusion of the process, all other assets and liabilities of Cresca attributed to us, including land and debts.

 

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On February 9, 2018, the re-distribution of assets and liabilities of Cresca was concluded and the portion of assets and liabilities attributed to the Company was transferred to the wholly-owned subsidiary Moroti.

 

As part of the re-distribution of assets and liabilities, the Company and Carlos Casado, partners in the joint venture, decided to waive the interest for late payment on the intercompany loans taken by Cresca in the total amount of R$32.9 million, of which our share was R$16.6 million. See Note 1.6 to our financial statements for the fiscal year ended June 30, 2020.

 

As of June 30, 2021, Moroti owned 59,585 hectares of which 34,673 were arable.

 

Raw Material Acquisition Risks

 

For the acquisition of farming inputs, our primary risks are foreign-exchange variations, the supply and demand of each input, farming commodity prices and freight prices. Our dependence on imported raw materials is also subject to supply and customs clearance delays. We are also subject to risks regarding the availability of the specific varieties of seeds we use, which are affected by weather conditions, among other factors.

 

In addition, the price of diesel fuel, which is the primary fuel used in farming machinery and trucks, is affected by the variation in oil prices as well as by the price-control policies adopted by the Brazilian government.

 

See “Item 3—Key Information—Risk Factors—Risks Relating to our Business and Industry” for information regarding the prohibition of the use of glyphosate and the freight rate schedule.

 

Customers

 

We currently sell a substantial portion of our total crop production to a small number of customers who have substantial bargaining power. In the year ended June 30, 2021, our three largest customers, Agro Serra, Brenco and Cargill, accounted for 50% of our total revenue. See “Item 3—Key Information—Risk Factors— Substantially all of our revenue is derived from a small number of customers, and we currently face a risk of default by our main customer.”

 

We did not and do not expect to renegotiate the terms of our agreements with our customers, such as extended payment terms or refund periods, or provide concessions or modify terms of arrangements and did not and do not expect to modify other contractual arrangements as a result of the COVID-19 pandemic.

 

Competition

 

The agriculture industry is composed of widely traded commodities, where the prices are freely determined based on supply and demand. The supply side is characterized by a large number of producers, each contributing a small part of the total production and thus having minimal influence over commodity prices, which are generally determined by indexes or exchanges in international markets, as is the case with soybean, the price of which is largely determined by the CBOT. Agricultural commodity producers therefore compete largely based on their production costs, and their scale of production. At the domestic level, producers compete on similar conditions, whereas at the international level, competition is affected significantly by, among other factors, government policies such as subsidies to agricultural producers, which can be substantial in developed countries.

 

Land acquisition is subject to intense competition. In this case, we compete to acquire the most appropriate land for cultivating our agricultural products. We believe that this process has contributed to an increase in land prices over the years and that the strongest competition has been from the larger groups having in-depth knowledge of the sector, management excellence and continuous objectives to increase their agricultural area portfolio. We understand that these large groups are mainly SLC Participações, operating in four Brazilian states; and Terra Santa Agro. In addition, we may face significant competition from large international companies which have greater financial resources than we do.

 

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Seasonality

 

Our principal products are subject to seasonality variations between the crop season and the off-season. The off-season occurs between the end of the harvest of a crop year and the beginning of the harvest of the following crop year. Such period occurs at different parts of the year depending on the agricultural product, as follows: (i) the off-season for grains in Brazil typically occurs between August and January; (ii) the off-season for sugarcane in Brazil typically occurs between December and March; and (iii) the off-season for cattle-raising in Brazil typically occurs between September and January. Because of the reduced supply of agricultural products during each product’s respective off-season, prices for such products are typically higher during that time.

 

Throughout the year, our working capital needs vary significantly depending on the harvest period of grains, sugarcane and other crops in Brazil. Changes in the harvest periods, resulting from unfavorable weather or financial restrictions on us, have a direct impact on our inventory levels, advances to producers, loans and sales volume during the year.

 

Insurance

 

Our businesses are generally subject to a number of risks and hazards, which could result in damage to individuals, or destruction of properties, facilities and equipment. As a general rule, we believe that our insurance coverage against risks that are typical in our business is adequate and consistent with the usual practices adopted by other companies operating in the same sector in Brazil. Nevertheless, we cannot ensure that the coverage set forth in our insurance policies will suffice for purposes of protecting us from all losses and damages that may occur.

 

We have a civil liability insurance policy that covers liability arising from compensation for damages caused to third parties in an amount of up to R$5 million. This policy is currently in force and will expire on November 19, 2021. We are negotiating with the insurance company to extend this policy.

 

We also have a business insurance policy (rural multi-risk) for storage structure (silo) and machinery located at our Chaparral farm located in Correntina, in the State of Bahia. This policy provides for different maximum indemnity coverage, depending on the insured event, such as lightning, explosion, electrical damages or windstorm. This policy is currently in force and will expire on April 2, 2022.

 

We also have a Directors and Officers (D&O) insurance policy, which covers the members of our board of directors, executive board, audit board or other body created by our bylaws or employees that hold a management position to which they have been elected or appointed, provided that such election or appointment has been ratified by competent bodies, as applicable, and that the indemnification shall always be subject to the limits provided in the respective insurance policy. Consultants, external auditors, shareholders, partners, interveners, depositaries or liquidators of the Company are not covered by this D&O insurance policy. This insurance policy covers civil liability up to R$30 million, and environmental damages up to R$30 million. This policy is currently in force and will expire on February 2, 2022.

 

We have an insurance policy that covers certain specific machinery (harvesters and planters), as well as the irrigation pivot system at our São José farm.

 

We also have an insurance policy that covers our headquarters office for fire, lighting and explosion events, as well as electric damage. This policy is currently in force and will expire on June 10, 2022.

 

Intellectual Property

 

In Brazil, title to a patent or trademark is obtained by means of the registration with the National Institute of Industrial Property (Instituto Nacional de Propriedade Industrial, or INPI). When such right is granted, the titleholder is ensured the exclusive use right thereof all over Brazil for a period of ten years, which may be renewed for successive equal periods indefinitely, as long as there is an interest in maintaining the trademark ownership.

 

Pursuant to the Brazilian legal framework, a trademark can be categorized as either a product, service, certification or collective mark. With regard to its presentation in local law, the trademarks can be nominative, mixed, figurative or three-dimensional. During the registration process, the depositor has an expectation of right to use the deposited trademarks, which he may avail himself from in order to identify its products or services until the registration process is ultimately concluded.

 

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We have filed three trademark registration applications with the INPI for the trademark name (which corresponds to our current corporate name) “BrasilAgro – Companhia Brasileira de Propriedades Agrícolas” under Nos. 828045089, 828045097 and 828045100.

 

Registration No. 828045089 concerning intermediation, purchase, sale or lease of properties, land, buildings and real estate in rural and urban areas, intermediation in real estate transactions of any kind, as well as participation in other companies, in undertakings in Brazil and abroad was granted to us by the INPI on June 2, 2020 and will expire on June 2, 2026. Registration No. 828045097 concerning marketing, distribution, importation and export of agricultural and livestock products was granted to us by the INPI on June 5, 2012 and will expire on June 5, 2022. Registration No. 828045100 concerning products related to agriculture and livestock, such as agricultural products, vegetables, forestry, grains and animals, fruits, vegetables, seeds, plants and natural flowers and animal feed was granted to us by the INPI on September 20, 2016 and will expire on September 20, 2026.

 

We also have filed three trademark registration applications for the trademark name “BrasilAgro – Companhia Brasileira de Propriedades Agropecuárias,” under applications No. 827971575, 827971567 and 827971583. Registration No. 827971567 was approved on April 7, 2020 and will expire on April, 7, 2030. Reistration Nos. 827971575 and 827971583 were approved on June 14, 2011 and January 28, 2014, respectively, and will expire on June 14, 2031 and January 28, 2024, respectively.

 

In addition, we filed three trademark registration applications for the single name “BrasilAgro.” The first one, filed at INPI under No. 829541870 is a service trademark, refers to NCL (9) 35 - marketing, distribution, importation and export of agricultural and livestock products, was approved on November 1, 2011 and expires on November 1, 2021. The second one, filed under No. 829541853, refers to a product trademark, on NCL 31, involving products related to agriculture and livestock, such as agricultural products, vegetables, forestry, grains and animals, fruits, vegetables and fresh vegetables, seeds, plants and natural flowers, animal food and malt, was approved on September 20, 2016 and remains in force until September 20, 2026. Finally, the third trademark registration application for the name “BrasilAgro” had the analysis thereof postponed by means of a decision dated June 28, 2011 and is currently halted given that it is pending of evaluation of another prior trademark registration application by the INPI. 

 

Following the Merger of Agrifirma, we also became the title owner of the following trademarks: (i) Registration No. 830154647, concerning the participation in other companies as a partner or shareholder, purchase and sale of real estate, and management of real estate, which was renewed on February 8, 2021 and will expire on February 8, 2031; (ii) Registration No 830154566, concerning coffee and cotton processing services, which was registered on November 29, 2016 and will expire on November 29, 2026; (iii) Registration No 830154620, concerning harvesting services (agricultural services), services of advice, consultancy and information on research in the field of agriculture, which was renewed on February 8, 2021 and will expire on February 8, 2031; (iv) Registration No. 830154663, concerning buying, selling, importing, exporting and commercialization of products related to agriculture, livestock and reforestation, such as coffee, cotton, soy, corn, firewood, cattle and their derivatives, such as meat and milk, which was registered on February 14, 2012 and will expire on February 8, 2031; and (v) Registration No. 830154582, concerning transport and storage services, which was renewed on February 8, 2021 and will expire on February 8, 2031.

 

Risk Management

 

We analyze and monitor the various risks to which our business and operations are exposed. In addition to monitoring the specific factors that directly affect our agricultural production and business operations, we also monitor the risks derived from commodity price variations for our individual agricultural products, as well as foreign-exchange variations. Through our risk management policy coordinated among our Strategic Planning department, Risk Management Committee and board of directors, we hedge our exposure to commodity price risks for our transactions through over-the-counter instruments including options and futures contracts negotiated in the commodity market and maintain our exposures within pre-established limits.

 

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Cash Management

 

To the extent we are unable or decide not to deploy our capital through agricultural property acquisitions or other investments, we maintain any uninvested cash and cash equivalents in an investment fund, which holds investments in fixed income securities in short-term, liquid investments (such as bank certificates of deposit, government securities and other cash-equivalents).

 

Regulation

 

In addition to the descriptions of regulatory matters set forth below, see the description of certain legal proceedings, including judicial and administrative proceedings relating to regulatory matters, set forth in “Item 8—Financial Information—Legal Proceedings.”

 

Environmental Regulation

 

The development of our agribusiness activities depends on a number of federal, state and municipal laws and regulations related to environmental protection. We may be subject to criminal and administrative penalties, besides being obligated to restore the environment and reimburse third parties for possible damages arising from non-compliance with such laws and regulations.

 

Administrative Liability

 

Administrative liability derives from an action or omission that results in violation of the standards of preservation, protection or restoration of the environment. Federal Decree No. 6,514 of July 22, 2008 establishes a set of sanctions that may be imposed as a result of breach of environmental regulation. Such sanctions include warning, fine, destruction of the product, suspension of activities, termination of tax benefits and credit lines granted by public institutions. Fines are determined based on the relevance and economic impact of the breach and can reach R$50.0 million. See “Item 3—Key Information—Risk Factors.”

 

Civil Liability

 

Under civil law, the offender is strictly liable for any environmental damage and subject to an objective standard of care, which creates liability regardless of negligence by the offender. Consequently, we are jointly liable with any third parties providing services for us to the extent their activities cause environmental damage. Environmental regulation also permits the regulator to recover damages from the controlling entity through the chain of share ownership if the direct offender is unable to pay the related damage.

 

Criminal Liability

 

Our officers, directors, employees and agents who engage in environmental crimes are subject to criminal sanctions, including fines, prison sentences and the imposition of community service requirements. 

 

Environmental Licenses

 

Environmental licensing is required for activities utilizing environmental resources that are considered potentially pollutant, or those that may in any way cause environmental degradation. Some Brazilian states, Bolivia and Paraguay require licenses for agricultural and animal-raising activities.

 

The environmental licensing procedure includes authorizations to change land use, water use licenses, licenses for agriculture, animal-raising activities and livestock activities, etc. All of these licenses guarantee that activities are being carried out in compliance with environmental laws and their possible impacts are being mitigated or compensated.

 

For the Paraguay farm, we obtained licenses to change land use and licenses for agricultural and animal-raising activities for the remaining area.

 

For the Nova Buriti farm, we carry out environmental impact studies and present them as regulatory agencies to obtain that licenses. However, we are also considering alternative options, such as a conservation easement, apportionment of land for an environmental reserve area and compensation for a legal reserve area.

 

For the Preferência farm, we renew the authorization to change land use with the competent environmental agency.

  

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Protected Areas

 

All rural properties in Brazil are required by law to maintain legal reserve areas. A legal reserve area is an area of each rural property where deforestation is not allowed and that is necessary for the sustainable use of natural resources, conservation and rehabilitation of ecological processes, conservation of biodiversity and shelter and protection for native fauna and flora. These areas are required in perpetuity.

 

In Brazil, it is mandatory to maintain as legal reserve at least 80% of an agricultural property located in Floresta biome within Amazonia Legal, 35% for an agricultural property in the savannah region within Amazonia Legal and 20% for an agricultural property located in other forms of native vegetation in other regions of Brazil. In Paraguay, it is mandatory to maintain as legal reserve at least 25% of all agricultural property with more than 20 hectares in forest regions and also a corridor of native vegetation of at least 100 meters for every 100 hectares of agricultural or livestock. In Bolivia, local laws do not require that a legal reserve be established, but it is mandatory that the property conform with its social economic purpose, which include the obligation to preserve, according to local laws, the biodiversity and the environment.

 

Permanent preservation areas are spaces, in both public domain and private domain, where the exercise of property rights has been limited. Permanent preservation areas include the margins of any water streams, the surroundings of headwaters and of natural water reservoirs, as well as lands inclined more than 45º. It will only be possible to intervene in these areas through previous authorization by the competent state environmental agency or, as an exception, with the specific purpose to avoid damage to the environment.

 

In addition to these areas, there are also areas for environmental compensation, and ecological corridors, which safeguard interconnection of fragments of vegetation, ensuring protection of local biodiversity. Protected areas may not be suppressed, without authorization of the competent state environmental agency, and may be used only under a regime of sustainable forest stewardship in accordance with technical and scientific criteria set forth in applicable regulations.

 

As of June 30, 2021, 72.974 hectares, or approximately 33% of the total area of our properties, consist of protected areas.

 

Rural Environmental Register (CAR)

 

In Brazil, all rural properties are required by law (Law No. 12.651/12 and Decrees Nos. 7.830/2012 and 8.235/2014) to register with the rural environmental register (CAR). This electronic registration integrates environmental information regarding the property, deforestation control, the monitoring and combating of forests and other forms of native vegetation, as well as environmental and economic planning of rural properties. The CAR gathers environmental information for each property regarding the situation of permanent preservation areas, legal reserve areas, forests and remnants of native vegetation, restricted use areas, consolidated areas, etc.

 

This register requires the rural proprietary to regularize their environmental situation. It is a requirement to have access to credit, however, sanctions are not imposed for those who are not registered with CAR. 

 

All of our owned properties are registered or in the process of being registered with CAR.

 

Ownership of Agricultural Land in Brazil by Foreigners

 

On August 23, 2010, opinion No. LA-01, of August 19, 2010, issued by the Federal Attorney General (AGU) was approved by the President of Brazil. The opinion addresses the purchase and lease of agricultural properties by Brazilian companies controlled by foreign individuals or legal entities holding the control of the capital stock of a company that owns land in Brazil. The Federal Attorney General’s opinion provides that Brazilian companies controlled by non-Brazilians require prior authorization to purchase agricultural properties and are subject to restrictions, including the following:

 

  i. the agricultural properties shall be used for agricultural, cattle raising or industrial activities, and shall be previously approved by the Ministry of Agrarian Development or by the Ministry of Development, Industry and Foreign Trade;

 

  ii. the total area of agricultural properties owned by foreigners shall not exceed the greater of (A) one fourth of the area of the municipality where the property is located; or (B) the sum of the areas held by foreigners of the same nationality shall not exceed 40% of the area of the municipality where the property is located; and

 

  iii. the acquisition shall not exceed 100 indefinite exploration modules, which are measurement units defined by INCRA. The MEI, which are measurement units adopted by INCRA, is subject to alterations by INCRA in case of changes in the economic conditions of a given region. Currently the size of the MEI range from five to 100 hectares, depending on the region.

 

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New acquisitions or new lease agreements of agricultural properties by companies controlled by non-Brazilians within the above-mentioned limits must be previously approved by INCRA. The request for the approval must be filed at the Regional Branch of INCRA (Superintendência Regional) of the State where the property is located. After that, INCRA will analyze the compliance with the above-mentioned requirements and if the transaction is approved by INCRA, it will issue a certificate of approval. The purchase and lease of agricultural properties beyond the limits of areas and percentages mentioned above require prior authorization from the Brazilian Congress.

  

In both cases, it is not possible to determine an estimated time frame for the approval procedure, since up to the date of the issuance hereof, there is no report involving the issuance of such a certificate. Moreover, for the time being, Brazilian courts have not yet ruled on the effectiveness and constitutionality of the contents of the aforementioned Attorney General’s Opinion.

 

As of June 30, 2021, approximately 55.9% of our common shares were held by foreigners.

 

On December 11, 2012, São Paulo’s General Comptroller of Justice (Corregedoria Geral de Justiça do Estado de São Paulo) issued Opinion No. 461/2012-E, establishing that entities providing notary and registrar services located in the State of São Paulo are exempt from observing certain restrictions and requirements imposed by Brazilian Federal Law No. 5,709/71 and Decree No. 74,965/74, regarding Brazilian companies with the majority of the capital stock comprised by foreigners residing outside of Brazil or legal entities incorporated abroad. In April 2013, the Regional Federal Court for the Third Region (Tribunal Regional Federal da 3ª Região – TRF) granted an injunction in the context of a claim brought by INCRA and the Federal Government against São Paulo’s General Comptroller of Justice Opinion No. 461/2012-E, suspending the effects of such opinion. In August 2013, the Regional Federal Court of the Third Region acknowledged its lack of jurisdiction to rule on such claim and sent the court records of the case to São Paulo State Appeals Court (Tribunal de Justiça do Estado de São Paulo). As a consequence of such decision, the injunction granted by the Regional Federal Court of the Third Region was set aside, and both INCRA and the Federal Government had declined on the claim. Since then, entities providing notary and registry services located in the State of São Paulo are, over again, exempt from observing certain restrictions and requirements imposed by Law No. 5,709/71 and Decree No. 74,965/74.

 

On June 25, 2014, the AGU and INCRA filed a suit with the Supreme Court (STF) against the State of São Paulo due to the decision ruled by São Paulo State Appeals Court which judged the Opinion 1 issued by AGU in 2010, unconstitutional. In this suit the stay of the preliminary order was required and, in the end, the definite annulment of Opinion 461-12-E of the Inspector General Office of São Paulo, issued on December 3, 2012. On August 7, 2014, the decision issued by Supreme Court Justice Marco Aurélio Mello, rapporteur of the process, was published, denying the injunction requested by AGU and INCRA, on the basis that the fact that more than one year and 7 months elapsed since from the issuance of the opinion of the Inspector General Office of São Paulo and the filing of the suit with STF, showing that there was no urgency in the analysis of the injunction request. In September 2016, Supreme Court Justice Marco Aurélio Mello suspended the effects of said decision issued by the São Paulo Justice Court that considered that the Opinion issued by the AGU in 2010 as unconstitutional. 

 

In addition, on April 16, 2015, the Brazilian Rural Society filed a claim for the acknowledgment of non-compliance with basic principles (ADPF) under certain provisions of the Brazilian Constitution with the Supreme Court in order to (i) declare that the paragraph 1 of article 1 of Law No. 5,709/1971 was not received by the 1988 Federal Constitution and (ii) reverse the opinion of the Federal Attorney General of 2010 (Opinion No. LA-01).

 

As of the date hereof, we are not able to provide an estimate of the timeframe for a final judgment in any of these lawsuits to be ruled by the STF.

 

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C. Organizational Structure

 

The chart below illustrates our corporate structure os of June 30, 2021. All of our subsidiaries are incorporated in Brazil, Bolivia and Paraguay.

 

 

   

D. Property, Plants and Equipment

 

See “—History and Development of the Company—Overview,” “—Business Overview—Agricultural Activities and Products,” “—Business Overview—Leases,” “—Business Overview—Investment Properties,” “—Business Overview—Agricultural Properties,” “—Business Overview— Environmental Regulation” and “—Business Overview—Environmental Licenses.”

 

ITEM 4A—UNRESOLVED STAFF COMMENTS

 

There are no unresolved staff comments as of the date of this annual report.

 

ITEM 5—OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

You should read the following discussion in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this report. Our audited annual consolidated financial statements have been prepared in accordance with IFRS as issued by IASB.

 

The following discussion contains forward-looking statements that involve risks and uncertainties, in particular with respect to the COVID-19 pandemic and related effects on our historical and future results of operations and financial condition. See “Forward-Looking Statements” and “Item 3. Key Information—Risk Factors.”

 

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A. Operating Results

 

Impact of the COVID-19 Pandemic

 

In December 2019, COVID-19 surfaced in Wuhan, China. The outbreak was declared a global pandemic by the World Health Organization on March 11, 2020. The speed and extent of the spread of COVID-19, and the duration and intensity of resulting business disruption and related financial and social impact are uncertain, and such adverse effects may be material to our business and operations.

 

In March 2020, we developed and implemented a plan comprised of certain measures to protect the health of our employees, prevent the spread of COVID-19 at our facilities and mitigate its effects on our operations. These measures included:

 

  the creation of a Prevention and Risk Committee to assess the overall situation, propose and revise preventive measures and actions to minimize risks, and coordinate the implementation of action plans;

 

  the adoption of a remote work policy for employees who are in certain risk groups or who work at our corporate headquarters in São Paulo;

 

  the implementation of certain measures and protocols to protect the safety of all persons involved in our operations, pursuant to the guidelines of the Brazilian Ministry of Health (Ministério da Saúde); and

 

  the adoption of contingency plans to prevent disruption in our operations.

 

All of our employees have been able to access all of our systems and company work tools remotely. The remote work arrangements that we adopted did not affect our ability to maintain our operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures.

 

Our operations in Brazil, Bolivia and Paraguay continued normally and, to date, we have not had had any material impact on our business and operations arising out of the COVID-19 pandemic. However, there are no recent comparable events that may guide us as to the effects of the COVID-19 pandemic, and we cannot anticipate the final effects of the COVID-19 pandemic on our business and operations until the COVID-19 pandemic is resolved.

 

See “Item 4—Information on the Company—Business Overview—Effects of the COVID-19 Pandemic,” for additional information concerning the COVID 19 pandemic. See also “Item 3—Key Information—Risk Factors—Risks Relating to our Business and Industry—We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations” and “—Risks Relating to Brazil—The measures taken or to be implemented by the Brazilian government in response to the COVID-19 pandemic may have an adverse effect on our business and operations.”

 

Business Drivers and Measures

 

Brazilian Macroeconomic Environment

 

Our financial condition and results of operations are influenced by the Brazilian economic environment.

 

Brazilian GDP increased 1.0% in 2017, increased 1.1% in 2018, increased 1.1% in 2019, decreased 4.1% in 2020 and increased 6.4% in the first six months of 2021. Inflation, as measured by the Broad Consumer Price Index (Índice de Preços ao Consumidor Amplo), or IPCA, published by IBGE, was 2.95%, 3.75%, 4.31% and 4.52% per year in 2017, 2018, 2019 and 2020, respectively, and 3.77% in the first six months of 2021. The U.S. dollar depreciated 1.5% in 2017, 17.1% in 2018, 0.6% in 2019 and 29.2% in 2020. In 2021 (until September 30, 2021), the real depreciated by 4.7% against the U.S. dollar. Unemployment in Brazil increased from 6.8% in January 2014 to 14.1% in June 2021. International reserves held by the Central Bank of Brazil decreased from US$376.7 billion as of September 30, 2016 to US$368.9 billion as of September 30, 2021.

 

In September 2015, Standard & Poor’s started to review the sovereign credit risk rating of Brazil, and downgraded it to a grade below the investment grade and, since then Brazil had been successively downgraded by the three major credit rating agencies worldwide. After the downgrading on September 30, 2015, Standard & Poor’s once more reduced the credit risk rating of Brazil from BB+ to BB and, more recently, on January 11, 2018, it downgraded the sovereign credit risk rating of Brazil from BB to BB- with stable outlook, citing the delay in the approval of tax measures intended to rebalance the government budget. In February 2016, Moody’s downgraded the credit risk rating of Brazil to a grade below the investment grade, to Ba2, with negative outlook, which in April 2018 changed to a stable outlook. In February 2018, Fitch downgraded the sovereign credit risk rating of Brazil to BB negative, which was reaffirmed in August 2018, with a stable outlook, citing structural weaknesses in public finance, high government indebtedness, a poor growth outlook, political environment and issues related to corruption.

 

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In 2020, the COVID-19 pandemic has significantly impacted economic activity and markets around the world, and its severity, magnitude and duration are highly uncertain, rapidly changing and difficult to predict. Actual and potential impacts of the COVID-19 pandemic on the global economy, the economies of certain countries and certain companies has led ratings agencies to review and downgrade the credit ratings of sovereigns and issuers of securities around the world. In May 2020, Fitch downgraded the sovereign credit rating of Brazil to BB- with negative outlook, citing the deterioration of the Brazilian economic environment as a result of political instability and the ongoing COVID-19 pandemic, which was reaffirmed in May 2021. A potential further downgrade of the ratings of Brazil, our ratings, or those of our debt securities could result in increased interest and other financial expenses related to our borrowings and debt securities and could reduce our liquidity and ability to obtain additional financing under desired terms and conditions.

 

Other Factors Affecting our Business

 

Market price variations for commodities: our principal products are subject to changes in commodities prices, including those of indexes such as the Intercontinental Exchange and the CBOT, exchange rates, as well as other indexes linked to our debts. Commodity prices are generally influenced by international, domestic and local supply and demand, which are in turn influenced by climactic and weather conditions, technology, and economic, commercial and political conditions, as well as exchange rates and transportation costs. For more information, see “Item 3—Key Information—Risk Factors—Risks Relating to our Business and Industry—Fluctuation in market prices for our agricultural products could adversely affect us” and “— Qualitative Evaluation of Market Risks.”

 

Foreign exchange: a portion of our income (loss) is linked to the exchange rate between the real and the U.S. dollar, and consequently our revenue is sensitive to foreign exchange fluctuations. Certain of our commodities, such as soybean, may be priced in reais or in U.S. dollars. In addition, certain of the raw materials necessary for farming activities, such as chemicals, pesticides and fertilizers, are priced in or based on the U.S. dollar. See “Item 3—Key Information—Exchange Rates.”

 

Inflation: inflation does not directly affect our revenue because our products are commodities whose prices are determined by reference to international commodity exchanges. Nevertheless, our labor and other operating costs are affected by inflation which directly affects our results of operations.

 

The table below sets forth certain market indices that affect our operating and financial results:

 

   Year Ended June 30,    
   2021   2020   2019   Source
Soybean Price (Paranaguá)  (R$/bag)    
Closing   158.12    115.32    81.80   Bloomberg
Exchange rate  (R$ per US$ 1.00)    
Beginning   5.37    3.82    3.90   Bloomberg
Closing   5.00    5.48    3.83   Bloomberg
Average   5.39    4.47    3.86   Bloomberg
ATR (R$/Kg of ATR)(1)   0.94    0.68    0.62   http://www.udop.com.br
Closing IGP-M (%)(2)   35.75%   7.31%   6.51%  BACEN
IPCA(3)   8.35%   2.13%   3.37%  BACEN
CDI(4)   2.26%   4.59%   6.32%  BACEN
NPK(5) (R$/ton)   2,146.91    1,362.73    1,150.28   Bloomberg

 

(1) ATR corresponds to the quantity of sugar available in the raw material subtracted from the losses in the industrial process.

(2) IGP-M is published monthly by FGV.

(3) IPCA is published monthly by IBGE.

(4) The CDI rate is the average of the rates of inter-bank deposits charged during the day in Brazil (accumulated in the period).

(5) NPK is the chemical compound of farming fertilizers made up of nitrogen, phosphorus and potassium combined at a ratio of 2:20:20.

  

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Principal Components of Our Statement of Operations

 

Revenue

 

Our operating revenue is derived mainly from the sale of (i) grains (comprised of soybean, corn, bean, cotton and sorghum); (ii) sugarcane; (iii) cattle and (iv) other farming products.

  

Taxes on sales

 

Taxes on sales vary depending on the product and the market, as follows:

 

Tax   Direct Export   Sale to
Importer/Exporter
  Domestic market
ICMS   Not levied   Not levied   Levied
PIS   Not levied   Not levied   Levied
COFINS   Not levied   Not levied   Levied
FUNRURAL   Not levied   Not levied   Levied
FETHAB   Levied   Levied   Levied

 

Below is a description of the principal taxes on sales of our products:

 

ICMS (Value-Added Tax on Sales and Services): ICMS is a state tax levied on the price of a product at an average rate of 18% for transactions within a state and 7% to 12% for transactions across states. ICMS payments are not applicable to exports of goods and services.

 

Federal Social Integration Program (Programa de Integração Social, or PIS) and Social Security Financing Contribution (Contribuição para o Financiamento da Seguridade Social, or COFINS): PIS and COFINS tax payments, levied at (i) 0.65% and 3.0% of gross revenue, respectively (cumulative) or (ii) 1.65% and 7.6%, respectively, after certain deductions (non-cumulative), depending on the business conducted and the nature of revenue earned, among other factors. PIS and COFINS payments are not applicable to exports of goods and services, or sales to import/export companies located in Brazil. Since we sell the entirety of our soybean production to such companies, such activities are not subject to PIS or COFINS payments. Brazilian law also exempts PIS and COFINS payments upon the sale of sugarcane used for the production of ethanol or biofuel, sale of maize to rural producers and manufacturers of animal feed and food and the sale of cattle.

 

Rural Workers Assistance Fund (Fundo do Produtor Rural, or FUNRURAL): Agricultural producers are subject to a tax of 2.3% to 2.85%, levied on total output sold. The FUNRURAL tax is not payable on exports of goods and services, but applies on direct sales to import/export companies located in Brazil.

 

State Fund for Transport and Housing (Fundo Estadual de Transporte e Habitação, or FETHAB) is a contribution per ton of products (soybean, corn, beans) sold in the State of Mato Grosso, as follows: R$38.48 per ton of soybean, R$10.91 per ton of corn and R$8.73 per ton of beans.

 

Gain (loss) on sale of farms

 

Upon the sale of investment property, such as our farms, we recognize in the statement of operations a gain (loss) for the difference between the sale proceeds and the carrying amount of the property sold. We account for our investment properties at cost.

  

Changes in fair value of biological assets

 

Our biological assets consist mainly of the cultivation of soybean, corn, cotton, bean, sorghum, sugarcane and cattle raising (see livestock), which are measured at fair value less cost to sell.

 

The fair value of biological assets is determined upon their initial recognition and at each subsequent balance sheet date. Gains and losses arising from the changes in fair value of biological assets is determined as the difference between fair value and the costs incurred in the plantation and treatment of crops of biological assets at the balance sheet date, and are recorded in the statement of operations in “Changes in fair value of biological assets.” In certain circumstances, the estimated fair value less cost to sell approximate cost incurred at that moment, especially when only a minor biological transformation has taken place or when no material impact is expected from that biological transformation on the price. Biological assets continue to be recorded at their fair value.

 

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The sugarcane crop productive cycle is five years on average, and for a new cycle to start depends on the completion of the previous cycle. In this regard, the current cycle is classified as biological asset in current assets, and the amount of the constitution of the bearer plant (bearer of the other cycles) are classified as permanent culture in property, plant and equipment. The calculation to estimate the value of the biological asset “sugarcane” was the discounted cash flow at a rate reflecting the risks and the terms of the operation. As a result, we projected the future cash flows in accordance with the projected productivity cycle, taking into consideration the estimated useful life of each area, the prices of total sugar recoverable, estimated productivity and the related estimated costs of production, including the cost of land, harvest, loading and transportation for each hectare planted. The soybean, corn and sorghum are temporary cultures, in which the agricultural product is harvested after a period of time spanning from 110 to 180 days after the planting date, depending on the cultivation, variety, geographic location and climate conditions. The calculation methodology used to estimate the value of the grains was the discounted cash flows at a rate reflecting the risk and terms of operations. As a result, we projected the future cash flows taking into consideration the estimated productivity, costs to be incurred based on the Company’s budget or on new internal estimates and market prices. The commodities’ prices available in futures markets, were obtained from quotes on the following boards of trade: CBOT (“Chicago Board of Trade”), the B3, and NYBOT (“New York Board of Trade”). For the agricultural products not quoted in these markets, we used the prices obtained through direct market surveys or disclosed by specialized companies. We considered the related logistic expenses and tax discounts in order to arrive at the prices of each of these products in each production unit of the Company.

 

As mentioned above, the fair value of the biological assets disclosed in the balance sheet was determined using valuation techniques – the discounted cash flows method. The data used in these methods is based on the information observed in the market, whenever possible, and if unavailable, a certain level of judgment is required to establish such fair value. Judgment is used the data to be used, e.g. price, productivity and production cost. Changes in the assumptions on these inputs might affect the fair value of biological assets.

 

Livestock

 

In 2016 the we began cattle raising operations, which typically consists of producing and selling beef calves after weaning, which characterizes the activity as breeding.

 

For segregation purposes, when applicable, the Company classifies its cattle herd into: beef cattle (current assets), which can be sold as a biological asset for meat production; and dairy cattle (non-current assets), which is used in farm operations to generate other biological assets. Up to the reporting date the Company only had beef cattle, which includes calves, heifers, cows and bulls.

 

The fair value of beef cattle is determined based on market prices, given the existence of an active market. Gain or loss from changes in the fair value of beef cattle is recognized in profit or loss for the period. The Company considered the prices in the cattle market in Bahia state and the metrics used in the market. Accordingly, beef and dairy cattle are measured based on arroba and the age bracket of animals.

 

Adjustment to net realizable value of agricultural products after harvest

 

Agricultural products from biological assets are measured at fair value when they are ready to be harvested, less selling expenses, when they are reclassified from biological assets to inventories.

 

A provision for adjustment of agricultural products to net realizable value is recognized when the fair value recorded in inventories is higher than the net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to sell. Adjustments to net realizable value are recognized in the statement of operations in “Adjustment of net realizable value of agricultural products after harvest.” 

 

Cost of sales

 

Cost of sales for sugarcane and grains includes: (i) the historical cost of the inventories including costs of raw materials such as seeds, fertilizers, pesticides, fuels and lubricants, as well as labor, maintenance of machines and agricultural equipment, depreciation and amortization and (ii) the difference between such historical cost and the fair value of the grains and sugarcane at the time of harvest.

 

Operating expenses

 

  Selling expenses: selling expenses refer mainly to shipping, storage, commissions, classification of products and other related expenses.

 

  General and administrative expenses: general and administrative expenses refer mainly to personnel, legal counsel, depreciation and amortization, lease payments and expenses related to our headquarters.

 

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Financial income and expenses

 

Financial income and expenses consist mainly of interest from financial investments, foreign exchange variations, monetary variations, interest on financial assets and liabilities and realized and unrealized gains (losses) with derivative financial instruments.

 

Income and social contribution-current and deferred taxes

 

Current and deferred income and social contribution taxes refer to taxes on net profits. We and our subsidiaries Imobiliária Engenho Ltda., I.A. Agro Ltda., GL Empreendimentos e Participações Ltda. and Agrifirma Brasil Agropecuária S.A. assess such taxes under the taxable income regime, with a maximum rate of 34%, consisting of: (i) income tax, at a rate of 15% of profits; (ii) income tax surcharge of 10% levied upon profits exceeding R$240,000 per year; (iii) social contribution tax on net profit, at a rate of 9%; and (iv) deferred income and social contribution taxes.

 

Our other subsidiaries assess such taxes under the presumed profit regime under which the tax base is computed as a percentage of revenue. This consists of income and social contribution taxes at a rate of 15% (plus a 10% surcharge for amounts exceeding R$240,000 per year) and 9%, respectively, levied on (i) 8% and 12%, respectively, of property sales; (ii) 32% of leases and services; and (iii) other revenue and capital gains.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with IFRS. We summarize our significant accounting policies, judgments and estimates in note 2 to our audited consolidated financial statements.

 

The critical accounting policies described herein are important to the presentation of our financial condition and results of operations, requiring the most difficult, subjective and complex judgments by our management, often as a result of the need to make estimates and assumptions about matters that are inherently uncertain. While preparing our financial statements, our management uses estimates and assumptions to record assets, liabilities and transactions. Our financial statements include different subjective and complex estimates regarding, among others, accounting for revenue recognition for grains and farm sales and related accounts receivable, determining the fair value of derivatives, biological assets and accounting for investments in investment properties, warrant, residual value and useful life of property, plant and equipment, deferred taxes, share base payment and legal claims. In order to provide a better understanding of how our management makes its judgments about future events, including the variables and assumptions underlying such estimates, we have identified the following critical accounting policies.

 

Fair value of biological assets

 

The fair value of biological assets is determined using valuation techniques, including the discounted cash flows method. The inputs for estimates are based on market information, whenever possible, and when such inputs are not available, a certain level of judgment is required to estimate the fair value. Judgment involves, for example, price, productivity, crop cost and production cost. Changes in the assumptions involving any of these factors may affect the fair value calculations of biological assets.

 

With regard to cattle, the Company values its breeding stock at fair value based on market price for the region.

 

Residual amount and useful life of property, plant and equipment and investment properties

 

The residual amount and useful life of assets are assessed and adjusted when necessary at the end of each reporting period. The carrying amount of the asset is immediately reduced to its recoverable value if the carrying amount is estimated to exceed the recoverable value.

 

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Legal claims

 

We are party to judicial and administrative lawsuits, as described in Item 8-Financial Information-Legal Proceedings. Provisions are recorded for contingencies related to judicial lawsuits that are estimated to represent probable losses (present obligations resulting from past events where an outflow of resources is probable and can be reliably estimated). The evaluation of the probability of loss includes the opinion of external legal advisors. Management believes that these contingencies are properly recorded and presented in the financial statements.

 

Revenue from contracts with customers

 

We recognize our revenue in an amount that reflects the Company’s expected consideration in exchange for the transfer of good or services to a customer when all performance obligations have been fulfilled.

 

Sale of goods

 

Our revenue from grain and sugarcane sales is recognized when performance obligations are met, which consists of transferring the significant risks and benefits of ownership of the goods are transferred to the purchaser, usually when the products are delivered to the purchaser at the determined location, according to the agreed sales terms.

 

In the case of grains, we normally perform forward contracts where the price is set up by us for the total or partial volume of grains to be sold at the delivery date, based on the calculations agreed on the selling contracts. Certain selling contracts are established in U.S. dollars where the amount in reais is also established based on the foreign exchange rate according to the sale terms. The price can also be adjusted by other factors, such as humidity and other technical characteristics of grains. Upon the grains delivery, the revenue is recognized based on the price established with each purchaser considering the foreign exchange rate on the delivery date. After the grains are delivered to the addressee, the quality and final weight are evaluated, thus determining the final price of the transaction, and adjusting the contractual amounts in accordance with such factors as well as by the foreign exchange rate variation up to the settlement date.

 

As for the sale of sugarcane, the Company generally enters into sales contracts for future delivery where data such as volume and minimum ATR are pre-fixed. The price of sugarcane takes into account the amount of ATR per ton of sugar cane delivered, and the value of the ATR, released monthly by CONSECANA.

 

Sale of farms

 

Sales of farms are not recognized until the performance obligation is met, which happens when: (i) control of the asset has been transferred; (ii) the Company has determined that it is probable the sale price will be collected; and (iii) the amount of revenue can be reliably measured. Usually these are met when the buyer makes the first down payment, and transfer of possession of the asset is completed, according to the contractual terms. The result from sales of farms is presented in the statement of operations as “Gain on sale of farm” at net value of the related cost.

 

Revenue from cattle raising

 

Revenue from the sale of beef cattle is recognized when the related performance obligations are met, which consists of transferring control of the cattle to the buyer, usually when the cattle is delivered to the buyer at a specific place, in accordance with the contractual terms.

 

The beef cattle raising business consists of the production and sale of beef calves after weaning (rearing process). Some animals that prove to be infertile may be sold to meat packers for slaughtering. At the Paraguay operations, the business consists of growing and selling these animals for slaughtering. The price for the sale of cattle is based on the market price of the arroba of fed cattle in the respective market on the transaction date, the animal weight, plus the premium related to the category. The sale of cattle in Brazil and Paraguay operations, in turn, considers the price of the arroba of fed cattle or heifer/cow on the date of sale in the respective market, applied to carcass yields.

 

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Revenue from leasing of land

 

The revenues from operating lease of land are recognized on a straight-line basis over the leasing period. When the lease price is defined in quantities of agricultural products or livestock, the lease amount is recognized considering the price of the agricultural product or livestock effective at the balance sheet date or at the date established in contract. The amounts received in advance as leasing, where applicable, are recognized in current liabilities. Leasing revenues in which a significant portion of the risks and benefits of ownership are retained by the lessor are classified as operating leases.

 

Investment properties

 

The land of rural properties purchased by us is measured at acquisition cost, which does not exceed its net realizable value and is presented in “Non-current assets.” The fair value of the investment properties were obtained through valuation reports of the farms prepared by independent experts. The valuation is carried out according to market practices. Certain factors such as location, type of soil, climate of the region, calculation of the improvements, presentation of the elements and calculation of the land value are all taken into account during the valuation process.

 

Deferred income and social contribution taxes

 

Deferred income and social contribution taxes are calculated to take into account all tax timing differences as follows: (1) income or expenses which are not yet taxable or deductible, such as gain on fair value of biological assets and provisions for contingencies, respectively; and (2) tax loss carryforwards, which have no expiration, when realization or recovery in future periods is considered probable.

 

Deferred tax assets are generated under the taxable income regime only, based on our business plan. The business plan includes consideration of a variety of factors including the 30% annual limitation for utilizing tax loss carryforwards and changes in the Brazilian economic conditions. We evaluate whether a valuation allowance is required for these assets and deferred tax assets are recognized only to the extent that is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized, otherwise a valuation allowance is recorded. We also include in our evaluation the limitation of utilizing up to only 30% of annual taxable income in connection with recognition of tax loss carryforwards.

 

Fair value of financial instruments

 

When the fair value of the financial assets and liabilities presented in the balance sheet cannot be obtained in the active market, it is determined using valuation techniques, including the discounted cash flow method. The data for such methods is based on those practiced in the market, when possible; however, when it is not viable, a certain level of judgment is required to establish the fair value. The judgment includes considerations on the data used, such as liquidity risk, credit risk, and volatility. Changes in the assumptions about these factors may affect the presented fair value of financial instruments.

 

Transactions with share-based payment

 

We measure the cost of transactions to be settled with shares with employees based on the fair value of equity instruments on the grant date. The estimate of the fair value of share-based payments requires the determination of the most adequate pricing model to grant equity instruments, which depends on the grant terms and conditions. It also requires the determination of the most adequate data for the pricing model, including the expected option life, volatility and dividend yield, and the corresponding assumptions.

 

Leases

 

We account for lease agreements in accordance with the requirements of IFRS 16 – Leases and recognize right-of-use assets and lease liabilities for the lease operations under agreements that meet the requirements of the accounting standard. In order to measure lease liabilities, our management considers only the minimum fixed lease payments. The measurement of lease liabilities corresponds to the total future payments of leases and rentals, adjusted to present value, considering the incremental borrowing rate.

 

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New standards, amendments and interpretations of standards

 

New or revised pronouncements applied for the first time in the current year

 

Amendments to IFRS 3 – Definition of a Business

 

The amendment to IFRS 3 – Business Combinations clarifies that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that, together, significantly contribute to the ability to create output. Furthermore, it clarifies that a business can exist without including all of the inputs and processes needed to create outputs. These amendments had no impact on the consolidated financial statements of the Company, but may impact future periods should the Company enter into any business combinations.

 

Amendments to IFRS 7, IFRS 9 and IAS 39 – Interest Rate Benchmark Reform

 

The amendments to IFRS 9 and IAS 39 – Financial Instruments: Recognition and Measurement provide a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainty about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument. These amendments have no impact on the consolidated financial statements of the Company as it does not have any interest rate hedge relationships.

 

Amendments to IAS 1 and IAS 8 – Definition of Material

 

The amendments provide a new definition of material that states, “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. These amendments had no impact on the consolidated financial statements of, nor is there expected to be any future impact to the Company.

 

Amendments to IFRS 16 – COVID-19 Related Rent Concessions

 

On 28 May 2020, the IASB issued COVID-19-Related Rent Concessions – Amendment to IFRS 16 Leases. The amendments provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the COVID-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a COVID-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the COVID-19 related rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. The amendment applies to annual reporting periods beginning on or after June 1, 2020. Earlier application is permitted. This amendment had no impact on the consolidated financial statements of the Company.

 

New or revised pronouncements applied for the first time in the year ended June 30, 2020

 

IFRS 16 – Leases

 

IFRS 16 supersedes IAS 17 – Leases, IFRIC 4 – Determining whether an Arrangement contains a Lease, SIC-15 – Operating Leases-Incentives and SIC-27 – Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognize most leases on the balance sheet.

 

Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 does not have an impact for leases where the Company is the lessor.

 

The Company adopted IFRS 16 using the modified retrospective method of adoption, with the date of initial application of July 1, 2019.

 

The standard had significant impacts on the financial statements, since, according to the new principles introduced by IFRS 16, the Company recognized lease liabilities and right-of-use assets on the date of initial application for leases previously classified as operating leases. The Company’s main contract are related to agricultural partnership operations and land lease, in addition to other less relevant contracts that involve the lease of machinery, vehicles and properties.

 

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The Company elected to use the transition practical expedient to not reassess whether a contract is, or contains, a lease at July 1, 2019. Instead, the Company applied the standard only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Company also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (short-term leases), and lease contracts for which the underlying asset is of low value (low-value assets).

 

The right-of-use of the asset were measured at the amount equivalent to the lease liability, adjusted by the amount of any payments made in advance or accumulated related to these leases that were recognized in the balance sheet immediately prior to the initial adoption of the standard. Lease liabilities are discounted to present value using the incremental borrowing rate of the lessee on the transition date.

 

Interpretation IFRIC 23 – Uncertainty over income tax treatments

 

The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments.

 

The Interpretation specifically addresses the following:

 

  Whether an entity considers uncertain tax treatments separately

 

  The assumptions an entity makes about the examination of tax treatments by taxation authorities

 

  How an entity determines taxable profit (loss), tax bases, unused tax losses, unused tax credits and tax rates

 

  How an entity considers changes in facts and circumstances

 

An entity must determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. The interpretation is effective for annual reporting periods beginning on or after January 1, 2019, but certain transition reliefs are available. The Company adopted the standard as of July 1, 2019 and concluded that there are no significant effects on its consolidated financial statements.

 

New or revised pronouncements applied for the first time in the year ended June 30, 2019

 

In the fiscal year starting July 1, 2018, the Company adopted IFRS 9 – Financial Instruments and IFRS 15 – Revenues from Contracts with Customers. The adoption of these new standards did not have any impact in the Company’s statement of income, except for the amended and additional disclosures required by these standards.

 

IFRS 9 – Financial Instruments

 

The IASB issued the final version of IFRS 9 – Financial Instruments, which replaces IAS 39 – Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 combines the three aspects of the project for accounting for financial instruments: classification and measurement, asset impairment, and hedge accounting. The standard is applicable for fiscal years beginning on January 1, 2018.

 

Starting July 1, 2018, the Company applied IFRS 9 – Financial Instruments as the basis for recognition, classification and measurement of financial instruments.

 

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IFRS 15 – Revenue from Contracts with Customers

 

IFRS 15 establishes a five-step model to account for revenues from agreements with clients. According to IFRS 15, revenue is recognized for a value that reflects the consideration to which an entity expects to be entitled in exchange for the transfer or goods or services to a client. The new standard on revenue will replace all current requirements for recognition of revenue in accordance with IFRS.

 

Starting from July 1, 2018, the Company adopted the IFRS 15 – Revenue from Contracts with Customers.

 

The standard provides the principles to be applied by an entity to determine the measurement of revenue and how and when it must be recognized, based on five steps: i) identification of the agreements with clients; ii) identification of the performance obligations within the agreements; iii) determination of the transaction price; iv) allocation of the transaction price to the performance obligations within the agreements; and v) recognition of revenue when the performance obligation is fulfilled.

 

The changes establish the criteria for measurement and registration of sales, as they were effectively made with due presentation, as well as registration of the values to which the Company is entitled in the operation, considering any estimates of impairment loss.

 

Standards issued but not yet in force

 

Amendments to IFRS 3 – Defining Businesses

 

In October 2018, the IASB issued amendments to IFRS 3 regarding the definition of a business to help entities to determine if a set of activities and assets acquired is a business or not. They clarify the minimum requirements for a company, eliminate the assessment of if market participants are capable of replacing missing elements, include guidelines to help entities to evaluate if an acquired process is substantive, determine better the definitions of business and outputs and introduce a test of concentration of optional fair value. New illustrative cases were provided with the amendments.

 

Since the amendments apply prospectively to transactions or other events occurring on the date or after the first-time adoption, the Company will not be affected by these amendments on the transition date.

 

Amendments to IAS 1 and IAS 8 – Definition of Material Omission

 

In October 2018, IASB issued amendments to IAS 1 and IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of omission in all standards, with the information material if omitting, misstating or obscuring if it could reasonably influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

 

Such amendments are not expected to have a significant impact on Company’s individual and consolidated financial statements.

 

There are no other standards and interpretations issued and not yet adopted that may, in the opinion of the Management, significantly impact profit or loss or shareholders’ equity disclosed by the Company.

 

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JOBS Act

 

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain requirements for qualifying public companies.

 

Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions, we may not be required to, among other things, provide an auditor’s attestation report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act to comply with any PCAOB rules, that, if adopted in the future, would require mandatory audit firm rotation and auditor discussion and analysis pursuant to any future audit rule promulgated by the PCAOB. These exemptions apply until we are no longer an “emerging growth company.” The JOBS Act also provides “emerging growth companies” an election to comply with new or revised accounting standards on a delayed basis for those standards that have a different effective date for public and private companies. However, such election is limited to companies that prepare their financial statements and report in accordance with accounting principles generally accepted in the United States of America. As our financial statements are prepared in accordance with IFRS, such accommodation is not available to us, and we will be required to apply new or revised accounting standards under IFRS as from the effective date established in the corresponding standard.

 

Recent Developments

 

Sale of Rio do Meio Farm

 

On September 20, 2021, we entered into an agreement to sell an area comprised of 4,573 hectares (2,859 arable hectares) in the Rio do Meio Farm located in Correntina, in the State of Bahia. The sale price was R$130.1 million (approximately R$ 45,507/arable hectare) or 250 soybean bags per arable hectare, which was divided into seven annual installments, with an advance of R$5.3 million, which was already paid, and the first installment in the amount of R$10.6 million becoming due in 2021. The remaining balance will be paid in seven annual installments.

 

Sale of Alto Taquari Farm

 

On October 7, 2021, we entered into an agreement to sell an area comprised of 3,723 hectares (2,694 arable hectares) in the Alto Taquari Farm located in Alto Taquari, in the State of Mato Grosso. The sale price was R$589.0 million (approximately R$218,641/arable hectare) or 1,100 soybean bags per arable hectare. Part of such price corresponding to R$16.5 million was paid in October 2021 and an additional payment of R$31.4 million shall be made by November 2021. The remaining balance is indexed in soybean bags and will be paid in eight annual installments, starting in May 2022. The delivery of the area will occur in two phases, the first occurred in October 2021, consisting of 2,566 hectares (1,537 arable hectares), in the amount of approximately R$336.0 million, and the second will occur in September 2024, consisting of 1,157 arable hectares, in the amount of approximately R$253.0 million. We intend to continue to explore and operate the areas that were sold until completion of each delivery phase.

 

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Results of Operations

 

The following discussion of our results of operations is based on our consolidated financial statements prepared in accordance with IFRS. The discussion of the results of our business segments is based upon financial information reported for each of the segments of our business, as presented in the table below.

 

The following tables set forth operating results of each of our segments and the reconciliation of these results to our consolidated statement of income.

 

   Year Ended June 30, 2021 
   (in R$ thousands) 
           Agricultural activity 
   Total   Real estate   Grains   Cotton   Sugarcane   Cattle raising   Other   Corporate 
Net revenue   662,952    11,365    330,417    27,771    264,978    28,966    (545)    
Gain from sale of farm   53,097    53,097                         
Gain (loss) on fair value of biological assets and agricultural products   527,348        348,307    30,051    142,302    10,234    (3,546)    
Reversal of provision for agricultural products after harvest   (22,728)       (22,728)                    
Cost of sales   (729,145)   (1,874)   (431,126)   (37,082)   (231,543)   (25,596)   (1,924)    
Gross profit   491,524    62,588    224,870    20,740    175,737    13,604    (6,015)    
                                         
Operating income (expenses)                                        
Selling expenses   (27,951)   (491)   (26,073)   (289)   (563)   (535)        
General and administrative expenses   (46,852)                           (46,852)
Other operating income   (22,613)                           (22,613)
Equity pickup   11                            11 
Operating income (loss)   394,119    62,097    198,797    20,451    175,174    13,069    (6,015)   (69,454)
                                         
Net financial income                                        
Financial income   849,623    269,001    524,696    3,253    3,406    4,113    -    45,154 
Financial expenses   (945,611)   (233,339)   (601,953)   (7,431)   (8,929)   (7,273)   -    (86,686)
Income (loss) before taxes   298,131    97,759    121,540    16,273    169,651    9,909    (6,015)   (110,986)
                                         
Income and social contribution taxes   19,515    (10,762)   (41,324)   (5,533)   (57,681)   (3,369)   2,045    136,139 
                                         
Net income (loss) for the year   317,646    86,997    80,216    10,740    111,970    6,540    (3,970)   25,153 

 

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   Year Ended June 30, 2020 
   (in R$ thousands) 
           Agricultural activity 
   Total   Real estate   Grains   Cotton   Sugarcane   Cattle raising   Other   Corporate 
Net revenue   487,568    14,680    233,413    13,052    192,942    32,674    807     
Gain from sale of farm   61,420    61,420                         
Gain (loss) on fair value of biological assets and agricultural products   160,371        86,373    1,373    75,861    (1,298)   (1,938)    
Reversal of provision for agricultural products after harvest   (4,153)       (4,153)                    
Cost of sales   (483,813)   (4,876)   (245,805)   (13,529)   (184,811)   (32,436)   (2,356)    
Gross profit   221,393    71,224    69,828    896    83,992    (1,060)   (3,487)    
                                         
Operating income (expenses)                                        
Selling expenses   (14,300)   3,731    (16,247)   (282)   (1,136)   (366)        
General and administrative expenses   (43,890)                           (43,890)
Other operating income   1,231                            1,231 
Equity pickup   (150)                           (150)
Operating income (loss)   164,284    74,955    53,581    614    82,856    (1,426)   (3,487)   (42,809)
                                         
Net financial income                                        
Financial income   375,413    146,161    11,325    886            23,053    193,988 
Financial expenses   (406,168)   (133,795)   (39,362)   (3,651)   (4,828)   (1,532)   (43,175)   (179,825)
Income (loss) before taxes   133,529    87,321    25,544    (2,151)   78,028    (2,958)   (23,609)   (28,646)
                                         
Income and social contribution taxes   (13,975)   (6,722)   (8,685)   731    (26,530)   1,006    8,027    18,198 
                                         
Net income (loss) for the year   119,554    80,599    16,859    (1,420)   51,498    (1,952)   (15,582)   (10,448)

 

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   Year Ended June 30, 2019 
   (in R$ thousands) 
           Agricultural activity 
   Total   Real estate   Grains   Cotton   Sugarcane   Cattle raising   Other   Corporate 
Net revenue   357,910    8,520    171,735        160,476    16,795    384     
Gain from sale of farm   142,812    142,812                         
Gain (loss) on fair value of biological assets and agricultural products   56,718        18,714    2,619    34,511    1,526    (652)    
Reversal of provision for agricultural products after harvest   (2,040)       (2,040)                    
Cost of sales   (319,214)   (1,788)   (156,656)       (142,303)   (17,118)   (1,349)    
Gross profit   236,186    149,544    31,753    2,619    52,684    1,203    (1,617)    
                                         
Operating income (expenses)                                        
Selling expenses   (10,536)   (35)   (10,885)           (201)   585     
General and administrative expenses   (38,812)                           (38,812)
Other operating income   (1,064)                           (1,064)
Equity pickup   1,102                            1,102 
Operating income (loss)   186,876    149,509    20,868    2,619    52,684    1,002    (1,032)   (38,774)
                                         
Net financial income                                        
Financial income   310,538    93,460    13,699        79,232        11,549    112,598 
Financial expenses   (297,616)   (116,502)   (9,566)       (44,569)           (126,600)
Income (loss) before taxes   199,798    126,467    25,001    2,619    86,968    1,002    10,517    (52,776)
                                         
Income and social contribution taxes   (22,719)   (7,724)   (8,500)           (341)   (3,576)   26,991 
                                         
Net income (loss) for the year   177,079    118,743    16,501    2,619    (29,569)   661    6,941    (25,785)
                                         

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The table below shows a summary of our statement of operations for the years indicated.

 

   2021   2020   2019 
   (in R$ thousands, except share and per share information) 
CONSOLIDATED STATEMENT OF INCOME            
Revenue   662,952    487,568    357,910 
Gain on sale of farms   53,097    61,420    142,812 
Changes in fair value of biological assets and agricultural products   527,348    160,371    56,718 
Adjustments to net realizable value of agricultural products after harvest, net   (22,728)   (4,153)   (2,040)
Cost of sales   (729,145)   (483,813)   (319,214)
Gross profit   491,524    221,393    236,186 
Selling expenses   (27,951)   (14,300)   (10,536)
General and administrative expenses   (46,852)   (43,890)   (38,812)
Other operating income (expenses) net   (22,613)   1,231    (1,064)
Share of (loss) profit of a joint venture   (11)   (150)   1,102 
Operating income (loss)   394,119    164,284    186,876 
Financial income   849,623    375,413    310,538 
Financial expenses   (945,611)   (406,168)   (297,616)
Financial (expense) income, net   (95,988)   (30,755)   12,922 
Profit before income and social contribution taxes   298,131    133,529    199,798 
Income and social contribution taxes   (19,515)   (13,975)   (22,719)
Net Profit for the year   317,646    119,554    177,079 
Profit attributable to equity holders of the parent   317,646    119,554    177,079 
Issued shares at the fiscal year end   102,377,008    62,104,301    56,888,916 
Basic earnings per share   4.56    2.11    3.29 
Diluted earnings per share   4.45    2.09    3.27 

 

Year Ended June 30, 2021 Compared to Year Ended June 30, 2020

 

Net revenue

 

Net revenue increased R$175.4 million from R$487.6 million for the year ended June 30, 2020 to R$663.0 million for the year ended June 30, 2021. This increase was mainly due to the following:

 

  i. Revenue from sugarcane sales: revenue from sugarcane sales increased R$72.0 million from R$192.9 million (reflecting sales of 2,062,354 tons at an average price of R$93.55 per ton) for the year ended June 30, 2020 to R$265.0 million (reflecting sales of 2,026,640 tons at an average price of R$130.75 per ton) for the year ended June 30, 2021. This represents an increase of 37.3% over the previous year, mainly resulting from the increase in average per-ton sugarcane sales price, which was partially offset by a decrease in sales volume. The increase in per-ton sugarcane price was due to the higher price of the TRS (total recoverable sugar) of sugarcane sold. In the same period, there was also an increase in the price of the TRS per ton of harvested sugarcane, from R$0.672 per kg in 2020 to R$0.937 per kg in 2021.

 

  ii. Revenue from grain sales: revenue from grain sales increased R$97.0 million from R$233.4 million for the year ended June 30, 2020 (reflecting sales of 252,386 tons at an average price of R$1,081.3 per ton) to R$330.4 million for the year ended June 30, 2021 (reflecting sales of 280,878 tons at an average price of R$1,176.4 per ton). This represented an increase of 41.6% over the previous year resulting from increases in soybean and corn sales, as explained below:

 

  Revenue from soybean sales: revenue from soybean sales increased R$40.6 million from R$195.2 million (reflecting sales of 166,145 tons at an average price of R$1,174.92 per ton) for the year ended June 30, 2020 to R$235.8 million (reflecting sales of 137,581 tons at an average price of R$ 1,713.64 per ton) for the year ended June 30, 2021. This represents an increase of 20.8% over the previous year resulting mainly from the increase in commodity prices.

  

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  Revenue from corn sales: revenue from corn sales increased R$42.0 million from R$35.0 million (reflecting sales of 84,686 tons at an average price of R$413.60 per ton) for the year ended June 30, 2020 to R$77.0 million (reflecting sales of 139,485 tons at an average price of R$552.09 per ton) for the year ended June 30, 2021. This represents an increase of 118.7% over the previous year, which was a result of the increase in the number of hectares planted, including the production volume increase from the acquisition of farms in Bolivia in the beginning of 2021 as well as an increase in the corn sales price.

 

  iii. Revenue from cattle sales: cattle-raising revenue decreased by R$3.7 million from R$32.7 million (related to the sale of 15,159 head of cattle at R$5.72 per kilo) for the year ended June 30, 2020 to R$29.0 million (related to the sale of 9,685 head of cattle at R$ 7.91 per kilo) for the year ended June 30, 2021. The decrease in the volume sold is due to the stage of maturity of the herd in 2021, with fewer heads of cattle in the point of sale during the year ended June 30, 2021.

 

The table below shows a summary of the number of hectares harvested, productivity and revenues from grain and sugarcane production:

 

   Harvest (hectares)   Productivity (tons)   Revenue (in R$ thousands) 
   2021   2020   2021   2020   2021   2020 
Grain   89,571    81,905    282.420    252,386    330.417    233,413 
Sugarcane   27,831    29,169    2,248,492    2,236,328    264.978    192,942 

 

Gain on sale of farms

 

For the year ended June 30, 2021, the gain on sale of farms was R$53.1 million, including the sale of 1,654 hectares (1,250 arable hectares), 133 arable hectares of the Jatobá Farm and 2,160 hectares (1,714 arable hectares) of the Bananal X Farm, a rural property located in Luís Eduardo Magalhães, in the State of Bahia. We also recognized a gain of R$2.9 million related to deferred revenue after final measurement of the Jatobá II Farm. Revenue from sales of farms totaled R$85.8 million, at a cost of R$32.7 million, including indirect taxes. For the year ended June 30, 2020, we sold 3,199 hectares of the Jatobá and Alto Taquari Farms in the States of Bahia and Mato Grosso, respectively, for an aggregate amount of R$71.5 million at a cost of R$10.1 million, including indirect taxes.

 

Changes in fair value of biological assets and agricultural products

 

Changes in fair value of biological assets and agricultural products increased R$367.0 million from a gain of R$160.4 million for the year ended June 30, 2020 to a gain of R$527.4 million for the year ended June 30, 2021. This variation resulted mainly from the increase in the fair value of biological assets and agricultural products of grains from a gain of R$86.3 million for the year ended June 30, 2020 to a gain of R$348.3 million for the year ended June 30, 2021. Such variation was mainly due to an increase in the commodities prices in relation to the previous year due to market conditions. In addition, the fair value of biological assets and agricultural products of sugarcane varied from a gain of R$75.9 million for the year ended June 30, 2020 to a gain of R$142.3 million for the year ended June 30, 2021. Such variation was a result of the increase in ethanol prices.

 

Adjustments to net realizable value of agricultural products after harvest

 

We recognized an impairment of net realizable value of agricultural products after harvest of R$4.2 million for the year ended June 30, 2020. For the year ended June 30, 2021, we recognized an impairment of net realizable value of agricultural products after harvest of R$22.7 million. Such variations resulted from the increase in the corn and soybean prices from the harvest time to the end of the fiscal year.

 

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Cost of sales

 

Cost of sales increased R$245.3 million from R$483.8 million for the year ended June 30, 2020 to R$729.1 million for the year ended June 30, 2021.

 

Changes in costs year-over-year are directly linked to the market prices of commodities at the time of harvest as well as the harvested volumes (tons), as explained below:

 

  i. Cost of soybean sold: the cost of soybean sold increased by R$125.8 million. Our average cost per ton of soybean sold increased 94.4% from R$1,241.64 per ton (corresponding to 166,145 tons at a total cost of R$206.3 million) for the year ended June 30, 2020 to R$2,413.92 per ton (corresponding to 137,581 tons at a total cost of R$332.1 million) for the year ended June 30, 2021, mainly due to an increase in the commodity price, which was partially offset by a decrease in the volume sold.

 

  ii. Cost of corn sold: the cost of corn sold increased by R$45.8 million. Our average cost per ton of corn sold increased 45.8% from R$385.9 per ton (corresponding to 84,686 tons at a total cost of R$32.7 million) for the year ended June 30, 2020 to R$562.5 per ton (corresponding to 139,485 tons at a total cost of R$78.5 million) for the year ended June 30, 2021, mainly due to an increase in the commodity price and an increase in the volume sold.

  

  iii. Cost of sugarcane sold: the cost of sugarcane increased by R$46.7 million. Our average cost per ton of sugarcane sold increased 28% from R$89.61 per ton (corresponding to 2,062,354 tons at a total cost of R$184.8 million) for the year ended June 30, 2020 to R$114.72 per ton (corresponding to 2,018,393 tons at a total cost of R$231.5 million) for the year ended June 30, 2021, mainly due to an increase in the sugarcane market price, which was partially offset by a decrease in the volume sold.

 

Gross profit

 

For the reasons mentioned above, our gross profit for the year ended June 30, 2021 was R$491.5 million, representing an increase of R$270.1 million, compared to R$221.4 million for the year ended June 30, 2020.

 

Selling expenses

 

Selling expenses increased by R$13.7 million from R$14.3 million for the year ended June 30, 2020 to R$28.0 million for the year ended June 30, 2021. The increase of R$13.7 million was mainly due to a gain related to the reversal of allowance for expected credit losses in 2020, arising from the acquisition of Agrifirma, an increase in commissions and selling expenses related to a higher volume of agricultural products sold, and an increase in freight and storage expenses, from R$14.5 million in the year ended June 30, 2020 to R$24.7 million in the year ended June 30, 2021, due to the opening of a silo plant at the Araucária Farm and the higher cost of processing storage in the Xingu region. Selling expenses were also affected by the soybean crop failures in Paraguay, the Company incurred in commercial fines in the amount of R$4.5 million for the year ended June 30, 2021..

 

General and administrative expenses

 

General and administrative expenses increased R$3.0 million from R$43.9 million for the year ended June 30, 2020 to R$46.9 million for the year ended June 30, 2021. This increase was primarily due to higher personnel expenses, taxes paid for the 2nd long-term stock incentive plan approved by us in May 2021 and the increase in expenses with listing and bookkeeping costs, expenses with phone services, building maintenance, notary offices and insurance, in connection with the growth of the Company’s operations.

 

Other operating income (expenses), net

 

For the year ended June 30, 2020, other operating income, net, amounted to R$1.2 million. For the year ended June 30, 2021, other operating expenses, net, amounted to R$22.6 million. Other operating expenses, net for the year ended June 30, 2021, relate to (i) higher expenses arising out of settlements in connection with labor lawsuits entered into during the year ended June 30, 2021, (ii) the contractual losses, costs referring to commercial contracts resulting from the crop failures in Paraguay; and (iii) the negative impact of R$12.7 million on the subscription warrants issued in connection with Agrifirma’s merger as a result of the price change in our shares.

 

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Equity pickup

 

For the year ended June 30, 2021 we recorded a gain of R$ 0.01 million compared to an expense of R$0.2 million for the year ended June 30, 2020.

 

Financial income (expenses), net

 

Financial income increased R$474.2 million from R$375.4 million for the year ended June 30, 2020 to R$849.6 million for the year ended June 30, 2021 and financial expenses increased R$539.4 million from R$406.2 million for the year ended June 30, 2020 to R$945.6 million for the year ended June 30, 2021. The variation in financial income (expenses), net is mainly attributable to:

 

  i. The increase in gains on remeasurement of receivables from the sale of farms and leases in the amount of R$28.5 million, which was due to the variation in the amount to be received from the sales of the Araucária, Alto Taquari and Jatobá Farms, denominated in soybean bags. This variation is explained by the variation of the soybean price index, considering the Chicago Stock Exchange (CBOT), port premium (basis), exchange rate and interest rate (with reference to the CDI).

 

  ii. The increase in foreign exchange losses in the amount of R$7.3 million, which was due to the variations of the exchange rate of the Brazilian real against the U.S. dollar in the year ended June 30, 2021 as compared to the year ended June 30, 2020.

 

  iii. The increase in losses from realized and unrealized derivative transactions in the amount of R$77.3 million. The derivatives result reflects the commodities hedge operations results and the impact of the exchange variation of the Brazilian real against the U.S. dollar on cash, which was partially dollarized in order to maintain purchasing power with regard to inputs, investments and new acquisitions, which have a positive correlation with the U.S. dollar.

  

Income and social contribution taxes

 

We recognized income and social contribution tax expenses of R$19.5 million for the year ended June 30, 2021 and of R$(14.0) million for the year ended June 30, 2020. Current income and social contribution tax expenses increased from R$ 10.5 million for the year ended June 30, 2020 to R$31.0 million for the year ended June 30, 2021. Deferred income and social contribution tax expenses increased from R$(3.5) million for the year ended June 30, 2020 to R$50.5 million for the year ended June 30, 2021.

 

Profit for the year

 

As a result of the above, profit for the year ended June 30, 2021 increased to R$317.6 million, compared to R$119.6 million for the year ended June 30, 2020.

 

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Year Ended June 30, 2020 Compared to Year Ended June 30, 2019

 

Net revenue

 

Net revenue increased R$129.7 million from R$357.9 million for the year ended June 30, 2019 to R$487.6 million for the year ended June 30, 2020. This increase was mainly due to the following:

 

  i. Revenue from sugarcane sales: revenue from sugarcane sales increased R$32.5 million from R$160.5 million (reflecting sales of 1,781,229 tons at an average price of R$90.09 per ton) for the year ended June 30, 2019 to R$192.9 million (reflecting sales of 2,062,354 tons at an average price of R$93.55 per ton) for the year ended June 30, 2020. This represents an increase of 20.2% over the previous year, mainly resulting from the increase in average per-ton sugarcane sales price and the increase in sales volume. The increase in per-ton sugarcane price was due to the higher price of the TRS (total recoverable sugar) of sugarcane sold. In the same period, there was also an increase in the price of the TRS per ton of harvested sugarcane, from R$0.639 per kg in 2019 to R$0.672 per kg in 2020.

 

  ii. Revenue from grain sales: revenue from grain sales increased R$61.7 million from R$171.7 million for the year ended June 30, 2019 (reflecting sales of 158,454 tons at an average price of R$1,083.8 per ton) to R$233.4 million for the year ended June 30, 2020 (reflecting sales of 252,386 tons at an average price of R$1,081.3 per ton). This represented an increase of 35.9% over the previous year resulting from increases in sales volume, represented mainly by revenues from soybean and corn sales, as explained below:

 

  Revenue from soybean sales: revenue from soybean sales increased R$33.5 million from R$161.7 million (reflecting sales of 137,114 tons at an average price of R$1,179.45 per ton) for the year ended June 30, 2019 to R$195.2 million (reflecting sales of 166,145 tons at an average price of R$1,174.92 per ton) for the year ended June 30, 2020. This represents an increase of 20.7% over the previous year resulting from an increase in sales volume, which was a result of the increase in the number of hectares planted, in line with our strategy to continuously develop arable areas at the farms we operate.

  

  Revenue from corn sales: revenue from corn sales increased R$25.0 million from R$10.0 million (reflecting sales of 21,340 tons at an average price of R$469.35 per ton) for the year ended June 30, 2019 to R$35.0 million (reflecting sales of 84,686 tons at an average price of R$413.60 per ton) for the year ended June 30, 2020. This represents an increase of 249.7% over the previous year, which was a result of the increase in the number of hectares planted, in line with our strategy to continuously develop arable areas at the farms we operate.

 

  iii. Revenue from cattle sales: cattle-raising revenue by R$15.9 million from R$16.8 million (related to the sale of 8,750 head of cattle at R$5.18 per kilo) for the year ended June 30, 2019 to R$32.7 million (related to the sale of 15,159 head of cattle at R$5.72 per kilo) for the year ended June 30, 2020. The increase in the number of head of cattle sold is a result of the maturity of the herd held by us as well as the acquisition of head of cattle in the period.

 

The table below shows a summary of the number of hectares harvested, productivity and revenues from grain and sugarcane production:

 

   Harvest (hectares)   Productivity (tons)   Revenue (in R$ thousands) 
   2020   2019   2020   2019   2020   2019 
Grain   81,905    66,899    252,386    158,454    233,413    171,735 
Sugarcane   29,169    31,832    2,062,354    1,781,229    192,942    160,476 

 

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Gain on sale of farms

 

For the year ended June 30, 2020, we sold 3,199 hectares of the Jatobá and Alto Taquari Farms in the States of Bahia and Mato Grosso, respectively, for R$71.5 million at a cost of R$10.1 million, including indirect taxes. For the year ended June 30, 2019, we sold 13,011 hectares of the Jatobá and Alto Taquari Farms in the States of Bahia and Mato Grosso, respectively, for R$177.2 million at a cost of R$34.4 million, including indirect taxes.

 

Changes in fair value of biological assets and agricultural products

 

Changes in fair value of biological assets and agricultural products increased R$103.7 million from a gain of R$56.7 million for the year ended June 30, 2019 to a gain of R$160.4 million for the year ended June 30, 2020. This variation resulted mainly from the increase in the fair value of biological assets and agricultural products of grains from a gain of R$18.1 million for the year ended June 30, 2019 to a gain of R$86.3 million for the year ended June 30, 2020. Such variation was mainly due to an increase in the soybean and corn yields in relation to the previous year. In addition, the fair value of biological assets and agricultural products of sugarcane varied from a gain of R$34.5 million for the year ended June 30, 2019 to a gain of R$75.9 million for the year ended June 30, 2020. Such variation was a result of the increase in productivity due to rainfall levels.

 

Adjustments to net realizable value of agricultural products after harvest

 

We recognized an impairment of net realizable value of agricultural products after harvest of R$2.0 million for the year ended June 30, 2019. For the year ended June 30, 2020, we recognized an impairment of net realizable value of agricultural products after harvest of R$4.2 million. Such variations resulted from the decrease in the corn and soybean prices from the harvest time to the end of the respective fiscal year, mainly due to price volatility during the harvest caused by the COVID-19 pandemic.

 

Cost of sales

 

Cost of sales increased R$164.6 million from R$319.2 million for the year ended June 30, 2019 to R$483.8 million for the year ended June 30, 2020.

Changes in costs year-over-year are directly linked to the market prices of commodities at the time of harvest as well as the harvested volumes (tons), as explained below:

 

  i. Cost of soybean sold: the cost of soybean sold increased by R$58.6 million. Our average cost per ton of soybean sold increased 15.2% from R$1,077.50 per ton (corresponding to 137,114 tons at a total cost of R$147.7 million) for the year ended June 30, 2019 to R$1,241.64 per ton (corresponding to 166,145 tons at a total cost of R$206.3 million) for the year ended June 30, 2020.

 

  ii. Cost of corn sold: the cost of corn sold increased by R$23.8 million. Our average cost per ton of corn sold decreased 7.6% from R$417.81 per ton (corresponding to 21,340 tons at a total cost of R$8.9 million) for the year ended June 30, 2019 to R$385.9 per ton (corresponding to 84,686 tons at a total cost of R$32.7 million) for the year ended June 30, 2020.

  

  iii. Cost of sugarcane sold: the cost of sugarcane increased by R$42.5 million. Our average cost per ton of sugarcane sold increased 12.2% from R$79.71 per ton (corresponding to 1,781,229 tons at a total cost of R$142.3 million) for the year ended June 30, 2019 to R$89.61 per ton (corresponding to 2,062,354 tons at a total cost of R$184.8 million) for the year ended June 30, 2020.

 

In 2020 depreciation and amortization increased by R$36.2 million from R$22.5 million in the year ended June 30, 2019 to R$58.7 million in the year ended June 30, 2020, mainly due to the amortization of the right-of-use asstes recognized upon the adoption of IFRS 16.

 

Gross profit

 

For the reasons mentioned above, our gross profit for the year ended June 30, 2020 was R$221.4 million, representing a decrease of R$14.8 million, compared to R$236.2 million for the year ended June 30, 2019.

 

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Selling expenses

 

Selling expenses increased by R$3.8 million from R$10.5 million for the year ended June 30, 2019 to R$14.3 million for the year ended June 30, 2020, primarily as a result of the increase in freight and storage expenses from R$9.6 million in the year ended June 30, 2019 to R$14.5 million in the year ended June 30, 2020, due to the increase in grain sales volume in the year ended June 30, 2020, which was partially offset by the provision for expected credit losses, which, for the year ended June 30, 2020, presented a reversal of the provision resulting in a gain in the amount of R$2.4 million, while for the year ended June 30, 2019 there was an addition to the provision resulting in a loss of R$0.5 million.

 

General and administrative expenses

 

General and administrative expenses increased R$5.1 million from R$38.8 million for the year ended June 30, 2019 to R$43.9 million for the year ended June 30, 2020. This increase was primarily a result of the expenses related to personnel due to the payment of taxes related to the Long-Term Stock-Based Incentive Plan approved by the Company in 2017, the increase with service providers, due to the Agrifirma merger and of the increase of software expenses, impacted by the increase in the dollar.

 

Other operating income (expenses), net

 

For the year ended June 30, 2019, other operating expenses, net, amounted to R$1.1 million. For the year ended June 30, 2020, other operating income, net, amounted to R$1.2 million. The merger with Agrifirma impacted other operating income and expenses, mainly due to transaction costs and the changes in fair value of subscription warrants and restricted shares issued by us. Additionally, in the year ended June 30, 2020, we recognized a gain of R$6.3 million as insurance compensation due to the losses in Paraguay caused by climate conditions.

 

Equity pickup

 

For the year ended June 30, 2020 we recorded an expense of R$0.2 million compared to a gain of R$1.1 million for the year ended June 30, 2019.

 

Financial income (expenses), net

 

Financial income increased R$64.9 million from R$310.5 million for the year ended June 30, 2019 to R$375.4 million for the year ended June 30, 2020 and financial expenses increased R$108.6 million from R$297.6 million for the year ended June 30, 2019 to R$406.2 million for the year ended June 30, 2019. The variation in financial income (expenses), net is mainly attributable to:

 

  i. The decrease in the gain on remeasurement of receivables from the sales of farms and leases from R$173.0 million for the year ended June 30, 2019 to R$146.2 million for the year ended June 30, 2020 and the decrease in the loss on remeasurement of receivables from the sale of farms and leases from R$161.5 million for the year ended June 30, 2019 to R$108.6 million for the year ended June 30, 2020, which related mainly to the adjustment to the present value of such receivables. The net gain on remeasurement of receivables from the sale of farms and machinery of R$37.5 million was due to the variation in the amount to be received due to the sales of the Araucária, Alto Taquari and Jatobá Farms, totaling 3.7 million soybean bags. This variation is explained by the soybean price index, considering the Chicago Stock Exchange (CBOT), port premium (basis), exchange rate and interest rate (with reference to the CDI).

  

  ii. The increase in foreign exchange income from R$17.1 million for the year ended June 30, 2019 to R$14.0 million for the year ended June 30, 2020 and the increase in foreign exchange expenses from R$17.7 million for the year ended June 30, 2019 to R$15.8 million for the year ended June 30, 2020, which resulted in a net loss of R$1.1 million for the year ended June 30, 2020.

 

  iii. The increase of R$91.9 million of realized and unrealized gains on derivatives transactions from R$114.3 million for the year ended June 30, 2019 to R$206.2 million for the year ended June 30, 2020 and the increase of R$155.8 million of realized and unrealized losses on derivatives transactions from R$98.6 million for the year ended June 30, 2019 to R$254.4 million for the year ended June 30, 2020. For the year ended June 30, 2020, the net result of derivative transactions was a loss of R$48.2 million, of which R$68.8 million loss is related to currency operations and R$20.9 million gain is related to operations with commodities. For the year ended June 30, 2019, derivative operations totaled R$15.7 million gain, of which R$10.1 million are related to currency operations and R$5.6 million are in operations with commodities. The derivatives result reflects the commodities hedge operations results and the impact of the exchange variation on cash, which was partially dollarized in order to maintain purchasing power with regard to inputs, investments and new acquisitions, which have a positive correlation with the U.S. dollar.

 

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  iv. The increase in interest on marketable securities and receivables from R$6.1 million for the year ended June 30, 2019 to R$9.0 million for the year ended June 30, 2020.

 

  v. The increase in interest on marketable securities expenses from R$0.3 million for the year ended June 30, 2019 to R$1.5 million for the year ended June 30, 2020 in connection with the increase of the total amount of long-term loans and financing for farm development.

 

Income and social contribution taxes

 

We recognized income and social contribution tax expenses of R$14.0 million for the year ended June 30, 2020 and of R$22.7 million for the year ended June 30, 2019. Current income and social contribution tax expenses remained the same, at R$10.5 million for the years ended June 30, 2019 and June 30, 2020. Deferred income and social contribution tax expenses decreased from R$12.2 million for the year ended June 30, 2019 to R$3.5 million for the year ended June 30, 2020.

 

Profit for the year

 

As a result of the above, profit for the year ended June 30, 2020 decreased to R$119.6 million, compared to R$177.1 million for the year ended June 30, 2019.

 

B. Liquidity and Capital Resources

 

As of June 30, 2021, we held R$1,059.1 million in cash and cash equivalents and marketable securities. We usually hold cash and cash equivalents in Certificate of Deposits and Repurchase Agreements issued by banks rated at least AA by Moody’s and Brazilian and American treasury bonds. Of the total amount of cash and cash equivalents, approximately R$37.0 million was held in jurisdictions outside Brazil and as a result there may be tax consequences if such amounts were moved out of these jurisdictions or repatriated to Brazil. We regularly review the amount of cash and cash equivalents held outside of Brazil to determine the amounts necessary to fund the current operations of our foreign operations and their growth initiatives and amounts needed to service our Brazilian indebtedness and related obligations.

 

Throughout the year, our working capital needs vary significantly depending on the harvest period of grains, sugarcane and other crops in Brazil.

 

See “Item 4—Information on the Company—B. Business Overview—Seasonality.”

 

We believe that our current capital resources, together with our ability to obtain loans and credit facilities and, when appropriate, to raise equity in the capital markets, are sufficient to meet our present cash flow needs.

  

Sources and Uses of Funds

 

We finance our investments both by using (i) our own resources; (ii) loans and credit facilities with development banks and governmental development agencies, under which interest rates are lower than market rates, due to the fact that such credit facilities have long-term characteristics; (iii) funds obtained from public offerings of our common shares; and (iv) securitization transactions in the Brazilian capital markets. Our principal sources of financing are discussed below under the heading “Indebtedness and cash and cash equivalents” and our main uses of funds include acquisition of land, cultivation of sugarcane, improvements and acquisition of machinery and vehicles.

 

The investments made in the fiscal year ended June 30, 2021 totaled R$78.9 million, all of which were used for the development of land for cultivation of grains, sugarcane and pasture.

 

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Cash Flows

 

Our cash flow generation from operating activities may vary from period to period depending on fluctuations in our sales and service revenue, costs of goods sold and operating income (expenses) and may also vary within such periods as a result of seasonality. Operating activities primarily refer to revenue generated from the sale of grains and sugarcane.

 

Investing activities primarily refer to the acquisition of agricultural properties, developing of such properties for cultivation, purchasing machines, and re-modeling, construction and improvements to agricultural properties and sale of farms.

 

Financing activities primarily refer to loans and credit facilities, principally from development banks, for the development of new projects and the purchase of machines and equipment.

 

The table below presents our cash flows for the periods indicated.

 

   Year ended  June 30, 
   2021   2020   2019 
   (in R$ thousands) 
CONSOLIDATED CASH FLOW            
Net cash flows (used in) from operating activities   151,232    69,024    51,338 
Net cash flows (used in) from investment activities   (214,009)   (29,295)   21,266 
Net cash flows from (used in) financing activities   954,857    18,451    (27,621)
Net change in cash and cash equivalents   892,080    58,180    2,451 

 

Years ended June 30, 2021 and 2020

 

Operating activities: Net cash generated from operating activities was R$151.2 million for the year ended June 30, 2021 compared to R$69.0 million for the year ended June 30, 2020. This increase was primarily due to: (i) an increase in net profit for the year in the amount of R$198.1 million; and (ii) an increase in cash generated from changes in working capital in the amount of R$228.9 million, mainly due to decreases in biological assets, trade accounts receivables and other receivables, which increased cash generated in the amounts of R$230.7 million, R$76.7 million and R$52.8 million, respectively, and was partially offset by an increase in inventories in the amount of R$111.7 million and a decrease in income tax and social contribution in the amount of R$28.2 million, which decreased cash generated; which were offset by adjustments to reconcile net profit for the year in the amount of R$344.8 million, mainly due to changes in fair value of biological assets and agricultural products in the amount of R$367.0 million.

 

Investing activities: Net cash used in investing activities was R$214.0 million for the year ended June 30, 2021 compared to net cash from investment activities of R$29.3 million for the year ended June 30, 2020. This variation resulted mainly from the acquisition of the farms in Bolivia.

 

Financing activities: Net cash from financing activities was R$954.9 million for the year ended June 30, 2021 compared to net cash from financing activities of R$18.5 million for the year ended June 30, 2020. This increase was mainly due to: (i) new loans in the aggregate amount of R$488.2 million in 2021, compared to new loans of R$ 301,0 million in 2020; (ii) a decrease in dividends paid in 2021 of R$42.0 million compared to R$ 50 paid in 2020; and (iii) a capital contribution of R$871.0 million as a result of the exercise of warrants by our founders in the amount of R$448.2 million and the proceeds from the primary offering of common shares, for an amount of R$440.0 million in gross proceeds to us from the primary offering. This increase was offset by an increase in the payment of loans and financing in an aggregate amount of R$345.8 million in 2021 in relation to loans entered into to finance the 2021 harvest and sugarcane investments compared to R$144.0 million paid in 2020.

 

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Years ended June 30, 2020 and 2019

 

Operating activities: Net cash generated from operating activities was R$69.0 million for the year ended June 30, 2020 compared to R$51.3 million for the year ended June 30, 2019. This increase was primarily due to: (i) adjustments to reconcile profit for the year in the amount of R$160.4 million related to the adjustment of the fair value of biological assets and unrealized agricultural products in the year ended June 30, 2020, compared to R$56.7 million in the year ended June 30, 2019; (ii) adjustments to reconcile the profit for the year in the amount of R$57.3 million related to the variation in the fair value of accounts receivable for the sale of farms and other financial liabilities, compared to R$14.0 million in the year ended June 30, 2019; (iii) an increase in cash flows from biological assets and agricultural products in the amount of R$114.0 million in the year ended June 30, 2020, compared to an increase in the amount of R$3.5 million in the year ended  June 30, 2019; and (iv) an increase in the amount of R$50.7 million in cash flow from customers in the year ended June 30, 2020, due to the increase in yields and improvement in sales prices, with a positive impact on trade accounts receivable and receivables from sales of farms, compared to an increase in the amount of R$3.4 million in the year ended June 30, 2019, which were offset by (i) a decrease in the amount of R$35.7 million in cash flow from suppliers in the year ended June 30, 2020, related to higher operating expenses due to the increase in operations, compared to an increase in the amount of R$10.0 million in the year ended June 30, 2019; and (ii) a decrease in the amount of R$42.7 million with regard to leases payable due to the impact of the implementation of IFRS 16 – Leases.

 

Investing activities: Net cash used in investing activities was R$29.3 million for the year ended June 30, 2020 compared to net cash from investment activities of R$65.7 million for the year ended June 30, 2019. This variation was mainly due to: (i) additions to investment properties in the amount of R$8.0 million related to the partial payment of the Serra Grande farm acquisition; and (ii) R$16.0 million related to the opening (cleaning and preparation of the soil to plant) of new crop areas at the Moroti and Chaparral farms.

 

Financing activities: Net cash from financing activities was R$18.5 million for the year ended June 30, 2020 compared to net cash used in financing activities of R$27.6 million for the year ended June 30, 2019. This variation was mainly due to: (i) new loans in the aggregate amount of R$143.9 million, of which R$130.0 million were used to pay Agrifirma’s debt; (ii) the payment of an aggregate amount of R$57.9 million in loans entered into to finance the 2020 harvest and sugarcane invesments; and (iii) the payment of R$50 million in dividends on November 14, 2019, as approved by the annual shareholders’ meeting held on October 16, 2019. 

 

Indebtedness and Cash and Cash Equivalents

 

Our total consolidated indebtedness (loans, financing, debentures and leases) was R$663.2 million as of June 30, 2021, compared to R$514.1 million as of June 30, 2020. Our short-term indebtedness as of June 30, 2021 amounted to R$322.0 million, compared to R$217.3 million as of June 30, 2020. Our long- term indebtedness as of June 30, 2021 was R$341.1 million, compared to R$296.2 million on June 30, 2020. Of the total indebtedness outstanding as of June 30, 2021, 51.4% consisted of long-term debt, compared to 57.7% as of June 30, 2020.

 

Our indebtedness is primarily comprised of loans and credit facilities with development banks and government agencies, by means of direct or indirect disbursements, and acquisitions payable with regard to our agricultural properties. Interest rates are generally lower than prevailing rates in Brazil, due to the fact that these credit facilities have long-term characteristics and other terms specific to the development agencies.

 

In addition, on May 25, 2018, 142,200 first issue debentures were subscribed and paid-in, not convertible into shares, in two series, for private placement totaling R$142.2 million, of which R$85.2 million in the first series and R$57.0 million in the second series. The debentures were tied to a securitization transaction, used as guarantee for the issue of 142,200 Agribusiness Receivables Certificates (Certificados de Recebíveis do Agronegócio). The first series will mature on August 1, 2022, subject to interest corresponding to 106.5% of the DI Rate, and the second series will mature on July 31, 2023, subject to interest corresponding to 110.0% of the DI Rate. The debentures are secured by a fiduciary transfer of real estate properties owned by us and located in the city of Correntina, State of Bahia.

 

In May 2021, ISEC Securitizadora S.A., a Brazilian securitization company, issued agribusiness receivables certificates (Certificados de Recebíveis do Agronegócio) (CRA) in the aggregate amount of R$240.0 million. The CRAs are backed by debentures that were issued by us and are comprised of a single series in the aggregate amount of R$240.0 million. The debentures mature on April 12, 2028 and accrue interest based on the broad consumer price index (Índice de Preços ao Consumidor Amplo), or IPCA, plus 5.36% per year, payable in seven annual installments. Principal is payable in two installments, on April 13, 2027 and April 12, 2028. The debentures are secured by a fiduciary transfer of real estate properties owned by us and located in the city of Correntina, State of Bahia.

 

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The debentures contain certain financial covenants related to the maintenance of certain financial ratios, based on the ratio of net debt to fair value of investment properties. Failure by us to maintain these ratios for the period of time during which the debentures remain outstanding may lead to the acceleration of the debt. On June 30, 2021 and as of the date of this annual report, we were in compliance with these covenants.

 

All loans and financing agreements listed below are in reais and have specific terms and conditions defined in the respective contracts with governmental economic and development agencies (including the Brazilian Development Bank – BNDES and the Northeastern Development Bank – BNB) that directly or indirectly grant those loans. 

 

The table below summarizes our material outstanding loans and financing agreements as of June 30, 2021.

 

      Annual interest rates and charges - %      
  Index   2021    2020    2021    2020 
Financing for agricultural costs                     
  Fixed rate + CDI   1.80% + 100%   1.80% + 100%   40,561    40,568 
  Fixed rate   3.24%   -    8,055    - 
  Fixed rate   3.90%   3.90%   -    9,072 
  Fixed rate   6.30%   6.30%   111,59    108,057 
  Fixed rate   6.34%   6.34%   2,436    3,251 
  Fixed rate   3.50%   -    3,078    - 
  Fixed rate   7.64%   7.64%   9,779    9,076 
  Fixed rate   4.91%   -    25,716    - 
                201,215    170,024 
Financing for agricultural costs (USD)                     
  Fixed rate   7.00%   7.00%   2,564    2,787 
  Fixed rate   -    8.50%   -    5,573 
                2,564    8,36 
Financing for agricultural costs (Paraguayan guarani)                     
  Fixed rate   8.00%   8.00%   -    7,94 
  Fixed rate   8.25%   8.25%   18,101    19,749 
  Fixed rate   9.50%   -    8,191    - 
                26,292    27,689 
Bahia Project Financing(*)                     
  Fixed rate   3.50%   3.50%   10,373    10,023 
  Fixed rate   -    6.50%   -    66 
  Fixed rate   -    7.50%   -    165 
                10,373    10,254 
Financing of working capital                     
  Fixed rate + CDI   2% + 100%   2% + 100    -    77,516 
                -    77,516 
Financing of working capital (EUR)**                     
  Fixed rate + CDI   1.32% + 100%   -    23,23    - 
                23,23    - 
Financing of Machinery and Equipment – FINAME                     
  Fixed rate        7.22         230 
                     230 
Financing of sugarcane                     
  Fixed rate   6.76%   6.76%   1,963    2,447 
  Fixed rate   0.00%   6.14%   -    40,857 
  Fixed rate   6.34%   6.34%   31,879    29,986 
  Fixed rate   3.76%   -    28,15    - 
                61,992    73,29 
Debentures                     
  CDI   106.50%   106.50%   58,045    88,884 
  CDI   110.00%   110.00%   43,717    59,548 
  Fixed rate + IPCA   5.37% + 100%   -    244,565    - 
                346,327    148,432 
(-) Transaction costs              (8,812)   (1,682)
                663,181    514,113 
Current              322,046    217,274 
Non-current              341,135    296,839 

 

(*)Financing to raise funds for opening of crop areas and improvements at the Jatobá and Chaparral farms.
(**)The loan in EUR is backed by a swap linked to CDI + 1.85% p.a.

 

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Changes in loans and financing during the year ended June 30, 2021 as follows:

 

   2020   Contracting   Payment of Principal   Payment of Interest   Appropriation of Interest   Foreign Exchange Variation   Total as of
June 30,
2021
 
                             
                             
Agricultural Cost Financing (reais)   170,024    35,856    (12,939)   (2,062)   10,336    -    201,215 
Agricultural Cost Financing (Paraguayan guarani)   36,049    8,095    (13,303)   (2,919)   2,809    (1,875)   28,856 
Bahia Project Financing(*)   10,254    -    (226)   (8)   353    -    10,373 
Working Capital Financing   77,516    185,000    (237,000)   (2,355)   2,022    (1,953)   23,230 
Financing of Machinery and Equipment – FINAME   230    -    (218)   (8)   4    (8)   - 
Sugarcane Financing   73,290    27,486    (39,497)   (2,582)   3,295    -    61,992 
Debentures   148,432    240,000    (42,647)   (6,557)   7,099    -    346,327 
Transaction costs   (1,682)   (8,247)   -    -    1,117    -    (8,812)
    514,113    488,190    (345,830)   (16,491)   27,035    (3,836)   663,181 

  

(*)Financing to raise funds for opening of crop areas and improvements at the Jatobá and Chaparral farms.

 

Capital Expenditures

 

We are focused on the acquisition, development and exploration of agricultural properties and the acquisition and development of properties that we believe have significant potential for cash flow generation and value appreciation. Our total capital expenditures related to these assets for the year ended June 30, 2021 were R$78.9 million, of which R$66.6 million refer to construction in progress, mostly for the clearance of areas and R$12.3 million refer to the opening and preparation of areas for cultivation and buildings and for improvements of the farm facilities.

 

All of our capital expenditures to date have been made as planned and according to the normal course of our operations. Our capital expenditures have not had any material impact from the COVID-19 pandemic.

  

Equity

 

Our total equity amounted to R$2,182,6 million as of June 30, 2021 and R$1,121.6 million as of June 30, 2020.

 

On February 3, 2021, the Company’s board of directors approved the price per common share of R$22.00 and an increase in the Company’s capital stock in the amount of R$440.0 million, through the issuance of 20,000,000 new common shares of the Company, in connection with the primary and secondary follow-on offering of commom shares. The selling shareholder in the offering sold an aggregate of 2,735,355 common shares issued by the Company.

 

The offering consisted of a restricted offering in Brazil, pursuant to Law No. 6,385, of December 7, 1976, as amended, and CVM Instruction No. 476, of January 16, 2009, as amended, and a private placement to (a) a limited number of qualified institutional buyers in the United States, as defined in Rule 144A under the Securities Act, and (b) institutional and other investors outside the United States and Brazil that are not U.S. persons, in reliance on Regulation S under the Securities Act. As a result of this offering, our capital stock was increased to R$1,139.8 million, divided into 82,104,301 common shares.

 

On May 14, 2021, our capital stock was increased by R$448.2 million through the issuance of 20,272,707 new common shares following the exercise of the First Series Warrants by Cape Town LLC, Cresud S.A.C.I.F.Y.A and Turismo Investment S.A.U. The First Series Warrants were issued on March 15, 2006 and granted to our founding shareholders in proportion to their respective interests in our capital stock on the issuance date. As a result of the exercise of the First Series Warrants, our capital stock was increased to R$1,588.0 million, divided into 102,377,008 common shares. See “Item 10—Additional Information—Description of Exercised and Expired Warrants.”

 

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C. Research and Development, Patents and Licenses, etc.

 

We do not currently have research and development policies and have not incurred research and development expenditures in prior years.

 

D. Trend Information

 

We expect to continue to operate in a highly competitive and regulated environment that will pose continued risks and threats to our existing businesses, placing the profitability of our assets under pressure. We expect our business to continue to be subject to the risks and uncertainties discussed in “Item 3—Key Information—Risk Factors.”

 

According to a report released in September 2021 by the United States Department of Agriculture (“USDA”), the soybean global production is forecasted at a record 384.4 million tons for the 2021/22 crop year, and Brazil’s production estimate was raised to a record 144.0 million tons. As of September, 2021, Brazilian soybean producers have already sold almost 39.5% of expected production at higher prices due to the weaker Brazilian real and stronger Chinese demand.

 

In addition to the information set forth in this section, additional information about the trends affecting our business can be found in “Item 5. Operating and Financial Review and Prospects—Operating Results—Business Drivers and Measures.”

 

We are not aware of any other trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information to not necessarily be indicative of future operating results or financial condition.

 

For a description of the effects of the COVID-19 pandemic on our results of operations, see “—Operating Results—Impact of the COVID-19 Pandemic.”

 

E. Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

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F. Tabular Disclosure of Contractual Obligations

 

The following table summarizes our significant contractual obligations and commitments as of June 30, 2021:

 

   Maturities per period 
   Less than
One Year
   One to
Two Years
   Three to
Five
Years
   More than
Five Years
   Total 
   (in R$ thousands) 
Trade accounts payable   75,224    -    -    -    75,224 
Derivative financial instruments   48,574    645    1,320    -    50,539 
Loans, financing and debentures(1)   322,046    55,984    38,355    246,796    663,181 
Lease payables   30,545    70,683    86,319    11,448    198,995 
Transactions with related parties(2)   5,568    2,519    -    -    8,087 
Other liabilities   45,133    7,295              52,428 

 

(1)Interest on variable interest rate loans and financing has been computed considering the interest rate as of June 30, 2021. See “Indebtedness and Cash and Cash Equivalents.”

 

(2)See “Item 7—B. Related Party Transactions.”

 

On May 8, 2015, we executed three agreements with Brenco:

 

The first agreement consists of a rural sub partnership to operate nine farms located in the municipalities of Alto Araguaia and Alto Taquari, in the state of Mato Grosso. The sub partnership started at the date of its signature and is estimated to end on March 31, 2026. The areas are to be used for the plantation and cultivation of sugarcane, which cannot exceed the duration of the contract. This contractual partnership meets the definition of an operating lease. The payment must always be in kind (tons of sugarcane) and delivered at the mill owned by Brenco, which is located in the vicinity of the farms, during the harvest period of the product. The quantity to be paid for the duration of the contract shall be established in tons per hectare and varies according to the area being explored. According to this contract, the quantity to be paid in the long term corresponds to 529,975 tons of sugarcane, of which 174,929 tons will be paid within one to five years and 355,046 tons will be paid over five years up to the expiration of the agreement.

 

The second agreement relates to the regulation of rights and obligations between agricultural partners from whom we acquired the crops of sugarcane planted by Brenco in the properties subject to the sub partnership agreement described above. This contract meets the definition of a financial lease. The payment must always be in kind (tons of sugarcane) and delivered at the mill owned by Brenco during the harvest period of the product. According to this contract, the quantity to be paid in the long term corresponds to 53,845 tons of sugarcane, of which 18,604 tons will be paid within one year and 35,241 tons will be paid within one to five years.

 

The third agreement regulates the exclusive supply to Brenco of the total sugarcane production in the properties included in the sub partnership agreement for two crop cycles, one cycle shall be effective until the depletion of the already existing sugarcane crops and the other cycle consists of the sugarcane being planted by us.

 

On February 7, 2017, we entered into two agreements for an agricultural partnership in relation to a property in São Raimundo das Mangabeiras, state of Maranhão, or Partnership IV.

 

The first agreement under Partnership IV establishes an agricultural partnership with Agro Pecuária e Industrial Serra Grande Ltda. (“Serra Grande”), which consists of a sugarcane exploration agreement of an area of around 15,000 hectares. The agricultural partnership will last for 15 years from the date of the agreement and may be extended for the same period. The amount to be paid to Serra Grande corresponds to 10% of the entire production obtained in the area referred to in the agreement and the initial volume to be produced in the area during the first year of the agreement was established at 850,000 tons. After this period, spanning between one and five years, the minimum volume to be produced in the partnership areas is 4,500,000 tons of sugarcane, and from the sixth year onward until the expiration of the agreement, the minimum production volume is 1,250,000 tons of sugarcane per crop year. 

 

The second agreement under Partnership IV governs the rights and obligations of the agricultural partners, through which we acquired sugarcane crops planted by the agricultural partner in the areas referred to in the partnership agreement described above. This agreement meets the definition of a finance lease. As consideration, we undertake to return, at the end of the agreement, the area referred to in the partnership agreement together with sugarcane stubble crops with the capacity to produce 850,000 tons of sugarcane in the crop year subsequent to the termination of the agricultural partnership agreement.

 

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G. Safe harbor

 

See “Forward-Looking Statements.”

 

ITEM 6—DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management Board of Directors

 

Our board of directors is responsible for establishing our overall business plan, guidelines and policies, including our long-term strategy, and for overseeing our performance. Our board of directors is also responsible for the supervision of our executive officers.

 

Pursuant to our bylaws, our board of directors consists of a minimum of five and a maximum of nine members. Election of our directors is made at annual shareholders’ meetings. At the date of this annual report, five of our directors, namely Eduardo Elsztain, Alejandro G. Elsztain, Saul Zang, Carlos María Blousson and Alejandro Casaretto were nominated by our controlling shareholder Cresud. The members of our board are elected at the shareholders’ meeting for a term of approximately two years, reelection being permitted. A director must remain in office until replaced by a successor unless resolved otherwise at the shareholders’ meeting or by the board of directors.

 

Under Novo Mercado regulations and our bylaws, a minimum of 20% of the members of our board of directors must be independent (as such term is defined under Novo Mercado regulations). However, three directors must be independent if nine members are elected to our board. Prior to taking office, our board members are required to sign an agreement to comply with the Novo Mercado regulation.

 

Pursuant to section 19 of our bylaws, our board of directors holds mandatory meetings six times a year, and may hold extraordinary meetings, as necessary. Meetings of our board of directors are convened only if a majority of the directors are present and all board decisions are taken by a 2/3 or 3/4 majority, or by simple majority, depending on the nature of the specific matters brought to discussion.

 

Brazilian corporate law and CVM Regulation No. 282/98 allow the adoption of a cumulative vote process by the request of shareholders representing a minimum of 5% of our capital stock. Brazilian corporate law allows minority shareholders that, individually or as a group, hold at least 15% of our common shares to appoint one director, by means of a separate vote. Brazilian corporate law does not allow for the election of a member to our board of directors, unless waived by our shareholders, if that person is an employee or senior manager of one of our competitors or has an interest conflicting with ours.

 

Our board of directors is currently comprised of nine members, all of whom were elected at the general shareholders’ meeting held on October 20, 2021, and whose terms will expire at our annual shareholders’ meeting for the approval of our financial statements for the fiscal year to end on June 30, 2023. The table below sets forth the name, title and date of election of each current member of our board of directors:

 

Directors*   Title   Date of election   Age
Eduardo S. Elsztain   Chairman   October 27, 2021   61
Alejandro G. Elsztain   Director   October 27, 2021   55
Saul Zang   Director   October 27, 2021   75
Isaac Selim Sutton   Independent Director**   October 27, 2021   60
Carlos María Blousson   Director   October 27, 2021   58
Alejandro Casaretto   Director   October 27, 2021   69
Efraim Horn   Independent Director**   October 27, 2021   41
Eliane Aleixo Lustosa de Andrade   Independent Director**   October 27, 2021   58
Isabella Saboya de Albuquerque   Independent Director**   October 27, 2021   51

 

*Ms. Carolina Zang and Mr. Gastón Armando Lernoud were elected to the positions of first and second alternate members of our Board of Directors, solely in the case of a vacancy in the position of a Non-Independent member of the Board of Directors. Mr. Ricardo de Santos Freitas was elected to the position of first alternate member of our Board of Directors, in the exclusive case of vacancy of the position of Mr. Issac Selim Sutton and Mr. Efraim Horn, Independent Members of our Board of Directors, and Ms. Janine Meira Souza Koppe was elected to the position of first alternate member of our Board of Directors, in the exclusive case of vacancy of the position of Ms. Eliane Aleixo Lustosa de Andrade and Ms. Isabella Saboya de Albuquerque, Independent Members of our Board of Directors.

 

**Independent director as defined under the Novo Mercado regulations.

 

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Below is a brief biographical description of each member of our board of directors:

 

Eduardo S. Elsztain. Mr. Elsztain has been engaged in the real estate business for more than twenty-five years. He is the chairman of the board of directors of Cresud SACIFyA, IRSA Propiedades Comerciales S.A., IRSA Inversiones y Representaciones Sociedad Anónima, IDB Development Corporation Ltd., Discount Investment Corporation Ltd., Banco Hipotecario S.A., BrasilAgro Companhia Brasileira de Propriedades Agrícolas S.A., Austral Gold Ltd., and Consultores Assets Management S.A., among other companies. He also Chairs IRSA Foundation, is a member of the World Economic Forum, the Council of the Americas, the Group of 50 and the Argentine Business Association (AEA), among others. He is co-founder of Endeavor Argentina and serves as Vice-President of the World Jewish Congress. Mr. Eduardo Sergio Elsztain is a brother of Alejandro Gustavo Elsztain.

 

Alejandro G. Elsztain. Mr. Elsztain obtained a degree in agricultural engineering from Universidad de Buenos Aires. He is currently Second Vice-Chairman of Cresud SACIFyA, Executive Vice-Chairman of IRSA Inversiones y Representaciones Sociedad Anónima, Chairman at Fibesa S.A. and Vice-Chairman at Nuevas Fronteras S.A. and Hoteles Argentinos S.A. In addition, he is Chairman of the Israeli companies Gav Yam and Mehadrin and Vice-Chairman of Property & Building Corporation Ltd. He is also a Director at IDB Development Corporation Ltd., and BrasilAgro Companhia Brasileira de Propriedades Agrícolas S.A., among other companies. He is also Chairman of Hillel Foundation Argentina. Mr. Alejandro Gustavo Elsztain is a brother of Eduardo Sergio Elsztain.

  

Saul Zang. Mr. Zang obtained a law degree from the Universidad de Buenos Aires. He is a member of the International Bar Association and of the Interamerican Federation of Lawyers. He was a founding partner of Zang, Bergel & Viñes Law Firm. Mr. Zang is Vice-chairman of Cresud SACIFyA, IRSA Propiedades Comerciales S.A., Consultores Assets Management S.A., and Fibesa S.A., among other companies, and Chairman at Puerto Retiro S.A. He is also director of IDB Development Corporation Ltd., Discount Investment Corporation Ltd., Banco Hipotecario S.A., BrasilAgro Companhia Brasileira de Propriedades Agrícolas S.A., BACS Banco de Crédito & Securitización S.A., Nuevas Fronteras S.A., and Palermo Invest S.A., among other companies.

 

Isaac Selim Sutton. Mr. Sutton holds a degree in economics from the Universidade de São Paulo (USP). He was an executive officer at the Safra Group’s holding company from 1994 to 2009. He is currently a member of the Fiscal Council of Bardella S.A. Indústrias Mecânicas. He has also served on the boards of directors of Bardella S.A., DPVAT S.A., Telenorte Celular, TIM Participações S.A., Veracel Celulose S.A., BR Properties S.A., Gevisa S.A. and Celma S.A., and on the fiscal councils of TIM Sul, Têxtil Renaux and TIM Nordeste.

 

Carlos María Blousson. Mr. Blousson obtained a degree in agricultural engineering from Universidad de Buenos Aires. He has been the Chief Sales Officer of Cresud SACIFyA since 1996. Prior to joining Cresud SACIFyA, he worked as a futures and options operator at Vanexva Bursátil – Sociedad de Bolsa. Previously, he worked as a farmland manager and a technical advisor at Leucon S.A.

 

Alejandro Gustavo Casaretto. Mr. Casaretto obtained a degree in agricultural engineering from Universidad de Buenos Aires. He has served as a technical manager, farm manager, and technical coordinator at Cresud SACIFyA since 1975.

 

Efraim Horn. Mr. Horn holds a business and philosophy degree from the Talmudic University of Florida (TUF) and an MBA degree from Fundação Armando Alvares Penteado (FAAP). Since 2004, he has been working at Cyrela Brazil Realty, in the Land and Treasury areas, and overseeing the expansion of the its operations in the North and Northeast regions of Brazil. Currently, as a co-President, he is responsible for the Urban Development, Land and the regional offices of Sao Paulo, Central West, North and Northeast regions of Brazil. Mr. Horn is a member of the Board of Directors of Plano & Plano Desenvolvimento Imobiliário S.A.

 

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Eliane Aleixo Lustosa de Andrade. Ms. Lustosa de Andrade holds a PhD in finance from the Industrial Engineering Department of PUC-Rio and a master’s degree in economics from the Economics Department of PUC-Rio, from which she also holds a degree in economics, obtained in 1986. She is certified as a board member of the Brazilian Institute of Corporate Governance – IBGC, and independent board member of the companies CCR and Solvi. She is a member of the Arbitration Chambers of Bovespa – B3, of the Brazilian Center for Mediation and Arbitration – CBMA and the Brazilian Chamber of Conflict Resolution in Energy and Mining. Ms. Lustosa de Andrade is also a member of the board of non-profit institutions, such as the Institute for the Study of Labor and Society – IETS and the Museum of Modern Art of Rio de Janeiro. Throughout her career, she has held positions in several private sector companies. She was the Chief Financial Officer of LLX Logística (currently Prumo Logística S.A.), Vice President of Finance and Control of Grupo Abril S.A., Executive Director of Globex Utilidades S.A. (Ponto Frio) and Financial and Investment Director of Petrobras’ Employee Pension Fund (Petros). She has also served as a board member at several companies, such as ALL Logística S.A. (currently Rumo), Fibria S.A., Metalúrgica Gerdau S.A., Coimex, CPFL, Coteminas, Perdigão (currently BRF), IBGC and as a member of the Bovespa Arbitration Board. In the public sector, she has served as a director of the BNDES in the areas of Desestatization and Capital Markets and of the Department of Economic Protection and Defense of the Secretariat of Economic Law of the Ministry of Justice (DPDE/SDE/MJ). She was a professor at PUC-Rio (Microeconomics at the Department of Economics and International Economics for the master’s degree course at the Institute of International Relations) and at several courses at IBGC (Brazilian Institute of Corporate Governance), as well as an economist at the Center for Monetary Studies and International Economics of the Brazilian Institute of Economics of the Getúlio Vargas Foundation in Rio de Janeiro.

 

Isabella Saboya de Albuquerque. Ms. Albuquerque holds a degree in economics from the Pontifical Catholic University of Rio de Janeiro. She is a Certified Management Advisor by the IBGC and also a Chartered Financial Analyst (CFA). Ms. Albuquerque was a member of the Board of Directors of Vale, from October 2017 to May 2021, and a coordinator of the Statutory Audit Committee of Vale, from March 2020 to May 2021, a member of the Board of Directors of Wiz Soluções (former FPC PAR Corretora de Seguros S.A.), a coordinator of the Related Parties Committee, a member of the People and Compensation Committee, from October 2015 to March 2020, a member of the B3 State-Owned Governance Market Advisory Chamber, from August 2017 to December 2020, a member of the Self-Regulation Board in Investment Governance Abrapp/Sindapp/ICSS, from December 2016 to January 2019, a member of the Board of Directors of IBGC, from April 2017 to January 2019, a member of the Board of Directors of BR Malls S.A. and an audit committee coordinator, from May 2016 to March 2017. Since November, 2015, Ms. Albuquerque is a member of the AMEC Working Group to prepare and monitor the AMEC Stewardship Code.

 

Board Committees

 

Pursuant to our bylaws, our board of directors shall elect among its members three directors to compose the Compensation Committee and a minimum of three and a maximum of four directors to compose the Executive Committee. In addition to these two statutory committees, our board of directors may establish other technical or advisory committees for a specific purpose and with specific duties, which members may or may not include our directors or executive officers. Our board of directors shall establish the rules applicable to these committees, including rules on their composition, term of office, compensation and operation. Such committees are advisory and non-deliberative in nature. The following advisory committees are currently established and active:

 

Compensation