UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 20-F

__

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

OR

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

For the fiscal year ended June 30, 2016

OR

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

OR

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

Commission file number 001-35723

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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, Email:  ri@brasil-agro.com
Av. Brigadeiro Faria Lima, 1309, 5th floor
São Paulo - SP 01452-002, Brazil

(Name, Telephone, E-mail and/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	Name of each exchange on which registered
American Depositary Shares, each representing one ordinary share, no par value	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.

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas is an emerging growth company as defined in Section 3(a) of the Securities Exchange Act of 1934.

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

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  o     No  x

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  x     No  o .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  o     No  o (Note:  None required for registrant)

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

 

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

U.S. GAAP o

International Financial Reporting Standards as issued by the International Accounting Standards Board x

Other o

 

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  o     Item 18  o

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  o     No  x

 

TABLE OF CONTENTS

Page

Part I	1
INTRODUCTION	1
ITEM 1 —IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	3
ITEM 2 —OFFER STATISTICS AND EXPECTED TIMETABLE	3
ITEM 3 —KEY INFORMATION	3
ITEM 4 —INFORMATION ON THE COMPANY	22
ITEM 4A —UNRESOLVED STAFF COMMENTS	38
ITEM 5 —OPERATING AND FINANCIAL REVIEW AND PROSPECTS	38
ITEM 6 —DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	57
ITEM 7 —MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	65
ITEM 8 —FINANCIAL INFORMATION	69
ITEM 9 —THE OFFER AND LISTING	75
ITEM 10 —ADDITIONAL INFORMATION	80
ITEM 11 —QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	111
ITEM 12 — DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	113
Part II	115
ITEM 13 —DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	115
ITEM 14 —MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	115
ITEM 15 —CONTROLS AND PROCEDURES	115
ITEM 16A—AUDIT COMMITTEE FINANCIAL EXPERT	116
ITEM 16B—CODE OF ETHICS	116
ITEM 16C—PRINCIPAL ACCOUNTANT FEES AND SERVICES	116
ITEM 16D—EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	117
ITEM 16E—PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	118
ITEM 16F—CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	118
ITEM 16G—CORPORATE GOVERNANCE	118
ITEM 16H—MINE SAFETY DISCLOSURE	120
Part III	121
ITEM 17 —FINANCIAL STATEMENTS	121
ITEM 18 —FINANCIAL STATEMENTS	121
ITEM 19 —EXHIBITS	121

 

 

 

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 ” refer to The Federative Republic of Brazil.

Presentation of Financial Information

All references herein 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.

On June 30, 2016, the end of our last fiscal year, the exchange rate for Reais into U.S. dollars was R$3.2098 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, 2015, the selling rate was R$3.1026 to US$1.00. The selling rate was R$2.2025 to US$1.00 on June 30, 2014, R$2.2156 to US$1.00 on June 30, 2013, and R$2.0213 to US$1.00 on June 30, 2012, 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, 2016 may not be indicative of future exchange rates. On September 30, 2016, the selling rate was R$3.2462  to US$1.00, as reported by the Central Bank. See “Item 3—Key Information—Exchange Rates” for information regarding exchange rates for the Real since July 1, 2011.

Financial Statements

We maintain our books and records in Reais. Our fiscal year is from July 1 of each year to June 30 of the following year. Our consolidated financial statements as of June 30, 2016 and 2015 and for the years ended June 30, 2016, 2015 and 2014 have been audited.

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.

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 the same year, and the crop year for grains is from July 1 to June 30 of the following year. We also make reference to the planting season and the harvest season, or harvest period. In Brazil, the planting season for grains is from September to December, and the planting season for sugarcane is from February to May. The harvesting period in Brazil for grains is from February to July, and such period for sugarcane is from April to November.

Market Information

The market information included herein 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 Brazilian 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, 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 they were made, although we have not independently verified it.

 

 

Rounding

Some percentages and amounts included herein 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. As such, 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 that, if adopted in the future, would require mandatory audit firm rotation and auditor discussion and analysis and 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 to provide 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 be 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 revenues exceed US$1 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, (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 that 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.

Forward-Looking Statements

This Annual Report on Form 20-F includes statements that constitute forward-looking statements. These statements are based on the beliefs and assumptions of our management and on information available to 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 by, 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.

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 on Form 20-F 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.

 

 

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.                   Selected Consolidated Financial Data

We prepare our annual consolidated financial statements in accordance with IFRS as issued by the IASB.

Due to the nature of our business and the harvesting periods in the locations where we operate, our fiscal year ends on June 30 of each year. References in this Annual Report on Form 20-F to a specific fiscal year relate to the fiscal year ended on June 30 of that calendar year, unless indicated otherwise.

The selected financial data has been derived from our audited consolidated financial statements as of June 30, 2016, 2015, 2014, 2013 and 2012, and for each of the five years ended June 30, 2016. The information set forth below is qualified by reference to, and should be read in conjunction with, our audited consolidated financial statements and the notes thereto and also “Item 5—Operating and Financial Review and Prospects” included in this Annual Report.

	Year ended June 30,
	2016		2015		2014		2013		2012
	(R$ thousand, except share and per share information)
CONSOLIDATED STATEMENT OF OPERATIONS
Net revenue	147,128		174,351		131,314		185,647		146,218
Gain on sale of farms	—		193,464		21,845		54,815		12,987
Changes in fair value of biological assets and agricultural products	(8,718)		9,788		1,092		2,289		(417)
(Impairment) Reversal of impairment of net realizable value of agricultural products after harvest, net	659		(3,038)		(2,043)		1,659		(2,663)
Cost of sales	(134,714)		(170,489)		(138,535)		(170,643)		(136,447)
Gross profit	4,355		204,076		13,673		73,767		19,678
Selling expenses	(2,732)		(9,006)		(10,239)		(14,028)		(4,015)
General and administrative expenses	(28,944)		(29,360)		(30,378)		(29,233)		(28,892)
Other operating income net	2,812		(3,422)		285		(3,539)		10
Share of loss of a joint venture	(511)		(4,355)		(704)		—		—
Operating (loss) income	(25,020)		157,933		(27,363)		26,967		(13,219)
Financial income	192,644		122,552		40,051		38,000		38,073
Financial expenses	(154,270)		(89,914)		(41,611)		(38,591)		(44,299)
Financial income (expense)	38,374		32,638		(1,560)		(591)		(6,226)
Profit (loss) before income and social contribution taxes	13,354		190,571		(28,923)		26,376		(19,445)
Income and social contribution taxes	(2,782)		(9,761)		15,561		2,351		12,845
Profit (loss) for the year	10,572		180,810		(13,362 )		28,727		(6,600 )
Profit (loss) attributable to equity holders of the parent	10,572		180,810		(13,362)		28,727		(5,572)
Loss attributable to non-controlling interests	—		—		—		—		(1,028)
Issued shares at the fiscal year end	58,226,600		58,226,600		58,422,400		58,422,400		58,422,400
Basic earnings (loss) per share	0.18		3.10		(0.23)		0.49		(0.10)
Diluted earnings (loss) per share	0.18		3.10		(0.23 )		0.49		(0.10 )
CONSOLIDATED CASH FLOW
Net cash flows (used in) from operating activities	(17,778)		(11,175)		22,880		(46,472)		(10,691)
Net cash flows from (used in) investing activities	161,111		19,952		(9,850)		54,085		(24,375)
Net cash flows (used in) from financing activities	(164,749)		(19,902)		(1,979)		617		(33,085)
(Decrease) increase in cash and cash equivalents	(21,416)		(11,125)		11,051		8,230		(68,151)

 

 

 

 

 

	Year ended June 30,
	2016	2015	2014	2013	2012
	(R$ thousand)
CONSOLIDATED BALANCE SHEET
Assets
Current assets
Cash and cash equivalents	54,204	75,620	86,745	75,694	67,464
Marketable securities	113,559	273,258	21,532	9,244	—
Trade accounts receivable	18,528	46,028	65,010	131,102	60,655
Inventories	22,413	32,225	40,210	28,805	72,558
Biological assets	-	1,624	1,421	1,201	4,111
Recoverable taxes	7,470	5,412	3,749	7,655	9,331
Derivative financial instruments	24,497	13,498	18,255	17,081	4,327
Transactions with related parties	1,065	856	723	347	—
Other current assets	858	316	442	430	710
Total current assets	242,594	448,837	238,087	271,559	219,156
Non-current assets
Biological assets	44,530	29,245	31,202	36,656	31,931
Restricted marketable securities	20,353	1,468	13,782	17,988	23,197
Receivables from related parties	44,363	39,060	26,068	—	—
Recoverable taxes	21,709	24,602	29,849	25,736	22,803
Deferred taxes	56,353	43,137	43,554	25,216	14,960
Derivative financial instruments	-	408	63	1,714	—
Trade accounts receivable	14,411	22,802	37,453	33,729	12,759
Investment properties	287,867	288,347	334,803	339,108	391,907
Other non – current assets	6,377	5,811	4,644	1,633	268
Investments in unquoted equity instruments	102,955	99,729	50,369	70	410
Property, plant and equipment	8,567	10,602	13,542	14,851	15,630
Intangible assets	3,450	3,792	4,966	2,570	2,741
Total non-current assets	610,935	569,003	590,295	499,271	516,606
Total assets	853,529	1,017,840	828,382	770,830	735,762
Liabilities and equity
Current liabilities
Trade accounts payable	12,073	5,545	8,158	7,777	4,151
Loans and financing	51,615	50,900	62,253	44,929	43,067
Labor obligations	8,856	11,215	8,730	8,752	7,436
Taxes payable	6,277	23,377	6,501	2,306	3,102
Dividends payable	2,532	40,358	25	1,963	2
Derivative financial instruments	2,165	5,655	204	2,860	8,307
Payables for purchase of farms	22,261	48,840	44,820	43,650	40,858
Transactions with related parties	536	480	33,237	183	—
Onerous contract	—	—	579	—	—
Advances from customers	278	8,147	15,038	2,124	4,490
Other liabilities	5,442	4,504	—	—	—
Total current liabilities	112,035	199,021	179,545	114,544	111,413
Non-current liabilities
Loans and financings	48,230	59,179	57,909	56,924	51,294
Taxes payable	970	1,508	2,482	5,812	2,695
Deferred taxes	—	—	—	—	—
Derivative financial instruments	4,392	1,670	—	1,140	10,209
Provision for legal claims	1,455	3,684	3,573	4,802	1,183
Other liabilities	432	672	967	623	—
Total non-current liabilities	55,479	66,713	64,931	69,301	65,381
Equity
Attributable to equity holders of the parent:
Capital	584,224	584,224	584,224	584,224	584,224
Capital reserve	1,771	2,349	4,201	3,385	2,134
Income reserves	89,156	89,156	—	6,296	—
Treasury shares	(37,203)	(224)	(1,934)	—	—
Additional dividends proposed	7,533	40,333	—	—	—
Other comprehensive income (loss)	40,005	36,268	8,403	(6,920)	(6,920)
Accumulated losses	—	—	(10,988)	—	(20,470)
	686,015	752,106	583,906	586,985	558,968
Non-controlling interests	—	—	—	—	—
	686,015	752,106	583,906	586,985	558,968
Total liabilities and equity	853,529	1,017,840	828,382	770,830	735,762

 

 

 

We have included information with respect to dividends and/or interest on shareholders’ equity paid to holders of our common shares and preferred shares since the fiscal year ended June 30, 2012 in Reais and in U.S. dollars translated from Reais at the commercial market selling rate in effect as of the payment date under the caption “Item 8—Financial Information—Dividends and Dividend Policy—Recent Dividend Payments.”

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.

The following tables show, for the periods and dates indicated, certain information regarding the Real /U.S. dollar exchange rate. On June 30, 2016, the Real/U.S. dollar exchange rate was R$3.2098 per US$1.00. On September 30, 2016, the Real /U.S. dollar exchange rate was R$3.2462 per US$1.00. The information below is based on the noon buying rate in the City of New York for wire transfers in Brazilian Reais as certified for U.S. customs purposes by the Federal Reserve Bank of New York.

Year ended June 30,	Average Rate(1)
	(R$ per US$1.00)
2012	1.792
2013	2.038
2014	2.297
2015	2.678
2016	3.695

(1)   The average rate is calculated as the average of the noon buying rates on the last day of each month during the period.

Period	High	Low
	(R$ per US$1.00)
April 2016	3.692	3.451
May 2016	3.617	3.465
June 2016	3.613	3.210
July 2016	3.339	3.230
August 2016	3.273	3.130
September 2016	3.333	3.193

 

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

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 one or more of the following:

·         failure to acquire and sell agricultural properties at attractive prices;

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

·         inability to overcome certain limitations on the acquisition of land in Brazil by foreigners, as provided in an opinion of the Federal Attorney General;

·         failure to expand our operations within the originally proposed time frame;

·         failure to maintain the fiscal structure of our subsidiaries;

·         inability to develop infrastructure and attract 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 margins;

·         inability to develop and operate our agricultural properties profitably that 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;

·         the failure of purchasers of our properties to comply with 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;

·         global climate conditions, such as global warming, which may contribute to the frequency of unpredictable and previously rare meteorological phenomena such as hurricanes and typhoons, as well as unpredictable and unusual patterns of rainfall, among others;

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

·         the economic, political and business environment in Brazil, and specifically in the geographic regions where we invest;

·         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.

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 do, depriving us of opportunities to acquire the best agricultural properties and/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 would have a material adverse effect on us.

The imposition of restrictions on acquisitions of agricultural properties by non-Brazilian 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. Under this legislation, companies that are majority-owned by foreigners may not 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 may not exceed 25% of the surface area of the relevant municipality, of which area up to 40% may 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 may not exceed 10% of the surface area of the relevant municipality. In addition, INCRA will also 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 lease of the property. The purchase and/or lease of agricultural properties that do not respect the requirements above 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 of certificates having been granted.

On September 30, 2016, approximately 76.48% of our common shares were held by foreigners and, accordingly, 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/or our inability to obtain needed approvals. There is a judgement pending on the Supreme Court ( Supremo Tribunal Federal, or STF ) regarding 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.  In addition, on April 16, 2015, the Brazilian Rural Society filed a request for non-compliance of basic principles (ADPF) at the Supreme Court, in order to (i) declare that the paragraph 1, of article 1, of Law No. 5,709/71 was not received under the 1988 Federal Constitution and (ii) reverse the opinion of 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. For example, we currently have control over the properties we own, and we would need to acquire properties in partnership with local companies in which we relinquish our right to exercise control over the entities acquiring such properties. This might have the effect of

 

increasing the number of transactions we must complete, which would add 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 consist of agricultural properties which are illiquid.

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 that we will be able to monetize our agricultural investments successfully. Agricultural real estate assets are generally illiquid and have volatile values, 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 favorable  to us. Lack of liquidity and volatility in local market conditions would adversely affect our ability to execute property dispositions on a timely and profitable basis which would have a material adverse effect on us.

We may not be profitable or our cash flow may not be positive for a number of years.

We expect to incur significant capital and operating expenses for several years on account of our continuing development activities. Due to the capital intensive and long-term nature of our real estate development activities, many of our properties will not generate immediate cash flows or provide a short-term return on investment. Therefore, we may not achieve positive cash flows or profitability for a number of years, and even if we do, we cannot assure you that such positive cash flows or profitability will be sustained in the future. Should we fail to achieve and sustain profitability, our business, financial condition and results of operations and the market value of our common shares would be adversely affected.

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 supply and demand as well as speculation;

·          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;

·          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;

 

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

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 would significantly reduce the value of our land holdings and materially and adversely affect our business, financial condition and results of operations.

Substantially all of our revenue is derived from a small number of clients, and we currently face a risk of default by our main customer.

We currently sell a substantial portion of our total crop production to a small number of clients who have substantial bargaining power. For instance, during the year ended June 30, 2016, our three largest customers accounted for 75% of our total revenue. Furthermore, we entered into a supply contract and a leasing contract with Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), controlled by Odebrecht S.A., pursuant to which we currently supply them with 100% of our sugarcane production from Alto Taquari and Araucaria 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 leasing contract covers a total area of 4,263 hectares which we will explore and operate until March 31, 2026. 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 client 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 client base also increases the adverse consequences to us should we lose any of our clients or if any of our clients default on their obligations to us, either in the form of non-payment or through a breach of any contractual provision or obligation, such as failure to ship a product purchased or delays in shipment. Noncompliance with the time of shipment of our products could directly affect the planning of our harvest, which could generate losses and result in additional costs.

We currently run the risk of default by Brenco, our main customer, due to the fact that its controlling shareholder, Odebrecht S.A., is being investigated for corruption in the operation called “Lava Jato” (Car Wash). Odebrecht’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’s controlling shareholder has been cutting costs, which can adversely affect Brenco, its business and its ability to meet its payments due to us.

We are dependent on third-party service providers.

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 purpose. 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 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 lawsuits alleging that an employment relationship exists between us and our contractors’ personnel, and that as a result we have joint and several or secondary liability for our contractors’ labor and social security payment obligations, lease payments or other obligations. Such lawsuits could be brought independently by such third-party employees, or could arise as a result of inspections by governmental authorities. The Brazilian Supreme Labor Court ( Tribunal Superior do Trabalho ) has held that outsourcing is legally permissible with respect to specialized services not related to the

 

company’s core business, such that an employment relationship is not formed between the outsourcer and the workers providing the non-core services. In addition, pursuant to the court’s decision, companies hiring third-party contractors in violation of such standard will be held secondarily liable for labor and social security contingent liabilities of the employees of such third-party contractors. If we are forced to recognize an employment relationship between us and the employees of our third-party service providers, we may be required to change our strategy with regard to the use of third-party service providers, which could have an adverse effect on our business, financial condition and results of operations.

Moreover, pursuant to Brazilian environmental law, we are jointly and severally liable, together with our contractors, for all environmental damages caused by our third-party contractors, irrespective of our fault for such damages. Such obligations or our costs for defending against any such allegations are potentially significant and could have a material adverse effect on us if we were deemed responsible for their payment.

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 shown, and are likely to continue to show, an impact on grain 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 finite period. Any reduction in the support for 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 on the price of our agricultural properties, which may adversely affect our business, financial condition and results of operations.

We are subject to extensive environmental 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 cure 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 make us jointly and severally liable for the obligations of our contractors, producers 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 the 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 stringent, 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.

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.

Property values in Brazil could decline significantly.

Property values 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 values will not decline. A significant decline in property values in Brazil could adversely affect the value of our properties.

Our growth depends on our ability to attract and retain qualified personnel.

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 context of a 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 ( ferrugem asiática ) and corn earworm ( helicoverpa zea ), can spread and may result in lower crop yields and higher operating costs. Currently, Asian soybean rust and corn earworm 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.

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 through registration of deeds at the applicable land registry. Land registry recording errors, including duplicate or fraudulent entries, and legal challenges to deeds occur frequently. Real estate title litigation is prevalent in Brazil, and as a result there is a risk that such errors, fraud or challenges could adversely affect our business, financial condition and results of operations, causing the loss of all or substantially all 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 compete effectively 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 to, among other things, protect local producers by limiting access of Brazilian companies to their markets. For example, the European Union charges protective tariffs designed to mitigate the effects of Brazil’s lower production costs on local European producers. Developed countries also sometimes use direct and indirect subsidies to enhance the competitiveness of their producers in other markets. 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 volume of exports 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 adversely affect our business, financial condition and results of operations.

Fluctuations in the value of the 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.

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.

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 harvesting period in Brazil normally begins in April and ends in November. As a result, our results of operations are likely to continue to fluctuate significantly between the planting and harvesting 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 be faced with the possibility of 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 result.

Our growth 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 securities, 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, principally 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 fulfill the conditions of the respective agreement. 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 may enter into strategic partnerships and alliances in order to benefit from certain business opportunities. We cannot predict if and when such strategic partnerships and alliances will occur. Our ability to expand our business successfully through 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 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, 2016, Cresud holds 39.76% of our common shares. Cresud has numerous other investments and may have other priorities that may conflict with those of our other shareholders, and as a result 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 real 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.

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 where the soil is generally 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 the case of the 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.

Some of our agricultural products contain genetically modified organisms (GMOs), and risks associated with GMOs remain uncertain.

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.

Lack of transportation, storage and processing infrastructure in Brazil 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 in general, and our operations in particular. 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.

Competition in the markets for our products may 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 such commodities are larger than us and possess greater 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.

We made investments in farmland in 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 and Paraguay. Nevertheless, we are in the process of considering our expansion into other countries in and outside Latin America, although we currently have no definitive commitments or specific plans with respect thereto. Accordingly, 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 the 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; and 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 recuperate 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 caused 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 enforcing of debts, or difficulties or restrictions imposed by local courts;

·          expropriation of private domain, imposition of legal or administrative limitations to the exercise of the property right 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;

·          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.

Risks Relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy, which, combined 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 policies related to our sector;

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

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 imposition of a tax on foreign capital entering Brazil (IOF tax), changes in monetary, fiscal and tax policies, currency devaluations, capital controls and limits on imports.

The Brazilian economy has been experiencing a slowdown – GDP growth rates were 3.9%, 1.8%, 2.7% and 0.1%, in 2011, 2012, 2013 and 2014, respectively, and GDP decreased 3.8% in 2015 and 4.6% in the first six months of 2016. In addition, inflation, unemployment and interest rates have increased more recently.

As a result of the Lava Jato (Car Wash) operation related to corruption in Brazil, a number of senior politicians, including congressmen, and executive officers of some 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.

On August 31, 2016, the Senate approved the impeachment of the president Dilma Rousseff, and the Vice-President Michel Temer replaced her as the new president. On September 12, 2016, the former Speaker of the House of Representatives, Eduardo Cunha, had his mandate revoked by the House and lost his political rights for eight years. The new President intends to implement some reforms, including in the labor laws and social security systems, and some other measures to achieve higher rates of economic growth and employment.  We cannot predict which policies will be adopted by the new Brazilian government and whether these policies will negatively affect the economy or our business or results of operations. In addition, we cannot predict whether the new government may become involved in corruption scandals or may face an increasing lack of support from Brazilian citizens, both of which may make it more difficult to implement new policies and increase the political and economic instability in Brazil. Such increase in instability or the new policies to be implemented by the new government (or the failure to implement them) may have an adverse effect in the Brazilian economy and our financial condition and results of operations.

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 Brazilian 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 on December 31, 2010. The SELIC rate has increased since then and, as of June 30, 2016, it was 14.15% 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 5.5% in 2013, 3.67% in 2014, and 10.54% in 2015. Cumulative inflation in the first six months of 2016, calculated by the same index, was 5.91%.

 

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, 2016, 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 in perceptions 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 BM&FBOVESPA, 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.

Risks Relating to our American Depository Shares and Common Shares

A holder of American Depository Shares may face disadvantages compared to a common shareholder when attempting to exercise voting rights.

Holders of our American Depository 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 by-laws, we must generally 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 legislation, 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.”

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 by-laws and Brazilian corporate law.

 

Our corporate affairs are governed by our by-laws 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 all of the members of our board of directors, our executive officers and our independent registered public accountants reside or are based in Brazil. The vast majority 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.

Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. 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 U.S. Securities and Exchange Act of 1934, as amended, or 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 the board be independent;

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

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

 

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 or auditor discussion and analysis, and any future audit rule promulgated by the PCAOB (unless 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, enacted on December 29, 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. 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 relative volatility and illiquidity of the Brazilian securities markets may adversely affect holders of our common shares and ADSs.

The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The BM&FBOVESPA, which is the principal Brazilian stock exchange, had a market capitalization of R$2.21 trillion (US$0.57 trillion) at December 31, 2015 and an average daily trading volume of R$6.8 billion (US$1.74 billion) for 2015. In comparison, aggregate market capitalization of the companies (including U.S. and non-U.S. companies) listed on the NYSE was US$18.4 trillion at December 31, 2015 and the NYSE recorded an average daily trading volume of US$10.57 trillion for 2015. There is also significantly greater concentration in the Brazilian securities markets. The ten largest companies in terms of market capitalization represented approximately 49% of the aggregate market capitalization of the BM&FBOVESPA at December 31, 2015. The ten most widely traded stocks in terms of trading volume accounted for approximately 49.2% of all shares traded on the BM&FBOVESPA in 2015. These market characteristics may substantially limit the ability of holders of our ADSs to sell the common shares underlying our ADSs at a price and at a time when they wish to do so and, as a result, could negatively impact the market price of our ADSs themselves.

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 BM&FBOVESPA.

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 which 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 exploitation 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 BM&FBOVESPA stock exchange in April 2006, or the IPO, and the subsequent commencement of our operations until the date hereof, we acquired 10 agricultural properties in seven Brazilian states, one of which is still in the process of registration of ownership, aggregating 177,404 hectares, of which 127,952 hectares were arable but less than 10% of which were cultivated

 

 

 

when acquired and 49,452 hectares were protected by environmental regulation. We also acquired a 50% interest in Cresca S.A., a company owning 141,931 hectares of rural land in Paraguay, of which approximately 71,000 were arable but less than 12,000 hectares of which were cultivated when acquired and approximately 71,000 hectares were protected by environmental regulation. Since then, four of our agricultural properties were fully sold and two of our agricultural properties were partly sold, representing in the aggregate a total area of 77,711 hectares. As of the date hereof, we hold 253,342 hectares, including 11,718 hectares leased and 117,307 hectares through our joint venture in Cresca S.A. Of this total, however, we are not the legal owner of one property representing 21,148 hectares, as the registration of ownership process for this property has not been finalized. In addition, on October 5, 2016, we and our partner in Cresca agreed to put for sale all the land that Cresca currently owns or to split it between us within 120 days when the joint venture will be terminated. We invested more than R$597.7 million since the IPO to acquire, develop and transform agricultural properties, of which R$22.3 million (as of June 30, 2016) are committed to pay the remaining purchase price of the acquired properties.

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

From July 1, 2013 until the date hereof:

·          on October 5, 2016, we and our partner in Cresca agreed to put for sale all the land that Cresca currently owns or to split it between us within 120 days when the joint venture will be terminated;

·          during 2015/2016 crop year, we developed 6,572 hectares of our 163,431 hectares of arable land through the cultivation of soybeans and other value-added crops;

·          during 2015/2016 crop year, we began cattle-raising operations at the Preferência Farm, in Bahia, initially consisting of breeding and fattening activities. We have acquired 4,836 head of cattle, which are distributed over 5,052 hectares of already active pasture; and we entered into a partnership to explore an area of 4,263 hectares in the municipalities of Alto Taquari and Alto Araguaia, in the State of Mato Grosso (“Partnership III”). These areas are close to Alto Taquari farm and will be used for sugarcane by March 31, 2026;

·          we sold the remaining 27,745 hectares of the Cremaq farm and related assets in the State of Piauí in June 2015 for a total of R$270.0 million. The value of the land and related assets sold in June 2015 as recorded in the Company’s books was R$63.6 million (acquisition plus investments, net of depreciation);

·          we made capital increase in Cresca S.A. in the year ended June 30, 2015 in the amount of R$ 25.9 million (R$ 14.5 million in the year ended June 30, 2014);

·          we sold 1,164 hectares of the Araucária farm in the State of Goiás for a total amount of R$41.3 million (the equivalent of 735 thousand bags of soybean) in June 2014 (payable in four installments over a period of four years), five years after acquiring them for R$10.7 million;

·          our joint venture, Cresca S.A., sold 24,624 hectares of rural land in Paraguay for a total of US$14.8 million in April 2014 (payable in three installments over a period of three years), four months after acquiring them for US$8.6 million, which was recognized on July 14, 2014, when ownership of the land was transferred; and

·          we acquired in December 2013 (i) 50% interest in Cresca S.A, a company owning 81,231 hectares and an option to acquire an additional 60,700 hectares, totaling 141,931 hectares of rural land located in Paraguay; (ii) Cresud credit with Cresca; and (iii) an advisory service agreement, pursuant to which Cresud agrees to render services to Cresca in exchange for payment of fees. The total consideration of this transaction was US$19.8 million.

 

The map below indicates the location of our agricultural properties, their arable areas, their current or intended production activities and the sold areas as of June 30, 2016:

 

(1)   This represents the total property area. BrasilAgro has a 50% equity interest in Cresca S.A. On October 5, 2016, we and our partner in Cresca agreed to put for sale all the land that Cresca currently owns or to split it between us within 120 days when the joint venture will be terminated.

(2)   BrasilAgro signed a partnership in “Partnership II Farm” for up to 11 crops and up to 10,000 hectares.

(3)   BrasilAgro signed a partnership in “Partnership III Farm,” which will expire on March 31, 2026.

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 of our financial statements for the fiscal year ended June 30, 2016.

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, 2016.

 

Property	Location	Acquisition Date	Total Area	Land & Improvements Cost on June 30, 2016 (1)	Estimated Fair Market Value on June 30, 2016	Appreciation (2)
			(ha)	(R$ million)
Jatobá Farm	Jaborandi/BA	Mar/07	31,606	59.2	303.5	413%
Alto Taquari Farm	Alto Taquari/MT	Aug/07	5,395	35.7	120.7	238%
Araucária Farm	Mineiros/GO	Apr/07	8,124	58.2	150.9	159%
Chaparral Farm	Correntina/BA	Nov/07	37,182	77.9	262.7	237%
Nova Buriti Farm	Januaria/MG	Dec/07	24,211	22.0	31.9	45%
Preferência Farm	Barreiras/BA	Sep/08	17,799	33.0	56.5	71%
Total			124,317	286.0	926.0	224%

 

We are focused on the acquisition, development and exploitation 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.

 

Agricultural Activities and Products

Independent Production

As of June 30, 2016, 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 clients who have substantial bargaining power. Our net revenue was R$147.1 million for the year ended June 30, 2016 and R$174.4 million for the year ended June 30, 2015. All of our sales are to clients located in Brazil.

 

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. On June 30, 2016, we had one manager at Partnership II farm, one regional manager for the Chaparral, Jatobá and Preferência farms and one regional manager for the Araucária, Alto Taquari and Partnership III farms.

 

Leases

As an alternative to independent production, we leased in the past, and may lease again in the future, 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 that were previously leased by them.

 

Grains

The planting season for grains runs from September to December, and harvest occurs between February and May. During the planting season for our 2015/2016 crop year, we planted 34,347 hectares of grains at our grain

 

farms in Brazil. For the years ended June 30, 2016 and 2015, net revenue from sale of grains constituted 40.2% and 66.7% of our net revenue, respectively.

During the planting season for our 2015/2016 crop year, Cresca planted 13,993 hectares of grains at their farms located in Paraguay.

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

Sugarcane

The sugarcane planting season runs from February to May, and harvest occurs between April and November. On June 30, 2016, we had 10,303 hectares planted with sugarcane at our Araucária, Alto Taquari, and Partnership III 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. We currently run the risk of default by Brenco, our main customer, associated with the fact that its controlling shareholder, Odebrecht S.A., is being investigated for corruption in the operation called “Lava Jato” (Car Wash). For the years ended June 30, 2016 and 2015, net revenue from the sale of sugarcane accounted for 56.8% and 30.4% of our net revenue, respectively.

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”), where 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.

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 clients’ sugar and ethanol refineries.

Livestock

On June 30, 2016, we began cattle-raising operations at the Preferência Farm, in Bahia, initially consisting of breeding and fattening activities. On June 30, 2016, we had 4,148  head of cattle distributed over 5,052 hectares of active pasture. We currently have 4,836 head of cattle, which are distributed over 5,052 hectares of active pasture.

Reforestation

On June 30, 2016, we had 24,211 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.

Investment properties

On June 30, 2016, the net book value of our investment properties was R$287.9 million, of which R$204.7 million represented land acquisition costs and R$83.2 million (net of accumulated depreciation) represented improvements, including building and infrastructure improvements and costs of clearing and preparing the land. For the year ended June 30, 2015, gain on farm sales accounted for R$194.0 million. We did not sell any farm during our fiscal year ended June 30, 2016.

 

Agricultural Properties

On June 30, 2016, we owned six agricultural properties, totaling 163,431 hectares of arable land (not including environmental preservation areas in accordance with Brazilian environmental law), including 11,718 hectares of leased area and 58,654 hectares through the joint venture Cresca S.A., located in the Brazilian States of Mato Grosso, Goiás, Minas Gerais, Bahia and Piauí and in Paraguay. During the planting season for our 2015/2016 crop year, we planted 23,954 hectares of soybean, 4,397 hectares of corn, 10,303 hectares of sugarcane, 5,996 hectares of other grains (sesame, sorghum and others) and 6,566 hectares of pasture. Except for part of the Nova Buriti farm and the joint venture Cresca S.A., 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 and III.

Cremaq Farm :  On October 2006, the Cremaq farm was acquired by our subsidiary Imobiliária Cremaq with a total area of 32,702 hectares for R$42.3 million. The deed was granted in April 2008 and registration was made on June 23, 2008. The property is located in the State of Piauí, in the Northeastern region of Brazil, next to the Itaqui Port.

At the time of acquisition, 3,000 hectares were cultivated with grain production. Since the acquisition until the sale on June 10, 2015, we invested R$26.0 million (net of accumulated depreciation) in infrastructure to support the production process, including the construction of housing for our employees and service providers, the division of farmable areas into plots to facilitate capacity for cultivation, and the installation of farm equipment, including the construction of a silo at a total cost of R$8.4 million with capacity to store 72,000 tons of grains (such silos are capitalized under property, plant and equipment).

During the planting season for our 2014/2015 crop year, we planted 14,965 hectares of soybean and 3,750 hectares of corn at the Cremaq farm.

On May 10, 2013, we sold 4,895 hectares of our Cremaq farm, 3,201 of which are arable, for a total sale price of R$37.4 million, equivalent to 901,481 soybean bags.

On June 10, 2015, we sold the remaining 27,745 hectares of our Cremaq farm and related assets, 18,578 of which are arable, for a total purchase price of R$270.0 million.

Jatobá Farm :  The Jatobá Farm has an area of 31,606 hectares and 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 in 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 Candeixas in the State of Bahia.

Prior to our acquisition, the Jatobá farm was used for pine reforestation. Since the acquisition until June 30, 2016, we invested R$25.8 million (net of accumulated depreciation) in the development of support infrastructure, such as the construction of houses for our employees and service providers, an administrative office, roads and loading docks, the division of farmable areas into plots to facilitate capacity for cultivation, in addition to having invested in land development and preparation of the soil for agricultural production. We have also invested in the installation of farm equipment, mainly including tractors that operate by GPS and machines that monitor and collect data with respect to our crops and transmit such data to our headquarters. During the planting season for our 2015/2016 crop year, we planted 8,762 hectares of soybean, 1,925 hectares of corn and 1,823 hectares of others grains at the Jatobá farm.

Alto Taquari Farm :  The Alto Taquari farm has an area of 5,395 hectares and 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.  Prior to our acquisition, the Alto Taquari farm was used for grain cultivation and cattle raising. As of June 30, 2016, we had 3,190 hectares planted with sugarcane. 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 2020. The property is located in the Municipality of Alto Taquari, State of Mato Grosso.

Araucária Farm :  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 date our partnership with Brenco was terminated and from which point we were 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, State of Goiás, and is primarily used for the cultivation of sugarcane and grain.

Prior to our acquisition, the Araucária farm was used for grain cultivation. Since the acquisition until June 30, 2016, we invested R$1.7 million (net of accumulated depreciation) in infrastructure improvements. We also invested in installation of farm equipment, mainly including tractors that operate by GPS and machines that monitor and collect data with respect to our crops and transmit such data to our headquarters.

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 Fam, 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 8,124 hectares, of which approximately 5,982 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 2020.

Chaparral Farm :  The Chaparral farm has an area of 37,183 hectares and 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. Since the acquisition until June 30, 2016, we invested R$30.7 million (net of accumulated depreciation) in infrastructure improvements. During the planting season for our 2015/2016 crop year, we planted 10,225 hectares of soybean and 4,173 hectares of others grains there. The property is located in the Municipality of Correntina, State of Bahia.

Nova Buriti Farm :  The Nova Buriti farm has an area of 24,211 hectares and was acquired directly by us in December 2007 for R$21.6 million. The balance outstanding to be paid on the acquisition price is R$19.8 million, the amount payable is adjusted based on the IGP-M (General Market Price Index) inflation index, and the registration of the conveyance of 21,183 hectares is subject to certain conditions and obligations binding on the sellers:  (i) the sellers must obtain, from the Judiciary and the Land Institute ( Instituto de Terras ) of the State of Minas Gerais official recognition of our ownership of the property and (ii) the sellers must obtain from and record with the Real Estate Registry a final deed of sale, after obtaining an official certificate from INCRA for the purchase of the property and the discharge of the owners of any obligations related to disputes (including in rem or pledge-related disputes) in connection with the property. Because this process depends upon the approvals of different federal government agencies in Brazil, and because the timing for such processes can be lengthy and unpredictable, we are unable to estimate the expected date for the completion of such processes. Our subsidiary Imobiliária Flamboyant holds a 13% interest in the property, and we hold the remaining 87%. The property is located in the municipality of Januária, 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.

Preferência Farm :  The Preferência farm has an area of 17,799 hectares and 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. Since the acquisition until June 30, 2016, we invested R$22.2 million (net of accumulated depreciation) in infrastructure improvements to the property and have 6,566 hectares of pasture.

During the 2015/2016 crop year, we began cattle-raising operations at the Preferência Farm, initially consisting of breeding and fattenings activities. We acquired 4,836 head of cattle, which are distributed over 5,052 hectares of active pasture. On June 30, 2016, we had 4,148 head of cattle, distributed through over 5,052 hectares of active pasture.

Partnership II :  On October 11, 2013, we entered into a partnership with respect to Partnership II farm for up to 11 harvests, which is expected to end in October 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 of 7,181 hectares, which is suitable for grain crops. During the planting season for our 2015/2016 crop year, we planted 4,967 hectares of soybean and 2,472 hectares of corn at the Partnership II farm.

Partnership III :  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”), where we have the right to operate an area of 4,263 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.

Cresca S.A. :  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., which represented 50% 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.

On October 5, 2016, we and our partner in Cresca agreed to put for sale all the land that Cresca currently owns or to split it between us within 120 days when the joint venture will be terminated.

As of the date hereof, Cresca owns approximately 117,000 hectares, of which approximately 60,000 hectares are suitable for agricultural purposes. During the planting season for our 2015/2016 crop year, we planted 7,200 hectares of soybean, 3,298 hectares of corn, 1,242 hectares of other grains and 2,253 hectares of pasture at the Cresca farms.

Investment in Brenco – Companhia Brasileira de Energia Renovável

In March 2007, we acquired an indirect minority interest in Brenco, controlled by Odebrecht S.A., 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 3.8% 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 0.046% 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

Cremaq

On June 10, 2015, we sold the remaining 27,745 hectares of our Cremaq farm, located in the municipality of Baixa Grande do Ribeiro, State of Piauí, 18,578 of which are arable, and related assets for a total purchase price of R$270.0 million. The rural property was acquired in 2006 for R$42.3 million and had a total area of 32,702 hectares. Of this initial area, 4,957 hectares were sold in May 2013. The value of the area sold in June 2015 in the Company’s books was R$63.6 million (acquisition plus investments, net of depreciation).

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 (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, 2016, net revenues of our sugarcane production to Brenco were R$83.6 million, representing 56.8% of our total 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.

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 leasing. The payment must always be in kind (tons of sugarcane) and delivered at the mill owned by Brenco, which

 

is located in the vicinities 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 deals with the regulation of rights and obligations between agricultural partners from whom BrasilAgro 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 127,699 tons of sugarcane, of which 41,470 tons will be paid within one year and 86,229 tons will be paid within one to five years.

For the year ended June 30, 2016, we delivered a total of 61.2 million tons of sugarcane pursuant to both 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 BrasilAgro.

We currently run the risk of default by Brenco, our main customer, associated with the fact that its controlling shareholder, Odebrecht S.A., is being investigated for corruption in the operation called “Lava Jato” (Car Wash). Odebrecht’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’s controlling shareholder has been cutting costs, which can adversely affect Brenco, its business and its ability to meet its payments due to us.

Cresca

Cresca is a company that invests in agricultural and cattle raising land in Paraguay. On December 12, 2013, it owned approximately 71,000 hectares and had a contract for the right to purchase approximately 70,000 additional hectares of agricultural land in the region of Mariscal Estigarribia in Paraguay. Pursuant to this agreement, Cresca purchased 46,900 hectares on July 14, 2014 and the remaining 24,700 hectares on January 20, 2015.

On April 7, 2014, Cresca sold 24,624 undeveloped hectares, which transaction was not recorded until July 2014 when ownership of the land was transferred. As of June 30, 2016, Cresca owns 117,307 hectares, of which approximately 60,000 hectares are suitable for agricultural purposes.

On October 5, 2016, we and our partner in Cresca agreed to put for sale all the land that Cresca currently owns or to split it between us within 120 days when the joint venture will be terminated.

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.

 

 

Customers

We currently sell a substantial portion of our total crop production to a small number of clients who have substantial bargaining power. For the year ended June 30, 2016, our three largest customers accounted for 75% of our total revenue. See “Item 3—Key Information—Risk Factors— Substantially all of our revenue is derived from a small number of clients, and we currently face a risk of default by our main customer.”

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 Vanguarda Agro. In addition, we may face significant competition from large international companies which have greater financial resources than we do.

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

We believe that our insurance coverage is adequate and consistent with the usual practices adopted by other companies operating in our sector in Brazil. However, we cannot guarantee that the coverage set forth in our insurance policies will be sufficient to protect us from all losses and damages that may occur.

As of August 2, 2016, we also have a D&O insurance policy with coverage indemnifying our managers and members of our board of directors against civil liability for R$30 million, expiring on November 19, 2016.

Intellectual Property

In Brazil, title to a patent or trademark is acquired through the registration with the National Institute of Industrial Property ( Instituto Nacional de Propriedade Industrial , or INPI). When such right is granted, the titleholder is guaranteed exclusive use throughout Brazil for a period of ten years, which may be renewed. During

 

 

the registration process, the depositor has an expectation of right to use the deposited trademarks, which it may use in order to identify its products or services.

We filed three trademark registration applications with the INPI for the trademark name (which corresponds to our corporate name) “BrasilAgro – Companhia Brasileira de Propriedades Agrícolas,” two of which are postponed while other trademark registration applications are being evaluated, and one of which was approved on June 5, 2012 and expires on June 5, 2022.

We also have three trademark registration applications pending for the trademark name “BrasilAgro – Companhia Brasileira de Propriedades Agropecuárias.”  One of such applications was rejected based on INPI’s considerations of previously filed trademark applications.  We filed an appeal and await a final decision from the INPI regarding this application. Our business has not been affected by the refusal of this trademark registration application because such application relates to the trademark name “BrasilAgro – Companhia Brasileira de Propriedades Agropecuárias,” which is not our actual corporate name (our actual corporate name is “BrasilAgro – Companhia Brasileira de Propriedades Agrícolas”) and was filed at the time as a cautionary measure when we were in the process of deciding our legal name. In addition, the other two applications were approved on June 14, 2011, expiring on June 14, 2021 and on January 28, 2014, expiring on January 28, 2024.

In addition, we filed three trademark registration applications for the name “BrasilAgro,” one of which was approved on November 1, 2011 and expires on November 1, 2021; while the other two are postponed pending evaluation of other trademark registration applications by the INPI.

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.

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 and Paraguay require licenses for agricultural and animal-raising activities.

The environmental licensing procedure includes “prior,” “installation” and “operating” licenses. A “prior” license is granted during the preliminary phase of planning the enterprise or activity to authorize its location and concept and attesting to its environmental feasibility. An “installation” license authorizes the installation of an enterprise or activity in accordance with the specifications stated in approved plans, programs and projects. An “operating” license authorizes an activity or enterprise to operate after the conditions stated in the “prior” licenses are fulfilled and verified, with environmental protection measures and certain conditions for operations. This last license must be renewed at the end of its period of validity, which is determined by the competent environmental agency depending on the activity being developed.

For the Paraguay farm, we obtained the approval of the environmental impact study and we are in the process of obtaining the licenses for the suppression of vegetation for the remaining area.

For the Nova Buriti farm, we are studying and analyzing some alternative options, such as:  environmental servitude, quota of environmental reserve and compensation of legal reserve.

Agriculture and livestock activities are currently required by law to obtain a special environmental license. We are in the process of obtaining such a license for the Jatobá farm and we must obtain one for the Preferência farm by 2021.

We have obtained environmental licenses for our other three properties:  the license for suppression of vegetation for the Araucária and Chaparral farms and the operating license for the Alto Taquari farm.

Legal Reserve

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 and in some cases are recorded as such in the real estate registry.

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.

All of our properties have legal reserve areas, although a part thereof has legal reserves that are in the process of being recorded at the offices of the applicable government agency. At the date of this Annual Report, none of our current landholdings are located in Floresta biome within Amazonia Legal. Legal reserve vegetation may not be suppressed, and may be used only under a regime of sustainable forest stewardship in accordance with technical and scientific criteria set forth in the regulations. Agricultural properties that fail to record the legal reserve are subject to daily fines. A total of 61,068 hectares, or approximately 23.3% of the total area of our properties, consist of legal reserves.

Permanent Preservation Areas

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 modify these areas through previous authorization by the competent state environmental body. A total of 19.277 hectares, or 7.4% of the total area of our properties, consist of permanent preservation areas.

Suppression of Vegetation

We are in the process of obtaining authorization for suppression of vegetation with respect to 14.1% of our current land holdings upon which we have not yet commenced crop cultivation operations and that are not part of our legal reserve or permanent preservation areas, from the relevant environmental authorities in the locations where required. Accordingly, with respect to such areas where such authorization is required, we will not be able to commence crop cultivation operations until such authorizations are obtained. Because such authorizations depend upon governmental agencies, we are not able to provide an estimate of the time frame for receiving such approvals.

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 at 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 properties have this register.

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 adopted within different Brazilian regions that range from five to 100 hectares, depending on the region.

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 before 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 this Annual Report, there are no known cases of certificates having been granted. Additionally, there is no judgment so far by the Brazilian courts on the validity and constitutionality of the contents of the Federal Attorney General’s opinion.

As of June 30, 2016, approximately 77.82% 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 the 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 Law No. 5,709/71 and Decree No. 74,965/74, regarding Brazilian companies with the majority of the capital stock composed of 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 for the Third Region recognized its lack of jurisdiction to judge such claim and sent it 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 for the Third Region was set aside, and INCRA and the Federal Government had declined on the claim. Since then, entities providing notary and registrary 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 at the Higher Federal Court (STF) against the State of São Paulo due to the decision of São Paulo Justice 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 03, 2012. On August 7, 2014, the decision issued by Justice Marco Aurélio Mello, rapporteur of the process, was published, denying the injunction required by AGU and INCRA, on the basis that the period of more than 1 year and 7 months from the opinion of the Inspector General Office of São Paulo and the file of the suit in STF shows that there is no urgency in the appreciation of the injunction request. In September 2016, Justice Marco Aurélio Mello suspended the effects of the  decision of the São Paulo Justice Court that considered that the Opinion 1 issued by the  AGU in 2010 was unconstitutional.

 

 

In addition, on April 16, 2015, the Brazilian Rural Society filed a request for non-compliance of basic principles (ADPF) at the Higher Federal 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.

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 issued by the STF.

C.                   Organizational Structure

The diagram below illustrates our corporate structure as of the date hereof. All of our subsidiaries are incorporated in Brazil. Our investee Cresca S.A. is incorporated in Asunción, Paraguay.

 

(1)   Cape Town LLC is controlled by Mr. Elie Horn.

(2)   A portion of our common shares held by Cresud are deposited in The Bank of New York Mellon in the form of ADRs (American Depositary Receipts).

(3)   Agro Investment and Agro Managers are companies organized under the laws of Argentina, controlled by Cresud´s controlling shareholder (Mr. Eduardo Elsztain) and Cresud, respectively.

(4)   On October 5, 2016, we and our partner in Cresca agreed to put for sale all the land that Cresca currently owns or to split it between us within120 days when the joint venture will be terminated.

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.

A.                   Operating Results

Business Drivers and Measures

Brazilian Macroeconomic Environment

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

Brazilian GDP increased 2.7% in 2013 and 0.1% in 2014 and decreased 3.8% in 2015 and 4.6% in the first six months of 2016. The forecast is a decrease in the Brazilian GDP for 2016 and a  growth in the Brazilian GDP for 2017. Inflation, as measured by the Broad Consumer Price Index, or IPCA, published by the IBGE, was 5.9%, 6.4%, 10.7% per annum in 2013, 2014, 2015, respectively, and 8.8% in the first six months of 2016. The dollar appreciated 14.6%, 13.4% and 45.0 % against the Real in 2013, 2014 and 2015, respectively. From January 1 through June 30, 2016, the Real appreciated approximately 20.5% against the U.S. dollar. Unemployment increased from 5.5% in January 2013 to 11.6% in July 2016. International reserves held by the Central Bank of Brazil increased from US$370.6 billion on September 30, 2015 to US$376.7 billion on September 30, 2016.

The long-term credit rating for Brazil was downgraded by Standard & Poor’s from BBB- to BB, by Moody’s from “Baa2” to “Ba2” and by Fitch Ratings from BBB- to BB, placing Brazil back to speculative investment grade level (“junk”).

The current scenario is that the external vulnerability of Brazil may grow in the coming years, which may result in a deficit in the current account, since the entry of direct foreign investments may not be sufficient to cover the foreign debt.

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.

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:

 

 

 

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

(2)   IGP-M:  General Index of Market prices is published monthly by Fundação Getúlio Vargas.

(3)   IPCA:  National Index of Broad Consumer Prices published monthly by the Brazilian Statistics Institute (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.

 

Principal Components of Our Statement of Operations

Revenue

Our operating revenue is derived mainly from the sale of (i) grains (comprised of soybean, corn, and sorghum); and (ii) sugarcane and 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	Levied	Levied

 

These are the primary taxes on sales:

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. On June 30, 2016, we, Jaborandi Agrícola Ltda and Imobiliária Cremaq. were subject to noncumulative assessment for such payments, and our other subsidiaries were subjected to cumulative assessment. 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 to an entity that produces ethanol or biofuel.

 

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 sales to import/export companies located in Brazil.

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 correspond, mainly, to our soybean, corn, and sugarcane crops and are measured at fair value less cost to sell. These crops are not only cultivated to obtain non-real estate revenue, but also as a means of increasing the real estate value of the respective agricultural properties.

The agricultural production derived from our soybean, corn and sorghum crops is harvested after a period of time ranging from 100 to 170 days after planting, depending on the crop, variety, geographic location and climate conditions.

The sugarcane crops have a productive cycle of six years from the first harvest, and accordingly, are classified as long term biological assets.

The fair value of biological assets is determined upon their initial recognition and at each subsequent reporting date until harvested. The gain or loss in the variation of fair value of biological assets is determined as the difference between the fair value of the biological assets compared to the cost incurred in planting and cultivating such biological assets. Fair value is measured based upon the selling price of the crops, determined based on the market prices of similar crops at their current growth stage, if such price can be determined, less cost to sell at the time of harvest. If the selling price of the crops cannot be determined, then fair value is determined based upon the present value of the future cash flows expected to be generated by the assets. The gain or loss is recognized in the statement of operations from the time of initial planting through the time of harvest.

(Impairment) reversal of impairment of net realizable value of agricultural products after harvest

A provision for impairment of inventories with respect to the market value of agricultural products is recognized when the fair value recorded in inventories is greater than the net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less estimated cost of sales and selling expenses.

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.

 

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 Jaborandi Agrícola Ltda. and Cremaq Ltda. 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

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 methods, such as discounted cash flow. 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.

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

The value 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.

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 recognition

We recognize our revenue when the amount of revenue can be reliably measured, is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of our activities. We perform our estimations based on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each sale.

Sale of goods

Our revenue from grain and sugarcane sales is recognized when 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 a certain 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.

Sale of farms

Sales of farms are not recognized as revenue until (i) the sale is completed, (ii) we determine that it is probable the buyer will pay, (iii) the amount of revenue can be measured reliably, and (iv) we have transferred all risks and rewards to the buyer, and do not have a continuing involvement. 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 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 are obtained through valuation reports of the farms prepared by internal 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.

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 or to comply with PCAOB rules that, if adopted in the future, would require mandatory audit firm rotation and auditor discussion and analysis and 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.

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 operations.

 

 

	Year Ended June 30, 2016
	Total	Grains	Sugarcane	Real Estate	Other	Not allocated
	(R$ thousand)
Net revenue	147,128	59,372	83,628	—	4,128	—
Gain on sale of farms	—	—	—	—	—	—
Changes in fair value of biological assets and agricultural products	(8,718)	(31,755)	23,447	—	(410)	—
Reversal of impairment of net realizable value of agricultural products after harvest, net	659	659	—	—	—	—
Cost of sales	(134,714)	(52,995)	(75,605)	—	(6,114)	—
Gross profit (loss)	4,355	(24,719)	31,470	—	(2,396)	—
Operating income (expenses)
Selling expenses	(2,732)	(2,680)	—	(—)	(52)	—
General and administrative expenses	(28,944)	—	—	—	—	(28,944)
Other operating income net	2,812	—	—	—	—	2,812
Share of loss of a joint venture	(511)	—	—	—	—	(511)
Financial income	192,644	12,739	—	21,781	—	158,124
Financial expenses	(154,270)	(12,971)	—	(13,945)	—	(127,354)
Profit (loss) before income and social contribution taxes	13,354	(27,631)	31,470	7,836	(2,448)	4,127
Income and social contribution taxes	(2,782)	9,395	(10,700)	(2,664)	832	355
Profit (loss) for the year	10,572	(18,236)	20,770	5,172	(1,616)	4,482

 

 

	Year Ended June 30, 2015
	Total	Grains	Sugarcane	Real Estate	Other	Not allocated
	(R$ thousand)
Net revenue	174,351	116,289	52,925	—	5,137	—
Gain on sale of farms	193,464	—	—	193,464	—	—
Changes in fair value of biological assets and agricultural products	9,788	6,031	4,053	—	(296)	—
Impairment of net realizable value of agricultural products after harvest, net	(3,038)	(3,036)	—	—	(2)	—
Cost of sales	(170,489)	(112,714)	(52,799)	—	(4,976)	—
Gross profit (loss	204,076	6,570	4,179	193,464	(137)	—
Operating income (expenses)
Selling expenses	(9,006)	(5,762)	—	(3,168)	(76)	—
General and administrative expenses	(29,360)	—	—	—	—	(29,360)
Other operating expense net	(3,422)	—	—	—	—	(3,422)
Share of loss of a joint venture	(4,355)	—	—	—	—	(4,355)
Financial income	122,552	15,693	—	5,099	—	101,760
Financial expenses	(89,914)	(17,598)	—	(6,338)	—	(65,978)
Profit (loss) before income and social contribution taxes	190,571	(1,097)	4,179	189,057	(213)	(1,355)
Income and social contribution taxes	(9,761)	373	(1,421)	(7,347)	72	(1,438)
Profit (loss) for the year	180,810	(724)	2,758	181,710	(141)	(2,793)

 

 

	Year Ended June 30, 2014
	Total	Grains	Sugarcane	Real Estate	Other	Not allocated
	(R$ thousand)
Net revenue	131,314	91,645	38,235	—	1,434	—
Gain on sale of farms	21,845	—	—	21,845	—	—
Changes in fair value of biological assets and agricultural products	1,092	2,059	(719)	—	(248)	—
Reversal of impairment of net realizable value of agricultural products after harvest, net	(2,043)	(2,040)	—	—	(3)	—
Cost of sales	(138,535)	(98,529)	(34,790)	—	(5,216)	—
Gross profit (loss)	13,673	(6,865)	2,726	21,845	(4,033)	—
Operating income (expenses)
Selling expenses	(10,239)	(7,283)	—	(2,430)	(526)	—
General and administrative expenses	(30,378)	—	—	—	—	(30,378)
Other operating income (expenses), net	285	—	—	—	—	285
Share of loss of a joint venture..	(704)	—	—	—	—	(704)
Financial income	40,051	8,556	—	714	—	30,781
Financial expenses	(41,611)	(5,009)	—	(3,439)	—	(33,163)
Profit (loss) before income and social contribution taxes	(28,923)	(10,601)	2,726	16,690	(4,559)	(33,179)
Income and social contribution taxes	15,561	3,604	(927)	(1,039)	1,550	12,373
Profit (loss) for the year	(13,362)	(6,997)	1,799	15,651	(3,009)	(20,806)

 

 

 

 

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

 

Year Ended June 30, 2016 Compared to Year Ended June 30, 2015

Net revenue

Net revenue decreased R$27.3 million from R$174.4 million for the year ended June 30, 2015 to R$147.1 million for the year ended June 30, 2016. This decrease was mainly due to the following:

i.

Revenue from grain sales :  revenue from grain sales decreased R$57.1 million from R$116.3 million for the year ended June 30, 2015 (reflecting sales of 160,386 tons at an average price of R$725.05 per ton) to R$59.4 million for the year ended June 30, 2016 (reflecting sales of 81,410 tons at an average price of R$726.70 per ton). This represents a decrease of 49.1% over the previous year resulting from a decrease in sales volume partially offset by a slight increase in price. The decrease in sales volume of grains is a result of the reduction in the planted area from 61,376 hectares for the year ended June 30, 2015 to 29,087 hectares for the year ended June 30, 2016 and the reduction in the corn and soybean yields by 49% and 50%, respectively, impacted by the low rainfall levels during the season.

 

 

 

Gain on sale of farms

For the year ended June 30, 2016, we did not sell any farm. On June 10, 2015, we sold 27,745 hectares of the Cremaq farm in the State of Piaui for R$270.0 million.

Changes in fair value of biological assets and agricultural products

Changes in fair value of biological assets and agricultural products decreased from a profit of R$9.8 million for the year ended June 30, 2015 to a loss of R$8.7 million for the year ended June 30, 2016. This decrease resulted mainly from the decrease in the fair value of biological assets and agricultural products of grains from a profit of R$6.0 million for the year ended June 30, 2015 to a loss of R$31.7 million for the year ended June 30, 2016. Such variation was mainly due to a severe drought in 2015 that hit the farms in Bahia and Piauí, and had a direct impact in the soybean yield from the farms in Bahia and Piauí as well as the first corn crop. In addition, the fair value of biological assets and agricultural products of sugarcane change from a loss of R$4.1 million for the year ended June 30, 2015 to a profit of R$23.4 million for the year ended June 30, 2016. Such variation was a result mainly from an increase in sugarcane areas (from 27,909 hectares to 28,018 hectares), adjustments in price (from R$71.03 to R$73.16) and assumptions of the cutting, carrying and transportation costs of sugarcane (from R$55.67 to R$54.99).

(Impairment) reversal of impairment of net realizable value of agricultural products after harvest

We recognized an impairment of net realizable value of agricultural products after harvest of R$3.0 million for the year ended June 30, 2015.  While for the year ended June 30, 2016.we recognized a reversal of impairment of net realizable value of agricultural products after harvest of R$659 thousand..Such variations resulted from the reduction in the corn and soybean prices from the harvest time to the end of the respective fiscal year.

 

Cost of sales

Cost of sales decreased R$35.8 million from R$170.5 million for the year ended June 30, 2015 to R$134.7 million for the year ended June 30, 2016. 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 decreased by R$63.0 million. Our average cost per ton of soybean sold increased 8.2% from R$876.87 per ton (corresponding to 113,172 tons at a total cost of R$99.2 million) for the year ended June 30, 2015 to R$948.46 per ton (corresponding to 38,132 tons at a total cost of R$36.2 million) for the year ended June 30, 2016.
ii.	Cost of corn sold :  the cost of corn sold increased by R$3.0 million. Our average cost per ton of corn sold increased 33.8% from R$285.42 per ton (corresponding to 47,213 tons at a total cost of R$13.5 million) for the year ended June 30, 2015 to R$381.98 per ton (corresponding to 43,278 tons at a total cost of R$16.5 million) for the year ended June 30, 2016.
iii.	Cost of sugarcane sold :  the cost of sugarcane increased by R$22.8 million.  Our average cost per ton of sugarcane sold increased 10.6% from R$63.60 per ton (corresponding to 830,204 tons at a total cost of R$52.8 million) for the year ended June 30, 2015 to R$70.32 per ton (corresponding to 1,075,183 tons at a total cost of R$75.6 million) for the year ended June 30, 2016.

Gross profit

For the reasons mentioned above, our gross profit for the year ended June 30, 2016 was R$4.4 million, representing a decrease of R$199.7 million as compared to R$204.1 million for the year ended June 30, 2015.

Selling expenses

Selling expenses decreased R$6.3 million from R$9.0 million for the year ended June 30, 2015 to R$2.7 million for the year ended June 30, 2016, primarily as a result of the reduction in freight and storage and processing expenses which reflects the decrease in the amount of grain sold in the period from R$5.7 million for the year ended June 30, 2015 to R$2.6 million for the year ended June 30, 2016, the reversal of provisions for onerous contracts totaling R$579 thousand in fiscal 2016 and  the decrease in commissions on farm sales from R$263.5 thousand for the year ended June 30, 2015 to R$42.2 thousand for the year ended June 30, 2016.

General and administrative expenses

General and administrative expenses decreased R$0.5 million from R$29.4 million for the year ended June 30, 2015 to R$28.9 million for the year ended June 30, 2016. This decrease was primarily a result of the renegotiation of service contracts, which generated a reduction of R$1.1 million, or 27.0%, in expenses with service providers, but was partially offset by an increase in other expenses. The R$1.5 million, or 40.3%, increase in other expenses primarily refer to expenses with travel, telephone, building maintenance and systems, among others, and was mainly due to ITR (rural property tax) and expenses with the leasing of servers, now located in the cloud, partially offset by reduced depreciation and amortization. In addition, in fiscal 2015, there was a reversal of R$0.5 million related to the termination of the leasing agreement for the Parceria I Farm, in Bahia.

Other operating income (expenses), net

For the year ended June 30, 2015, other operating expenses, net amounted to  R$3.4 million, which included  the partial write-off of intangible assets from the sale of 24,000 hectares related to the Cresca land and exploration rights contract of R$612 thousand; and a payment related to a hereditary rights lawsuit in relation to Horizontina farm of R$1.2 million. For the year ended June 30, 2016, other operating income, net, amounted to R$2.8 million, which included a R$2.3 million gain for the discount obtained in the balance payable for the Alto Taquari Farm, partially offset by R$2.2 million for the provision for legal proceedings.

 

 

Share of loss of a joint venture

For the year ended June 30, 2016, we recorded a loss of R$511 thousand related to the results in our investment in Cresca (a loss of R$4.4 million for the year ended June 30, 2015).

Financial income (expenses), net

Financial income increased R$70.0 million from R$122.6 million for the year ended June 30, 2015 to R$192.6 million for the year ended June 30, 2016 and financial expenses increased R$64.4 million from R$89.9 million for the year ended June 30, 2015 to R$154.3 million for the year ended June 30, 2016. The change in financial income (expenses), net is attributable mainly to:

i.	The decrease in the gain on remeasurement of receivables from the sale of farms and machinery from R$41.5 million for the year ended June 30, 2015 to R$22.5 million for the year ended June 30, 2016 and the decrease in the loss on remeasurement of receivables.
ii.	The sale of farms and machinery from R$23.2 million for the year ended June 30, 2015 to R$12.6 million for the year ended June 30, 2016, 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$9.8 million was mainly due to an increase in the soybean price as well as the impact of the appreciation of the dollar on the soybean price used to calculate the fair value of receivables from sales of farms.
iii.	The decrease in foreign exchange income from R$14.7 million for the year ended June 30, 2015 to R$8.9 million for the year ended June 30, 2016 and the increase in foreign exchange expenses from R$8.1 million for the year ended June 30, 2015 to R$8.7 million for the year ended June 30, 2016, which resulted in a net gain of R$195 thousand for the year ended June 30, 2016. This increase in foreign exchange income, net refers mainly to the impact of the appreciation of the dollar on accounts receivable from Cresca.
iv.	The increase of R$63.9 million of realized and unrealized derivatives transactions income from R$52.3 million for the year ended June 30, 2015 to R$116.2 million for the year ended June 30, 2016 and the increase of R$70.3 million of realized and unrealized derivatives transactions (expenses) from R$39.9 million for the year ended June 30, 2015 to R$110.2 million for the year ended June 30, 2016, which resulted in a net gain of R$12.4 million for the year ended June 30, 2015 and R$5.9 million for the year ended June 30, 2016. This variation reflects the commodities hedge operations result from an income of R$10.5 million for the year ended June 30, 2015 to an expense of R$5.7 million for the year ended June 30, 2016 and the impact of the exchange variation on cash from an income of R$1.9 million for the year ended June 30, 2015 to R$11.6 million for the year ended June 30, 2016. We partially converted cash into dollars in order to maintain purchasing power with regards to inputs, investments and new acquisitions, which have positive correlations with the U.S. currency.
v.	The increase in interest on marketable securities and receivables from R$13.9 million for the year ended June 30, 2015 to R$45.0 million for the year ended June 30, 2016 in connection with the increase of the interest on returns on cash investments and the impact of the U.S. dollar exchange variation on the Cresca’s receivables.
vi.	The increase in interest on marketable charges from R$66 thousand for the year ended June 30, 2015 to R$9.8 million for the year ended June 30, 2016 in connection with the increase of the interest rates in the long-term loans and financing to develop the farms.

 

Income and social contribution taxes

We recognized income and social contribution tax expenses of R$2.8 million for the year ended June 30, 2016 and of R$9.8 million for the same period in 2015. Current income and social contribution tax expenses increased from R$9.3 million for the year ended June 30, 2015 to R$15.9 million for the year ended June 30, 2016, which was offset by a deferred income and social contribution tax gain of R$13.2 million for the year ended June 30, 2016, mainly related to the recognition of deferred loss tax carryforwards

Profit (loss) for the year

As a result of the above, profit for the year ended June 30, 2016, amounted to R$10.5 million as compared to R$180.8 million for the same period in 2015.

Year Ended June 30, 2015 Compared to Year Ended June 30, 2014

Net revenue

Net revenue increased R$43.0 million from R$131.3 million for the year ended June 30, 2014 to R$174.4 million for the year ended June 30, 2015.  This increase was mainly due to:

i.	Revenue from grain sales :  revenue from grain sales increased R$24.6 million from R$91.6 million for the year ended June 30, 2014 (reflecting sales of 122,415 tons at an average price of R$748.64 per ton) to R$116.3 million for the year ended June 30, 2015 (reflecting sales of 160,386 tons at an average price of R$725.05 per ton).
ii.	Revenue from soybean sales :  revenue from soybean sales increased R$19.6 million from R$82.0 million (sale of 95,700 tons at R$857.65 per ton) for the year ended June 30, 2014 to R$101.7 million (sale of 113,200 tons at R$898.28 per ton) for the year ended June 30, 2015. This represents an increase of 24% over the previous year, being 5% from the increase in soybean prices and 18.3% from higher sales volumes in the period.
iii.	Revenue from corn sales :  revenue from corn sales increased R$ 5.0 million from R$9.6 million (sale of 26,700 tons at R$359.32 per ton) for the year ended June 30, 2014 to R$14.6 million (sale of 47,200 tons at R$309.82 per ton) for the year ended June 30, 2015. This represents an increase of 52% over the previous year, resulting from a 76.7% increase in sales volumes, which was partially offset by a 13.8% decrease in prices.
iv.	Revenue from sugarcane sales :  revenue from sugarcane sales increased R$14.7 million from R$38.2 million (reflecting sales of 570,820 tons at an average price of R$66.98 per ton) for the year ended June 30, 2014 to R$52.9 million (reflecting sales of 830,204 tons at an average price of R$63.75 per ton) for the year ended June 30, 2015. The growth in the amount of tons of sugarcane was mainly due to the increase in the period harvest area from 7,583 hectares to 8,196 hectares. The decrease in the price of sugarcane per ton was due to a 4% decrease in average TRS (total recoverable sugar) kilo per ton harvested, from 140.31 kg/ton for the year ended June 30, 2014 to 134.40 kg/ton for the year ended June 30, 2015.

 

Gain on sale of farms

Gain on sale of farms increased R$171.6 million from R$21.9 million for the year ended June 30, 2014 to R$193.5 million for the year ended June 30, 2015. On June 10, 2015, we sold 27,745 hectares of the Cremaq farm in