SLC Agricola SA

BOVESPA:SLCE3

Earnings Call Transcript 2023-Q2

[Rodrigo Gelain, executive]

Good morning, everyone, and welcome to the Second Quarter 2023 Earnings Release Conference of SLC Agrícola. My name is Rodrigo Gelain, I am the Financial and Investor Relations Manager. Here, by my side, are our COO, CEO, Aurelio Pavinato; and our CFO and IRO, Ivo Brum. It's a privilege to be with you this morning.

Please be aware that the conference call is being recorded and will be made available on the company's IR website where you can also find today's presentation. For those who wish to listen to the simultaneous translation, we have this tool available. In Zoom, look for the Globe icon labeled as interpretation located at the bottom of the screen. Upon selecting it, choose your preferred language, Portuguese or English. For those listening to the conference in English, there is an option to mute the original Portuguese audio by clicking Mute Original Audio.

[Operator Instructions]

We emphasize that the information in this presentation and any statements made during the video conference regarding SLC Agrícola's business outlook, projections and operating and financial goals represent the beliefs and assumptions of the company's management as well as currently available information. Future considerations are not performance guarantees. They involve risks, uncertainties and assumptions as they pertain to future events and therefore, depend on circumstances that may or may not occur.

Investors should understand the general economic conditions, market conditions and other operational factors can affect SLC Agrícola's future performance, and may lead to results that materially differ from those expressed in such future considerations.

We inform that as of today, we have reissued the release adjusting the cotton price for the '22, '23 crop year from $88 to $91.13 per pound weight, in addition to the hedge percentage at 64.5% in the hedge table.

Now I would like to turn the floor over to our CEO, Aurelio Pavinato to begin our presentation. Pavinato, you may proceed.

[Aurelio Pavinato, executive]

Thank you very much, Gelain. Good morning. We appreciate everyone's participation in the second quarter 2023 earnings conference call for SLC Agrícola.

Please let's move to Slide 4, where we discuss the cotton market scenario. According to projections in the latest USDA reports, there is a good balance between global supply and demand in the current cycle. However, the market could see potential reductions in the output of major producing countries, which could create a gap between supply and demand and put upward pressure on prices.

Xinjiang, the main cotton-growing region in China, experienced unfavorable weather conditions for crop developments in July, putting current production estimates at risk. According to the USDA report, 41% of the U.S. current crop was rated as good and excellent, a 5% point decrease from the previous report. The current market expectations points to a reduction in the current cotton crop in West Texas.

The portion of cotton area in drought reached 20%. Planting in India is on par with the previous year with rainfall concentrated in the central cotton-growing areas. However, an early end to the monsoon season could impact production.

In summary, the price scenario for cotton fiber is expected to be volatile, influenced by climate factors in major-producing countries, which may present good opportunities for higher prices.

Moving on to Slide 5, let's talk about soybean. Soybean prices in CBOT spot contracts and prices paid for the oil seed in the Paranaguá SAPEA market has been recovering in the second quarter of 2023. This trend was influenced by a 4.6% reduction in the planted area in the United States, which primarily shifts to corn with productivity for the '23, '24 crop maintained.

Additionally, drought in the corn belt region during June and part of July brought crop conditions below the levels seen over the past years. And this could provide support to soybean prices on the Chicago Exchange.

Globally, for the 2023, 2024 crop year, the USDA expects a positive supply and demand balance of approximately 20.8 million tons, 15% lower than the initial projections. The market is awaiting the upcoming USDA report to be published on August 11, which will include updates on the '23, '24 crop projections.

Moving to Slide 6, let's discuss corn. For the '23, '24 season in the United States, the drought scenario previously described for soybean also affected corn crops, which are in the reproductive stage of development. As a result, there was an impact on yield. The good and excellent conditions of American crops are currently at their lowest levels for the comparable period of the last 5 years.

The USDA's July supply and demand report already indicated a minus 2% revision in corn productivity, which was more than offset by an increase of 6.2% in the planted area. Monitoring of crop conditions, combined with climate expectations will be important price indicators to watch during August and September with its global significance, the Russia-Ukraine conflict continues to impact international corn prices as the Ukraine ranks as the fourth largest global exporter of the grain. While weather conditions continue to support a positive outlook for corn in Ukraine, the country's export remains at risk.

I will now turn it over to my colleague, Ivo Brum, to comment on our financial performance. Ivo, please proceed.

[Ivo Brum, executive]

Good morning to all. Let's proceed to Slide 8, where we highlight some of the key points in our income. Net revenue for the quarter reached BRL 1.4 billion, a decrease of 13.2% compared to 2Q '22 due to lower soybean sales volume. We closed the first half with BRL 3.7 billion in net revenue, a decrease of 10.1% compared to first half '22 due to the lower cotton carryover stock from the '22 season, in which productivity was lower than the 2021 season.

In relation to the fair value adjustment of biological assets for cotton lint and seed cotton there was an increase of 3.1% this quarter, influenced by better yield estimates. We still need to adjust the fair value for 31,000 hectares of cotton, which were not at the harvesting stage at this date and 13 hectares of corn, which represents 9%. Adjusted EBITDA for the quarter reached BRL 569.8 million with an EBITDA margin of 39.4%. For the first half, adjusted EBITDA was BRL 1.5 billion with a margin of 41%.

Cash generation in the quarter was negative BRL 386 million, mainly due to payment for inputs, leases and ag implement rentals in the season. In the second half, we will have the sale delivery of cotton and corn being harvested whose costs have been already mostly been disbursed, projecting a more positive cash scenario and net debt adjusted EBITDA ratio for the year.

Our net result had 24%, and we also had -- net income was [ BRL 348.8 billion ]. And even though the results for the quarter, while order compared to the previous period last year, still presents strong margins and are in line with historical results.

Let's move on to Slide 9, where we present the cost forecast for the '22, '23 season. Higher yields and intensive use of new digital agriculture technologies have positively impacted the per unit cost per crop due to higher production and reduced input usage, the per unit cost. For first crop cotton decreased by 2.2%, and second crop carton decreased by 12.8% while soybean decreased by 2.9% and second corn crop remained stable.

Moving on to Slide 10. We'll take a look at the debt position. Adjusted net debt ended the quarter at BRL 3.9 billion, up compared for 4Q '22. Despite the negative cash generation, the net debt adjusted EBITDA ratio finished the period at 1.61x, which will be the peak for the year, considering we paid almost 100% of the crop cost and in the second half, we'll receive cash from the '22, '23 1st cotton -- first crop cotton and corn harvest.

I'll hand it over now to Pavinato.

[Aurelio Pavinato, executive]

Let's move on to Slide 12 where we discussed the crop status and estimates for the 2022, '23 season. Soybean concluded another season with good yields nearly stable compared to the previous record-breaking season. We reached 3,910 kilos per hectare, in line with our initial predictions and 11.5% above the national average according to CONAB.

As we announced in the material fact on July 3, both the first crop and second crop cotton as well as second crop corn are expected to surpass initial projections. Based on the evolution of the harvested area, we have updated our current yield estimates in this quarter's release.

The first crop cotton is expected to reach 2,005 kilos hectares of lint, 3.7% above budget and 0.8% higher than the material fact announcement. For second crop cotton, we are just beginning to harvest and estimate a 12.7% surplus over the projection, reaching 2,072 kilo of lint. The current fields have shown strong performance with good lint yields.

Regarding second crop corn, 66% that is 2/3 of the area have been already harvested. The expectation is to reach 7,750 kilos per hectare, 0.9% above budget and 23% higher than the previous season's performance, which was a year with scarce rains.

In addition to exceeding projections, we have achieved a significant lead over the national average. For soybeans, it's 11.5%. For first crop and second crop cotton, an average of 12.3%; and for corn, 35%, all of which surpassed the national averages released by CONAB in July 2023. In summary, strong production is confirmed for all crops in the 2022, '23 season.

In Slide 13, we discuss the land appraisal report. An evaluation was conducted on the company's land holdings by the independent consulting firm, Deloitte. The lands were appraised at BRL 10.9 billion, a 12% appreciation in the adjusted portfolio. The current value of the average agricultural usable hectare owned by the company is BRL 52,895 per hectare. We have advanced with purchases of inputs for the '23, '24 season, nearly completing the acquisition of fertilizers.

Additionally, we have already procured 87% of the crop protection package, 100% of the chemicals purchase and 13% pending for biological products. Based on these commitments, we have also progressed in the hedge for the '23, '24 crop reaching 38% for soybeans, along with 17% in commitments, a total of 56% of soybean hedged and 32% for corn.

Now let's move to Slide 16, where we will discuss ESG updates. On the ESG front, we have implemented circular economy at Fazenda Pamplona, in line with our zero waste to landfill goal by 2026. And we are implementing it also at Fazenda [indiscernible], Paranagua, Parceiro and Planalto. This initiative aims to increase the recyclability index of waste generated in operations and eliminated the disposal of waste in landfills.

Thank you very much. And now we will open the floor for the Q&A session.

[Rodrigo Gelain, executive]

So we will now begin the Q&A session. [Operator Instructions] Our first question from -- is from Matheus Enfeldt.

Matheus, can you hear us?

[Matheus Enfeldt, analyst]

I am sorry. I had a technical problem. Ivo and Pavinato, I would like to understand the price scenario a little better because there were several discounts on the logistics front. And I know that the company was trading a little below expectations. So could you please shed some light on that? How do you view future discounts on future crops? Is there any pressure on the realized prices of the company? And how can you evade the worst windows and hold on to corn and soybean to sell at better windows?

I would also like to understand for '23 and '24, and well, we know that price forming -- well, we were expecting perhaps an exchange rate that would be far worse than what we see now. So what can you -- can we think of flat hectare prices going up very little? And do you see any opportunities for expansion in '23 and '24, considering the climate conditions and the scenario? Could there be a mix in your crops, perhaps more cotton than corn in the mix?

[Aurelio Pavinato, executive]

Thank you very much, Matheus, for your question. Well, let's talk about the current prices. Well, there was a strong reaction 3 months ago. We were facing $12 per bushel in future prices in February, March next year. And because of this climate volatility in America, prices went back to $14 -- today, they are at $13.3. And in our vision, international prices will remain at a level that's higher than we had anticipated 3 months ago with the influence of the climate because the climate will remain volatile in spite of the predictions of El Niño with a good climate for South America. But climate is getting increasingly volatile, and this creates an influence on the international price markets. That's why we believe that the prices in the next cycle will be at around $13.

And of course, it will depend on the environment. But as for premiums in the domestic market, we believe that there will still -- they will still be under pressure in the last few months of the year. Premiums willing improve in relation to -- we are closing the corn harvest and with the pressure on soybean, there will be a price recovery. Premiums are already positive for future sales. And so in comparison to the previous crop, we'll have -- we'll commend better premiums in the domestic market.

As for the new crops, we foresee that there will still be pressure because there is high volume being offered. And in January or February, we'll start with large volumes to be sold, and we expect that the premiums will continue to be under pressure in the first half of next year. So currently, Brazil -- in this moment and also next year, depending on the supply and demand balance, Brazil will be a country that will be offering discounted products at a negative premium, which is not the historical standard, and that will create a benefit for the end customers that are buying our products.

Well, I have talked about prices and cost formation. The production cost adjustments were very intense in the last few months. And obviously, growers were waiting for that. And so they made the right decision in postponing the purchases now. They have made some purchases, and we see inputs at higher prices. So those farmers that have not bought everything are now facing higher prices, especially in nitrogenated products, where we saw an increase in the last 4 weeks, $100 to $180 more.

Also, in the chemicals market, we see some oscillation in prices in domestic and international. But for 2023, '24, the most important thing to remember is that cost adjustments were very quick. Perhaps they were more than we had anticipated. We thought that it would be a gradual process along 2023. And part of the cost adjustment would only hit in 2024. But since there was a lot of pressure on domestic prices, especially domestic prices, but also in the international markets, there was this downward revision for the '23, '24 crop year. So depending on the different positions we established along the year, there would be a higher or greater revisions for the '23, '24 crop year. Thank you very much.

Just -- you asked about the mix, crop mix, yes, cotton is a crop that -- well, since it competes with corn, so the data shows that cotton is more competitive today than corn. So when we think of Brazil, the trend is that cotton will be painted in a larger area than corn in the next crop/.

[Rodrigo Gelain, executive]

Thank you very much, Matheus, the question. The next question is from Daniel Sasson, Itaú BBA.

[Daniel Sasson, analyst]

I have a question specifically about logistics. We saw that growers were concerned with the commodities outflow. What do you envision in terms of freight costs in the medium and -- medium term in terms not only of availability, but also of prices? And if you could comment also your exposure to rail. Also, you have paid off a very significant share of the leases for the year but looking to the future, do you believe that with the decreasing prices in Brazil and Mexico, of course, the situation is different. Do you think that there is more room for a decrease in leases? Do you think that some of the agreements could be renegotiated in more favorable terms to you in the coming seasons?

[Aurelio Pavinato, executive]

Daniel, about logistics, the volume of soybeans was very large this year. And we're still lagging behind in trading, but we have 70% of the production already sold. So soybean will not represent a bottleneck in the future. But corn that is being harvested right now, it's a record-breaking volume for second crop corn. And this is putting pressure on logistics cost. There is an increase in freight costs.

Transportation in Brazil, we were always been able to find an outflow for our inventory. So we won't be in a chokehold. Today, Brazil -- well, we have already shipped out more than 20 million tons per month. So we'll be able to ship the entire production, both for soybeans and corn, not to mention the other products such as sugar, coffee and so on.

So in our understanding, and I was reading the report on logistics today, in the next few weeks, freight costs will be higher. But as the corn harvest is done in the fourth quarter of the year, freight costs will decline. And we'll have -- this is the expectation. But there is a large volume to be shipped. Of course, freight will go up, but we'll be able to ship all the volume that we have produced. Ivo, would you like to pitch in?

[Ivo Brum, executive]

Yes, thank you very much. Yes. Well, in fact, we paid a significant payment of leases. We announced in Table 24, well, of course, the reference 2 leases and also ag implement rentals, 50% of our soybean harvesting is outsourced. And also our yellow line, 50% is outsourced. So everything goes into this context because of the accounting rules. And payment, of course, is something that we are making very evident. And this is everything that it comprises.

The expectation is that with the decrease of the soybean bag, the amount paid for leases will go down. So if soybean is declining in price, we're talking about [ 120 ] for the next crop, so naturally, there will be a decrease in leases as well because this is -- this is linked to prices and currency. And in some contracts, we have renewals on a yearly basis, and in some, of course, we have a greater term for renewal.

[Rodrigo Gelain, executive]

Thank you, Daniel. The next question is from Joaquim, Citibank.

[Joaquim Atie, analyst]

Can you tell us a little bit more about the seed business? What do you expect for the next season? And also in relation to capital allocation, you are in -- you have your buyback program. How is this evolving? What about the M&A pipeline? Are there any opportunities for the acquisition or lease of new land just to understand a little bit more about your CapEx.

[Aurelio Pavinato, executive]

Thank you very much for this question, Joaquim. The seed business is making advances. It's the first year in which we are operating at the IBS in Mato Grosso do Sul, and we have met our targets, I mean also in cotton. And we are doing very well with an expectation to continue to grow to reach the targets that have been announced.

Can you comment on the buyback?

[Ivo Brum, executive]

Well, the buyback program is going very well. The shares were traded at a very low level. So we started buying back our shares with this. Once they regained their value, we decreased the pace because when -- once the share begins to rebound in value, we slowed down because the market is responding to our initiative, and we see that there is an increase in the stock price. About new businesses at the right time, we will be disclosing this information to you, Joaquim .

[Rodrigo Gelain, executive]

Thank you, Joaquim. Our next question is from Thiago Duarte, BTG Pactual.

[Thiago Duarte, analyst]

Gelain, Ivo Brum, Pavinato, a question and a follow-up, in fact. A question about productivity. I think that the 3 major crops are delivering either the record historically or very close to that. I think that the highlight goes to cotton and you have mentioned the benefits that you obtained through the process of digitalization and through the use of everything that technology can provide.

Now I would like to hear about your understanding. Is this sustainable? Have you reached, for example, in the case of cotton, 2,000 kilos per hectare? Do you think that this is a good starting point for next years? Of course, there is this variable climate, which this year was also favorable, but this is in line with what we -- what you call the trend line for the future. So I would love to hear your views on that.

And as for the follow-up, going back to the first question about costs for next year. Since you have already acquired most of the inputs for the next crop year, I know that you usually prefer to give guidance on costs to the market in the end of the year. But can you tell us anything at all? I think that I'm not really sure from the answer you gave, if you can imagine costs per hectare close to stability. But I assume that you have a good perspective on the variation for next year.

[Ivo Brum, executive]

Thank you, Thiago. I will answer firstly about costs because we have made a lot of progress. We have bought most of the crop protection. We're just waiting for the biocides. And last week also, we were visiting -- revisiting the cost of each farms. We have 20,000 farms, and we have benchmarks. We know exactly what is the harvesting cost. All processes are very well identified.

And we're finishing this study. What is yet to announce to the market in terms of the cost per hectare for the next crop year, what is keeping us from doing it is that there will probably be a mix in crops, a change of mix. We are going to migrate, for example, more to second crop cotton and corn, and this changes the balance that we weren't able to finish this process yet. But we expect that by the end of September, we have concluded this exercise. We expect a negative cost because there were also very significant reductions in crop protection.

But let's not forget that we are replenishing the volume of fertilizers that we didn't apply last year. So I will -- I would just like to make this warning that we applied less fertilizer, and we achieved record production. So the decision taken in the past was the correct one.

[Aurelio Pavinato, executive]

Thank you very much for this question, Thiago, on productivity. In this quarter, I think that the most relevant and striking fact in the announcements that we're making today is the company's operating performance. And this is measured through 2 indicators: the yields of our crops; and the production cost reduction of 1.5% against budget, which is very expressive when you think of the cost production reduction in relation to budget. This year, we were able to reduce costs. So what I want to emphasize in relation to this quarter is that our operating performance and our efficiency has improved greatly and has led to a reduction in production costs.

In relation to each of the crops, if you remember, those of you listening to us, what we have discussed in previous meetings, we said that our performance was according to expectations in soybeans producing 12%, 13% above the national average, but that we were still lagging behind in cotton in which we were closer to the national average in relation to -- and also below to the -- below the target of reaching at least 10% above the national average.

This year, we were successful in management, as always, and climate helped, and that's why we have a record yield. But this has another meaning because we have production units that are on a much higher level than the historical level. And this gives us the certainty that we'll be able to stabilize or continue to grow at a higher level in the comparison with previous years, specifically in cotton. So I think that the -- these signs are very positive.

The trend line for cotton was virtually stable. It was not going up. And now starting last year, as I mentioned in previous conferences in the regions where we didn't have shortcoming of rain, we are producing the same and in the areas such as Bahia and Mato Grosso, we did not have good production. But this year, there was no lack of rain anywhere so we have good yields in all regions, and this is helping us reach record production.

So I believe that we are evolving to a higher level in cotton, of course, with the interference of climate. But when we look at the trend line, I think that we are definitely moving to a higher level. And also in relation to corn depending on how much you invest in technology for corn, the lower price, you start really calculating the kilos of nitrogen to make sure that you're maximizing the economic efficiency. So this is our expectation in terms of yield and productivity. Thank you.

[Rodrigo Gelain, executive]

Thank you, Thiago. Our next question is from Pedro Fonseca, XP.

[Pedro Luis Silva Fonseca, analyst]

Well, I would like to go back to 2 of the answers you gave in relation to previous questions. Firstly, about costs. We had discussed in the past that we were expecting an increase of 20% in the amount of fertilizers year-on-year because of the right decision that you made to reduce the volume of fertilizer in the last season. So I would like to -- for you to confirm this. And if all other conditions remain equal and if the second corn and -- second crop cotton and corn continue to make sense, how much can you have in terms of conversion for the next crop year?

And secondly, well, another question. Going back to logistics, I would like to know, not only in terms of outflow, but in terms of inputs, I think that there will be pressure in logistics, of course, affecting the outflows of the production. But are you of the opinion that the fact that since trading is sluggish, and do you believe that once the input is sent to the fields, could there be any delays? And with this, could you miss an ideal planting window? Is there a risk of that happening? Or have you already addressed this possibility?

[Aurelio Pavinato, executive]

Thank you very much, Pedro, for your question. Well, use the fertilizers, yes. We are now -- well, I don't know exactly the percentage, but it's around what you said. In terms of increase in the amount of fertilizers, as for the mix, it's just as Ivo said, we're still making a study to see whether it's convenient to replace one crop by the other, but we don't know exactly the numbers -- the number of hectares.

And as for inputs, when I consider the amount of fertilizers that have already been shipped to Brazil, there are no delays in fertilizer imports for the year. The logistics from the ports to the units -- to the production units is indeed a little bit of a bottleneck. So some of the companies are facing some difficulties, but we're still in August. There's still September. We started planting mostly in October. So I believe that a lot of the production is still being shipped to the ports, and the trucks will be empty to take the inputs back to the production units.

So it is challenging, Pedro, but I think that will be no shortage. In our case, it's even easier because we had already procured these volumes in advance, for example, for phosphorus. And we are now applying -- we have actually applied most of this. So we have really no concerns at all in relation to receiving the inputs in our farms.

[Pedro Luis Silva Fonseca, analyst]

Well, I don't want to overstay my welcome, but what about the volume of bio-fertilizers? This has not been purchased yet, right? Can you explain to us the strategy behind this? Is there a logistics issue involved? Or is there a price expectation?

[Aurelio Pavinato, executive]

Well, there's a large volume of bio products that we make [ own from ] so we buy it in concentrate. So that's why we don't need to make such an advanced purchase. And there is no price volatility as we saw with chemicals. So that's why, of course, we're starting to negotiate, but we haven't closed the deals. In the last 2 months, we were really closing the deal on chemicals, and it was just the right time, in fact.

Today, Brazilian growers are really doing their procurements in advance whenever possible, and this, of course, puts a little pressure on prices. So it's part of our time line of acquisition of inputs, and we are feeling very comfortable about the timing for the purchase of biologicals.

[Rodrigo Gelain, executive]

Thank you, Pedro. Our next question is from Lucas Ferreira, JPMorgan.

[Lucas Ferreira, analyst]

Is El Niñ is a risk for the company? I think that in the long-term analysis, you said that, in general, the El Niño is not a risk for you. But I would like to know whether your opinion has changed. And when you work on the budget and the yield estimates for next year, will there be an impact of El Niño, especially considering the Northeast in cotton?

And my second question is I would like to find out more about your costs. Just a quick follow-up on this recent increase that we saw, especially in nitrogenated products, especially as a result of natural gas and oil prices because this has an impact on chemicals. And secondly, is -- do you think that lower fertilizer prices, is it something that makes pasture conversion a possibility for you considering the current input prices?

[Aurelio Pavinato, executive]

Thank you, Lucas. Yes, it's confirmed. We are now under the El Niño influence, and the models show that there is a 90% probability that we'll have an El Niño year next year, and this will affect the whole world.

Now about yield expectations, we analyze our history. Of course, it really depends on the year, a stronger El Niño or a lower -- or as slower El Niño. A second year of El Niño usually creates more consequences than a first year El Niño, like we saw in 2016. Considering that this is the first year that the El Niño will not be that strong, the waters of the Pacific will increase in temperature 1.5 degrees, we expect normal yields in our farms. In Bahia, we suffer a little bit. But in the other states, in fact, it's actually beneficial production growth. So we expect a normal crop.

This is part of our planning. So we avoided using a less resilient variant. So we have considered, well, okay, it will rain a little bit less, so we can use less crop protection. This was also an adjustment to El Niño. So we now have the vision that it will be a normal year as regards to yields, not a record-breaking year, but a year in which -- and we'll be announcing you the forecast considering this trend.

Costs. Well, chemicals in the international markets are being adjusted upward, even glyphosate, which is the commodity of chemicals. Well, it hit bottom and then it was adjusted up. So it really depends on supply and demand and how the market positions, but this is no scenario for adjustments. The international scenario is trending back to normal -- normality, even in nitrogen. Those are temporary adjustments upward. And of course, as a consequence of natural gas prices, et cetera. And we have also the prices of Mexico and also the negative premium. Sometimes it's more expensive because of demand, and sometimes it's the other way around. Fertilizers in domestic market could be cheaper than international markets.

So we went through a good moment where the domestic market had pretty much the same prices as the international market. Now demand is coming on strong, and the domestic market is making some adjustments. I think that the price adjustment was $20 more expensive in the last few weeks.

In relation to pasture conversion. Well, under normal prices, what is the perspective for Brazil is to continue converting pastures. And in the next 20 years, many hectares will be converted to agriculture. So this year -- in this year, there was not much conversion. But for next year, we believe that -- well, it will depend on the price of commodities and margins. Because the margins, if they are squeezed, then conversion will be more expensive than using mature land. So the speed of conversion in Brazil depends on margins, with tighter margins, less conversion. If margins are bigger, more conversion. So I believe that it seems that we'll go back to normal levels, and we'll continue to convert the pasture to fields.

[Rodrigo Gelain, executive]

Thank you, Lucas. Our next question is from Julia Rizzo, Morgan Stanley.

[Julia Rizzo, analyst]

I have a question about considering all of your land, all of your hectares, especially speaking of second crop in relation to corn, I think there were 138,000 hectares. How much can be converted to cotton? And is there time for that for the next crop year? And in relation to the hedging for next year, I think that cotton is a little behind. So what can you tell us about this in terms of current hedging?

And finally, for Ivo. Ivo, can you please remind me of the expected CapEx, including M&As and expansion and thinking mostly of cash disbursements.

[Ivo Brum, executive]

Thank you, Julia, for your question about corn. The problem is not the quality of soil. And also in Mato Grosso, we have -- soil is well prepared for planting. Now the issue is our production capacity. We need to harvest. So the cotton harvester is a very specific machine.

So we have an internal volume. So we need to identify how much we'll be able to buy. If we can't buy, of course, our first option is to lease the agricultural implements. And we also need to check the cotton gins. This is also a process that we plan ahead in the year in which we harvest because we don't want the cotton to be exposed for a very long time. So probably processing will happen in January or February 2025. All of this, of course, needs to be very carefully analyzed and just to make sure we'll have enough production capacity and also processing capacity.

As for the hedging, you are right, we are a little behind in cotton. Why are we lagging behind? Because we see that and we expect cotton to increase, to grow. And the climate scenario in the United States for cotton and also in China are not being favorable. Cotton has already rebounded. When we think of cotton 2024, it was at $0.77, and now it's at $0.79. And we expect that we will reach $0.80. And then we'll start to sell at this level, which we think is very feasible. But we're talking about an 18-month time line. And we can -- we have more than enough time for optimization.

For CapEx, [ BRL 600 million ]. This is what we have announced. For machines and crop inputs, we still have to see if there will be growth for the '25 -- '24, '25 crop year because sometimes we need to refurbish or also adopt correctives. We're still working on this projection. And CapEx, of course, is a decision that requires a lot of visibility on what we'll have on a '24, '25 crop year. So [ BRL 600 million ] is the number confirmed for CapEx. And for '24, we still have to hold on to see the planted area scenario.

[Julia Rizzo, analyst]

Are there any payments in addition to the [ BRL 600 million ]?

[Ivo Brum, executive]

Yes, yes. We have to buy -- we have to pay for the Paysandu acquisition, but this is not going to affect CapEx.

[Julia Rizzo, analyst]

But how much is it? Can you please remind -- I'm thinking of a cash mostly.

[Ivo Brum, executive]

[ BRL 200 million ] -- [ BRL 110 million ] this year to be paid off in December for Paysandu. We have declared in [ BRL 780 million ], this is 100% of the CapEx for the acquired land. So we still have [ BRL 110 million ], which will not affect CapEx for the year.

[Julia Rizzo, analyst]

Okay. Just to understand acreage for cotton. So the bottleneck is not soil or location. It's a matter of equipment, of machinery. And what about the time? Is there enough time to expand land for next year? Or there is no time for that?

[Ivo Brum, executive]

No, we're talking about planting in January next year, right? So there is enough time to get everything moving. I think that the critical point is the cotton harvesters and the cotton gins. And we will only need this for June, July, August next year. So there is enough time. Of course, we need to check whether the machinery is available, if the -- if the cotton gins can process all of the cotton that will be harvested, how much it means. And because we usually close in December, so it means that I have to start in January and February. With this comes additional cost, I need to hire the labor for that.

[Aurelio Pavinato, executive]

So we need to organize all of these aspects so that we can take the step, but we're working on it. Besides the planting window, the sooner we plant soybeans, the sooner we start to harvest in January, and the greater the potential to plant cotton and to exchange corn by cotton. So we are planning -- still on the planning phase, but we'll only have confirmation after soybean is planted.

[Rodrigo Gelain, executive]

Thank you, Julia. Our next question is from [indiscernible]. I'll read it. How concerning are the attitudes of the European Union restricting agricultural imports under the pretense of ecology or sustainability?

[Aurelio Pavinato, executive]

Well, the European Union in terms of concern with sustainability, they cannot really do that because there is a serious limitation, which is the energy basis for the European Union is not sustainable. However, they are ahead of us in terms of awareness. That's why the European Union is always advocating this cause. So when you look at Europe as a block, they are importers of grains. They import around 660 million tons of grains. So they are not self-sufficient.

And in the last decade, they didn't invest in biotechnologies such as GMOs. So productivity has not increased as in other countries and as in the average in the world. So they are increasing productivity by 5% -- 0.5% a year. So that's why they are in a deficit in relation to grain.

So of course, there is the issue of sustainability. And at the same time, they are dependent on agricultural products from the other countries of the world. For example, this requirement that they will approve, they will approve this restriction on importing agricultural products from areas with deforestation. This will affect Brazil, but at the same time, in Brazil, we see a pressure not to use deforestation. The traders won't be buying from areas with deforestation. In the case of the European Union, this is -- will take place in 2020, and we have to comply with the European requirement because in 2021, we didn't open any more land on deforested land in 2021.

And so the pressure -- the environmental pressure is strong. It's there, and it is -- and it's really a necessity because global change is a reality. So the energy transition to reduce emissions is something that will take place in Brazil. Instead of expanding operations in native land, we'll use degraded pastures because these are areas with low-carbon stocks. And with this -- by planting in those areas, we'll increase carbon stocks. So the environmental issue in Europe is something that's not sufficient, and that will not prevent or they need to import grain.

So this is how we view the situation. When you look at the globe, Europe is a small region. If you consider demand levels with a decreasing or declining population growth in population takes place in Asia and in China and in Africa as well. So our customers in the future won't be the Europeans, they will be Asian. In fact, they are very important clients today. Of course, I don't want to say that the environment is not important. It is very important because we have to reduce global warming, and this is only done by reducing our carbon emissions.

[Rodrigo Gelain, executive]

[Operator Instructions] We received a question from Gabriel [indiscernible] I will read it.

Congratulations on your performance. Since the previous quarter, we saw that short-term debt is higher than the cash of the company. I understand that the corn and cotton come in the second half of the year. But what can you say about the short-term debt in the comparison with your cash?

[Ivo Brum, executive]

Yes, Gabriel, yes this is indeed a fact. With the change of government, there's always some oscillation, and we had debt maturing along the year. And we decided in the beginning of the year to roll the debt over to the second half also for the -- to go through the transition in government.

Now the spreads are much lower. We have some very appealing credit lines. And you'll see in the second half that with the positive cash generation, which is something that we always have, now that we have paid of all the inputs and we have 2 important crops being harvested and the sales will take place in the second half, boosting our cash, and we'll see also the impact with the lengthening of the debt terms.

So we decided to make this decision. It was a valid decision because now spreads have come down, and we will be able to renegotiate our debt at a lower cost.

[Rodrigo Gelain, executive]

Thank you, Ivo. We have one last question from Lucas Santiago Oliveira, an investor. I would like to know if you plant in the off-season with nooses for example, in seed to increase nitrogen for the pre-corn? And this, of course, could help with fertilization for corn.

[Aurelio Pavinato, executive]

Thank you, Lucas, for this question. We have been investing in regenerative agriculture with biologicals as much as possible, no tillage, soil coverage. So how does the system work today? We have, of course, for -- we don't have time to cover the soil after cotton, but where we plant soybean and corn, we can have coverage after soy and altogether with corn. And for this, brachiaria has been working very well and some other legumes. We are testing several crops to see which one has the benefit with our operations. We have been using a mix of crops. We also have been using irrigation. For example, we harvest the corn and we use in Pamplona [indiscernible] well have also been using wheat with 134 bags, which were before at 90.

And so we are looking at the different crops using turnip or [indiscernible] to see which species are better for crop rotation. Using this interval, for example, in the state of Maranhao, in the preplanting phase, we can cover the soil in corn June, July. We see early rain in October, and then you can cover the soil to plant cotton in December. So in the different production units, we are doing everything we can to cover the soil the best we can. And when possible, we are using legumes for better fixation of nitrogen for corn.

[Rodrigo Gelain, executive]

Well, if there are no further questions, the second quarter 2023 conference call is closed. The Investor Relations department will be happy to take your questions and clarify any points. Thank you very much. Have a great day, everyone.