Deforestation in the Brazilian Soy Supply Chain: Market Access Risk from a Growing Share of Sourcing Commitments

The large-scale expansion of soybean cultivation in Brazil has been identified as one of the key drivers of deforestation in Brazil in the last 20 years. While the 2006 Soy Moratorium has helped to weaken the relation between deforestation and soy cultivation in the Brazilian Amazon Biome, other highly biodiverse and carbon-rich eco-regions – such as the Cerrado and the Gran Chaco – have still been converted to cropland at a rapid pace. Public awareness of the role of soy cultivation in deforestation in the Cerrado has grown recently, including among soy traders, consumer facing companies and financiers. This paper explores the existence and extent of market access risk and financial consequences in the soy supply chain due to weak sustainability performance.

  • At least 49 percent of Brazil’s soy trade is covered by some type of zero-deforestation commitment. This figure may soon reach 57 percent. This compares to 74 percent in Southeast Asian palm oil refining capacity that is covered by zero-deforestation commitments.
  • These pledges are not yet adequate to prevent the conversion of natural habitats, as the focus lies on eliminating illegal deforestation from supply chains. Accompanied by insufficient transparency and a limited scope of sanction mechanisms, traders still accept soy linked to legal deforestation. This is an issue in the agricultural frontier areas of the Cerrado.
  • Leading consumer goods companies have committed to zero net deforestation in agri-commodity supply chains by 2020. This increases the pressure on commodity traders to adopt and strengthen similar assurances, and address policy and implementation gaps in the short term.
  • Consequently, soy producers involved in deforestation face increasing market access risk. Those that supply traders with a zero-deforestation commitment risk losing market access if involved in illegal deforestation. In the near future, the risk of losing market access may also increase due to legal deforestation.
  • Soy producers face the highest risks among the three major stakeholders (growers, traders and investors). These major risks include a loss of customers and stranded assets. Medium risks are additional logistics expenses, storage costs, financing costs. Low risk stems from reputational damage. These can result in destruction of enterprise value.
  • Traders have more advanced ESG policies and lower risk exposure than producers. Medium risk involves the loss of customers and reputational damage, low risks include increased refinancing costs and processing overcapacity. These too can translate into loss of value.

Investors have a high likelihood of low severity risks from non-performing loans, reduced interest incomes, reduced access to funds, worse solvency position and financial and reputational damage that could lead to value loss.

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