Major agricultural commodity traders that operate in Brazil have agreed to a set of principles and transparency measures in an effort to reduce deforestation driven by soy production in Brazil’s Cerrado. As part of the Soft Commodities Forum, companies such as ADM, COFCO International, Glencore, Louis Dreyfus, Bunge and Cargill said last week that they will improve the monitoring of their soy supply chains by providing details on how much soy they are sourcing from areas at high risk of deforestation in the Cerrado. They will publicize their findings in June 2019.
“Transparency and data improve trust and facilitate problem solving. Today’s commitment will generate more of both,” said Greg Heckman, Acting CEO, Bunge Limited. “It is an important step by industry leaders that will help optimize agricultural sustainability in a vital region.”
While this initiative could foster greater transparency in the Brazilian soy supply chain, it is unclear how much impact it will have in reducing deforestation rates. Establishing a set of principles may not be enough to significantly reduce deforestation. Investors and NGOs are waiting to see how robust the monitoring system is before drawing conclusions. The Soft Commodities Forum, part of the World Business Council for Sustainable Development (WBCSD), did not give details on what actions the industry will take to cut deforestation as a result of this initiative. The companies’ large presence in the Brazilian soy market exposes them to various risks. Some 665,700 hectares were deforested in the Cerrado in 2018. Still, some positive trends are occurring: Deforestation is down, to a record low last year, according to the Ministry of Environment, and some have signed the Cerrado Manifesto, which calls on soy producers and investors to commit to zero deforestation in the region.
Some investors are not satisfied, however, with companies’ efforts in curbing deforestation. For instance, Bunge’s sustainability policy only addresses legal deforestation, while a value equal to 30 percent of ADM’s equity value would be at risk as a result of deforestation in the Cerrado, according to a CRR report published in September 2018.
These risks are likely to persist despite the transparency initiative announced last week, and they come on top of financial risks companies are now seeing in Brazil from shifting market fundamentals, such as weaker prices and lower exports. In Bunge’s latest earnings report, released on February 21, 2019, the company missed expectations in the fourth quarter, with a loss of USD 125 million due to lower soy prices and declining demand from China as the trade war between Washington and Beijing eases. If weaker demand from China continues, soy production expansion may in turn ebb. That dynamic, along with increased monitoring among traders, could contribute to lower rates of deforestation. However, it is too soon to tell if that will be the case.