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The Chain: Brazilian Agribusiness Faces Mounting Risks as Fires in the Amazon and Pantanal Biomes Surge Past 2019 Levels

October 7, 2020

In the wake of a particularly destructive 2019 fire season, year-to-date fire alerts for 2020 have already surpassed those of last year by 14 percent in the Amazon and over 200 percent in the Pantanal through September 30. On July 15, Brazilian president, Jair Bolsonaro, issued a 120-day moratorium on forest fires in the Amazon and Pantanal biomes. The move came in response to mounting pressure from investors, companies, NGOs, and international public figures, urging the Brazilian government to reduce the surging deforestation rates and fire alerts in 2020. However, satellite imagery has detected extensive fires in the Brazilian Amazon, with an estimated 66 percent concentrated in areas deforested since 2018.

Without increased efforts to curb both deforestation and associated fires in Brazil, the country is likely to face significant short-term and long-term financial risks related to maintaining the drinking water supply, energy generation, and agribusiness productivity. The agribusiness sector, particularly the soy and beef industries, also faces mounting financial risks related to fertilizing and irrigating soil and maintaining access to international markets amid linkages to deforestation and unsustainable land use. With the investor community becoming more vocal about the need to curb fires and deforestation in Brazil, soy and beef companies will likely continue to come under pressure to mitigate risk exposure.

2020 fire season in the Amazon biome

The Amazon has experienced a particularly severe dry season this year, likely due to the impact of a warming North Atlantic Ocean, which pulls moisture northward and is linked to more frequent hurricanes and extreme weather events in North America. According to the Brazilian National Institute for Space Research (INPE), fire alerts were up 20 percent in June and 28 percent in July when compared to 2019. Reported fire alerts in August remained relatively flat year over year but surged in September with a 61 percent uptick versus September 2019. Fire alerts were also detected in protected areas and indigenous territories within the Brazilian Amazon, including the Jamanxim and Altamira National Forests and the Xingu and Kayapó territories.

Figure 1 Active fire inside Jamanxim National Forest, Novo Progreso, Para (9/8/20)

Source: European Union, contains modified 2020, processed with EO Browser Copernicus Sentinel data

Notably, the Bolsonaro administration has announced intentions to transfer ownership of deforestation and fire monitoring from INPE, where it has been managed for three decades, to the military. The move risks reducing transparency and mirrors earlier actions taken to prohibit Brazil’s environment agency, IBAMA, from leveraging INPE data for enforcement purposes and to largely replace IBAMA firefighters with Army units. Since the enforcement of environmental forest policy was largely transferred to the military, the Associated Press reported a drastic reduction in fines for environmental crimes and a standstill of investigations and prosecutions into rainforest destruction. Instead, “the Brazilian army appears to be focusing on dozens of small road-and-bridge-building projects that allow exports to flow faster to ports and ease access to protected areas, opening the rainforest to further exploitation.”

Figure 2: Fire Alerts in the Amazon Biome Over Time (Through 9/30/20)

Source: Chain Reaction Research chart using data from INPE

Figure 3: Regional Fire Alerts in the Amazon Biome (Through 9/30/20)

Source: Chain Reaction Research visual using data from VIIRS NASA Fire Alerts

According to analysis conducted by NASA-funded researchers in Figure 3, deforestation plays a significant role in driving forest fires in the Amazon because of the financial incentive to remove roots and other biomass. An estimated 80 percent of deforestation and associated fires in the Amazon have been linked to the Brazilian beef industry. Since Brazil is the largest exporter of beef globally, the Environmental, Social, and Governance (ESG) risks related to reputational damage and access to international markets may have significant financial consequences. At least 540,000 hectares (ha) of burned land have been deforested in the past two years, and Brazil experienced a 34.5 percent uptick in deforestation rates in the 12 months before July 2020 compared to the prior year.

Figure 4: Amazon Fire Alerts by Fire Type

Source: Amazon Dashboard by NASA, Servir, Amazonia, University of California Irvine, and Cardiff University

Deforestation has had a particularly outsized impact on Amazon states like Rondônia and Amazonas, as shown in Figure 5 and Figure 6.

Figure 5: Rondonia, Brazil Fire Alerts by Fire Type

Source: Amazon Dashboard by NASA, Servir, Amazonia, University of California Irvine, and Cardiff University

 Figure 6: Amazonas, Brazil Fire Alerts by Fire Type

Source: Amazon Dashboard by NASA, Servir, Amazonia, University of California Irvine, and Cardiff University

Moreover, the Brazilian Amazon is quickly approaching a point at which, scientists predict, much of the Amazon will not be able to maintain the water cycles needed to sustain itself, likely resulting in expanding savannah and longer fire seasons. Carlos Nobre, a climate scientist at the University of Sao Paulo, estimated that this tipping point will occur when between 20 and 25 percent of the Amazon biome is deforested (17 percent to date). Without the water cycling services provided by the Amazon, it is estimated that regional rainfall would decline by 25 percent, which would strain drinking water supply to major cities like Sao Paolo, reduce power generation capacity through hydroelectric dams, and decrease agribusiness productivity.

Already, land impacted by agribusiness-driven deforestation and fires increasingly rely upon fertilizer usage over time as nutrients drain from the soil, but additional water shortages would likely exacerbate this problem, increase financial risks for companies operating in the country. Local temperatures in Brazil are also at risk of increasing by about 1.45 degrees Celsius (2.6 degrees Fahrenheit) by 2050 in the Business-as-Usual scenario calculated in a study by scientists at Rio de Janeiro State University and the University of California, Santa Cruz. The model uses datasets related to evapotranspiration rates, land surface temperatures, forest cover, sunlight reflection to predict a local temperature impacts of deforestation and explores multiple scenarios depending on the level of policy coverage and enforcement in the Brazilian Forest Code. Notably, these estimates do not take into account the broader impacts of global climate change, which would further increase temperatures in Brazil. The worsening effects of climate change will only continue to cause business risks to grow for the agricultural sector.

2020 fire season in the Pantanal Biome

The increase in fire alerts has been even more pronounced in the Brazilian Pantanal, the largest tropical wetlands in the world. In the Pantanal, fire alerts rose by 241 percent in July, 251 percent in August, and 181 percent in September compared to 2019. A Federal University of Rio de Janeiro analysis estimated that 3.2 million hectares have burned in 2020, alone, which equates to roughly 22 percent of the Brazilian Pantanal. To put this in perspective, 3.2 million hectares is larger than the country of Belgium. Located between Brazilian grasslands and dry, Paraguayan forests, the Pantanal is home to an estimated 1,200 vertebrate animal species, 36 of which face the threat of extinction. It is also a key ecosystem for an estimated 5,000 jaguars with one of the highest densities of the species per hectare in the world. Due to the changing precipitation cycles that result from Amazon rainforest destruction and a warming Atlantic Ocean, the Pantanal reached its lowest water levels since 1973 this year and was primed for a particularly destructive fire season. An estimated 99 percent of the Pantanal is privately owned for agriculture and ranching, and the region is home to roughly 2,500 fazendas and eight million cattle. Such activities may face increasing financial risks as the dry season becomes longer and fires become more prevalent.

Figure 7: Fire Alerts in the Pantanal Biome Over Time (Through 9/30/20)

Source: Chain Reaction Research chart using data from INPE

Figure 8: Regional Fire Alerts in the Pantanal Biome (Through 9/30/20)

Source: Chain Reaction Research visual using data from VIIRS NASA Fire Alerts

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