Beef and soy industries in the Southern Amazon region of Brazil are at risk of almost USD 200 billion of productivity losses due to Amazon deforestation, according to a new scientific study. The study, published in Nature Communications in May 2021, looked at the relationship between deforestation and rainfall. It also assessed the impact of deforestation policy scenarios on agricultural revenues, finding that forest loss in frontier areas in the Northern Amazon may result in alarming reductions of rainfall in the Southern Amazon. The Southern Amazon is a highly developed agricultural region that accounts for the lion’s share of croplands and pasture in Brazil. Most agricultural production in the area is rainfed.

In a “weak environmental governance” scenario, the scientists project productivity-associated revenue losses of USD 5.6 billion for soy cultivation and USD 180.8 billion for beef production. According to the authors, “Brazil may have passed a threshold at which further Amazon deforestation translates into direct economic damage.” It concludes that the current trajectory of expansion into forested areas puts the agricultural productivity of the entire country at risk. In an interview with Thomson Reuters, a co-author of the study, Argemiro Teixeira, said that forest protection can support Brazil’s agricultural sector. “[It is] possible and necessary to improve the industry while preserving the environment,” he said.

The study quantified the financial risk in one of the most pressing chronic physical risks of deforestation to agricultural commodity sectors. As outlined in CRR’s January 2021 paper on its TCFD-aligned framework to assess deforestation risks, forest loss is agriculture’s largest climate change risk. With Brazil’s high current deforestation rates and the country’s substantial role in global soft commodity markets, rainfall pattern shifts may have a ripple effect on global food systems.

Stakeholders throughout the beef and soy supply chains bear the greatest risk. Agricultural producers will be most directly affected by the productivity losses as quantified in this study. But reduced supply and fluctuating prices may also affect companies further down the supply chain. For example, cattle prices in Brazil already increased by 60 percent over the last year. This has resulted in the temporary halting of production in meatpacking plants to adjust supply to demand, with assumed financial consequences for Brazil’s meatpackers. Reduced cattle productivity triggered by future deforestation may greatly exacerbate such impacts.

Similarly, financial institutions with holdings in these sectors face increased risk exposure and may have to mitigate physical climate risks stemming from deforestation. Firms such as UBS, which recently formed a joint venture with Banco do Brasil with an agribusiness focus, have claimed that “it is possible to deal with Brazilian agribusiness without getting involved in environmental problems.” However, any UBS client located in the Southern Brazilian Amazon may face such environmental problems even without being directly involved in forest clearing.

The physical risk of rainfall pattern shifts adds to the transition risks stemming from the global shift toward a low-carbon economy. Brazil’s beef and soy sectors face a range of such transition risks:

• Technological advancements allow alternative plant-based protein sources, such as vegetarian hamburgers, to compete with beef on price;
• Consumer preference for vegetarian options are growing in Brazil, China, the EU, and elsewhere;
• Downstream companies, including Nestle, H&M, VF Corporation, Grieg Seafood, Bremnes Seafood and Gårdsand, have excluded Brazil or specific Brazilian suppliers from their purchases in response to deforestation concerns.
• Investors have pushed for more stringent corporate zero-deforestation policies by filing shareholder resolutions (e.g. at Bunge, JP Morgan, and Procter & Gamble), issuing public letters and initiating collaborative engagement processes.
• States are placing more stringent deforestation due diligence requirements on their domiciled companies (e.g. France, Germany and the UK) or are tightening market import restrictions (e.g. the European Union). In the United States, diplomatic efforts by President Biden may be complemented by the expansion of the Lacey Act to include banning the import of commodities grown on illegally deforested land. The United States may also require companies to report on deforestation in their supply chain or ban deforestation-linked imports.

Despite these notable trends, deforestation-related transition risks have so far not impacted the bottom lines of the major companies in the beef and soy supply chains. The net profits, share prices, and profit margins of the major meatpackers and soy traders in Brazil have not seen significant shifts. Contrary to the palm oil sector, the evidence for the financial materiality of deforestation risks remains theoretical in the beef and soy industries. Despite such financial losses not materializing in the short term, climate and nature related impacts on agricultural productivity may be expected in coming years.