Brazil’s soy sector faces climate-related profitability challenges, though proactive mitigation can reduce losses and capture rising consumer demand: Orbitas research

– Even climate transition pathways limiting global warming to below 2° C present significant risks for Brazil’s soy sector.
– Soy prices could drop by 15%, putting many producers at a more than 60% risk of financial loss by 2050.
– But producers could capitalize on an 88% increase in agricultural capital investment – $157 billion – could be on the table for Brazil’s farmers that transition by 2050, achieving sustainable efficiency improvement, emissions reductions and increasing yields by 1/6th.
New research from Orbitas, a Climate Advisers initiative, reveals that the Brazilian soy sector faces challenges in a transitioning world, but despite the presence of climate-related risks, there are new opportunities for capital providers and producers, who stand to benefit from the projected increase in global soy. By 2050, climate transitions may lead to an over 15% decrease in soy pricing, putting a large proportion of today’s soy farmers in Brazil at an over 60% risk of financial losses. Coupled with an anticipated fall in soy consumption in the ruminant meat sector, a major user of soya products, the soy sector faces significant risks. However, reducing production costs and greenhouse gas emissions and investing in sustainable practices and technologies can help minimize profitability shortfalls and generate a 14% increase in yields. There are, additionally, opportunities for soy producers to capitalize on the rising global demand for soy products, which is projected to increase over 14% despite a reduction in demand for ruminant meat feedstock, due to its diverse range of downstream applications, including plant protein, biofuel and as feed for a variety of livestock. In a new report entitled Brazil’s Soy Sector Amidst Climate Transitions, Orbitas analyzed different government, consumer and private sector responses to climate change, known as ‘climate transitions.’ The report considers the opportunities for limiting profitability shortfalls, which include investing in sustainable efficiency improvements, reducing production costs, lowering emission intensity and greenhouse gas emissions costs, minimizing land rent payments and capitalizing on sustainable technological advancements, emerging market segments and diversified revenue streams. Brazil’s soy sector generated USD 86.9 billion in gross revenue in 2020 and supplies international markets with more than 50% of soy traded globally. Brazil’s continued dominance in the global soy sector and its ability to mitigate financial risks will depend on the ability of key stakeholders to prepare for inevitable climate transitions in the sector. In the analysis, Orbitas used different scenarios to showcase the potential impacts that climate transitions may have upon the Brazilian soy sector and reflect how different levels of climate action ambition can create material financial risks and opportunities. It discovered that even under its Modest-Forecast scenario – one aligned with keeping global warming under 2o C – there are still anticipated challenges and changes required for the sector. This Modest-Forecast scenario anticipates the following significant risks for the Brazilian soy sector by 2050: – Economic volatility common under climate transitions could lead to the probability of financial losses exceeding 60% for many producers if current practices are continued. – Competition for land could rise significantly, resulting in an 11% reduction in cropland areas. – Technological innovations are expected to be a major driver in decreasing production costs, potentially reducing producer prices by 15%. – Low Performance soy farms in Brazil could see profitability plummet over USD 617 below 2020 levels by 2050. – Shifting consumer demand away from ruminant meat consumption could decrease the demand for soy as a feedstock, leading to a 3% decrease in Brazilian soy demand. Orbitas goes on to outline that significant opportunities exist for stakeholders operating in Brazil’s soy sector under a 2o C-aligned forecast: – A projected 88% increase in agricultural investment incentivized by increasing competition for agricultural land could increase the average yield per hectare for soy farmers by 1/6th. – Producers could capitalize on the global demand for soy products which is projected to increase by over 14% due to the wide range of applications for soy. Diversifying into growing markets, including plant protein, biofuel and non-ruminant livestock feed markets, can increase producer resilience. – Rising adoption of technology and sustainable practices could enhance land use efficiency of crops by 8%. – Brazilian soy production could increase by 2%. – Scaling the shift toward more sustainable, forest-friendly and efficient agricultural practices to meet rising supply chain due diligence standards could allow Brazil to increase soy exports by 6%. – High Performance farms could increase profitability by 4/5th (83%) through technological innovation. – Net emissions from agriculture and land use could decrease by 1,356 Mt CO2 compared to 2020 levels. There are opportunities for Brazilian soy farmers to boost profitability by proactively adopting technology and management solutions that increase financial resilience to climate transitions and diversify revenue streams. Implementing practices like no-till farming, cover crop rotation, and integrated pest management can cut production costs and improve yields, particularly for those lacking access to affordable financing. These improvements not only lower the cost per unit of output but also confer a competitive edge, crucial for sustaining positive margins amidst projected declines in soy prices ranging from 10 to 28% by 2050. Compared to the Modest-Forecast policy approach predicting a 15% decrease in soy producer prices by 2050, Ambitious-Innovation could potentially lead to a steeper 28% decrease. “Investing today in sustainable practices and efficiency improvements is not just about securing the competitiveness of Brazil’s soy sector—it’s about safeguarding Brazil’s future amidst climate transitions,” said Niamh McCarthy, Director, Orbitas and report author. “Climate risks are unavoidable, but by prioritizing resilience and innovation, soy producers can navigate the challenges, capitalize on opportunities, and sustainably shape the trajectory of the soy industry.” Mitigating climate risks requires collaboration across the soy value chain. Investing in soy production efficiency, not land expansion, will be crucial for market competitiveness by 2050. Most producers must sustainably intensify without deforestation or costly land use to remain profitable. Investments in efficiency, emission-reducing technologies, land ownership, new markets, and revenue diversification are key to maintain Brazil’s soy dominance and enable climate transition opportunities. “We have seen increasing climate change awareness and concern from Brazilian farmers,” commented Luiz Carlos Carvalho, President of the Brazilian Agribusiness Association. “It is critical for agribusinesses to understand climate transitions and to leverage the significant opportunities they present to ensure long-term profitability and success.” “The future of Brazilian agriculture will be very different from its past. This Orbitas report highlights the risks and opportunities for investors and producers emerging from transitioning to resilient and low-carbon production systems,” added Dr. Alexandre Köberle, Senior Fellow, Orbitas and report author. “It pioneers spatially disaggregated analysis aiming to provide guidance for climate-smart investment decisions.” Orbitas’ recent analysis on the Brazilian cattle sector offers further insights into sustainable practices and resilience strategies, providing valuable resources for stakeholders across Brazil’s agricultural landscape, read the full report here.   Orbitas is an initiative of Climate Advisers, and combines cutting edge economic modeling with traditional financial analysis to highlight emerging climate transition risks and opportunities for smarter financing. Climate change and the transitions to mitigate it represent some of the potentially largest systemic changes our economies have ever seen. Climate transition risks – legal and policy, technology, market and reputation – are all potential pitfalls that can impact performance and are increasingly critical to address, and they all present corresponding opportunities for market leaders.