Risks and opportunities for Brazilian agribusiness

Experts assess aspects that put pressure on Brazilian agricultural production and how these factors connect with Horiens’ protection proposals

The month of November 2023 was marked by a heatwave that hit mainly the Southeast and Midwest regions of Brazil. According to the National Meteorological Institute (Inmet), an agency linked to the Ministry of Agriculture and Livestock, more than 2,700 municipalities were affected, which means that they spent at least five days with temperatures 5ºC above the average expected for the month. The El Niño phenomenon and global warming are the main causes of these temperature changes.

There is a lot of talk about the impact of climate change on agriculture. To discuss how the sector can prepare itself to face the new challenges, we brought together Horiens experts for this chat, which marks the debut of the “Seeing beyond” series.

From the latest updates on the sector, which you have seen in news and market events, what are the points of attention for agribusiness in the short and medium term?

Márcio dos Santos (Leader of Horiens’ risk analysis laboratory, Risk Labs) – There are two very clear trends and it is worth noting that they are antagonistic. On the one hand, the impact of climate change on agriculture and productivity is quite clear. At the same time, there is an increase in demand for food, driven by factors such as population growth, an increase in per capita consumption and per capita income. Climate change is pushing down production, especially of grains, while the second factor is pushing it up.

Francisco Paladino (Risk and Insurance Manager at Horiens) – Embrapa has a very interesting study called “Vision 2030: The Future of Brazilian Agriculture” (click here to access). The survey shows that Brazilian agriculture will play a leading role in the coming years. In the last five decades, the country has gone from being a food importer to one of the world’s most important producers and exporters, feeding approximately 1.5 billion people in the world. This same document lists Climate Change as one of the seven megatrends that will impact the agricultural sector.

Recently, the consultancy Datagro raised its estimate of a deficit in the world sugar balance for the 2023/24 harvest to 4.36 million tons due to the impacts of the El Niño phenomenon. How does this projection impact the Brazilian sugar-energy sector?

Francisco – The sugar deficit in the world already exists today. In the last three years, sugar stocks have had to be burned.  Now with India’s decision, which is one of the world’s main players, to reduce sugar exports in order to focus on ethanol production and their Proálcool Program, there will be an even bigger shortfall of sugar in the world. It’s a great opportunity for Brazilian mills, which have idle production capacity. The bottleneck in Brazil has been agricultural productivity and planted area, not industrial capacity.

Another important point in the global context is that Russia and Ukraine are major fertilizer producers and the war between them has caused the price of this commodity to soar. So the production chain in the agricultural sector remains tight. Producers don’t have much margin for error. If they take out bank financing to rotate the crop, the margin is tight. This is an additional factor for risk management. The high price of fertilizer in recent years has led many mills to avoid reforming their sugarcane fields in the most appropriate way, which results in a loss of productivity due to management and ends up impacting the claims of traditional agricultural insurance.

Is traditional agricultural insurance enough to protect producers?

Ingrid Gregório (Risk and Insurance Manager at Horiens) – Climate risks are among the most impacting risks for rural producers. In this context, it’s important to mention Agrymetric (click here to find out more), a differentiated parametric insurance that protects producers from climate risk, i.e. based on a detailed data analysis, it will focus on climate risk itself, which is uncertainty, because the producer knows if he’s doing it right or not.

Francisco – It’s important that we clearly show the difference between traditional agricultural insurance and parametric insurance. The Embrapa material we cited earlier shows the need to improve risk transfer. Parametric is an innovation that responds to this demand from the agricultural market. This is becoming increasingly clear to the insurance market and also to producers. The great thing about Agrymetric is that we’ve managed to address climate risk insurance based on data, statistical models and predictive analysis, in other words, it’s a high-precision insurance product, which is great for all parties involved – the insured and the insurer.

Márcio – There’s a question of opportunity to protect the business. The insurance solution that existed in the past was not fully adequate. That’s where Agrymetric comes in, which is a solution that meets the interests of the business and is available. Sugar exports were already a complex issue for the insurance sector in the relatively recent past, especially Guarantees, because sugar that was in Guarantee disappeared when international prices increased. Today we have a scenario of opportunity for the Brazilian market as a whole.

It is also important to mention that sugarcane will not be the crop most impacted by climate change, according to the Embrapa survey. It should be the only exception among Brazilian crops that may even see an increase in productivity by 2050. Everything else, including soybeans and corn, is expected to see a drop in productivity, up to 50% in the case of some grains.

Is Agrymetric exclusive to sugar cane or does it apply to other crops?

Ingrid – Our work is by no means restricted to sugarcane. There are many other cultures that can be parameterized.  Soy is a good example. But we talk a lot about sugarcane because we have a lot of experience with this crop at Horiens. In 2022, we took out the largest sugarcane insurance policy in Brazil (find out more in our cases: click here).

What do you see as the future prospects for Brazilian agribusiness?

Márcio – The horizon is very promising. For the sugar-energy sector, for example, we will have a revolution with the reforming of ethanol to produce hydrogen. We still don’t know how this will happen. But until a few years ago it was a sector that suffered a lot, because it depended a lot on the price of gasoline, which was artificially controlled. Now it’s a sector that already has more capital, including large international groups with an eye on acquisitions. The ESG trend and the goals of decarbonizing the economy are also helping to boost the sector. On this environmental issue, Brazil is far ahead of other countries.

Ingrid – Several mills are in the process of adapting to corn ethanol, not least as a way of taking advantage of the off-season, from December to March, but also to turn part of their production to sugar. The price of gasoline is always an unknown. Sugar has a promising future for the Brazilian sugar-energy market.

Francisco – When we look at the risks in other segments of agribusiness, we have seen an increase in the confinement of cattle. Brazil has always been a country of extensive grazing. With the lack of abundant land, producers are starting to increase the number of feedlots for the final fattening. In the United States, almost 90% of cattle before being slaughtered are confined. In Brazil 10%, but it is increasing rapidly. And the confinement of cattle brings with it a series of risks for the herd, such as disease, lightning strikes and fires. Livestock insurance is likely to develop over the next few years. The increase in demand for animal protein is a consumer trend that goes hand in hand with this.

Ingrid – Brazil has a huge potential to increasingly position itself as the world’s main food hub. The country has favorable climatic conditions, the availability of natural resources and is well positioned as an agricultural power committed to environmental preservation.

Want to talk more with the Horiens team about risk management for agribusiness? Contact us: /contact/. It will be a pleasure to deepen this dialog.