Consequences of Weak Sustainability Performance of Soy Supply Chains in Brazil
Growing Market Risks for the Brazilian Soy Industry from Deforestation
The large-scale expansion of soybean cultivation in Brazil has been identified as one of the key drivers of deforestation in Brazil in the last 20 years. While the 2006 Soy Moratorium has helped to weaken the relation between deforestation and soy cultivation in the Brazilian Amazon Biome, other highly biodiverse and carbon-rich eco-regions – such as the Cerrado and the Gran Chaco – have still been converted to cropland at a rapid pace. Public awareness of the role of soy cultivation in deforestation in the Cerrado has grown recently, including among soy traders, consumer facing companies and financiers.
Chain Reaction Research in its latest sustainability risk analysis research explores the existence and extent of market access risk and financial consequences in the soy supply chain due to weak sustainability performance.
The Soy Economy: Globally and in Brazil
The global soybean cultivation area has almost doubled during the last 20 years. It grew from 62.4 million hectares (ha) in the market year 1996/97, to 120.3 million ha in 2016/17. The market for soybeans and derived products reached a global value of USD 146 billion in 2017. It is expected to grow to USD 216 billion by 2025. Most soybeans are processed by being crushed into two main products – soybean meal and soybean oil, with soybean husks as by-products. The average crushing ratio for soybeans is 78.5 percent soybean meal and 18.5 percent soybean oil. Soybean meal is used as a highly nutritious ingredient in livestock feed. The oil is typically used as a cooking oil, as well as in cosmetics, detergents, industrial products, biodiesel and animal feed. Tofu is one food product made from soybean milk and is a major source of protein in oriental diets. Brazil’s role as a leading global soy producer has quickly evolved. During the last 25 years, the cultivation area in the country more than tripled, from 9.7 million ha in market year 1991/92 to 33.9 million ha in 2016/17. The same year, Brazil caught up with the U.S. as the largest global soy producer. China has become the single largest importer of soy products from Brazil, followed by the European Union (EU).
Major Findings of the Report
- At least 49% of Brazil’s soy trade is covered by some type of zero-deforestation commitment. This figure may soon reach 57%. This compares to 74% in Southeast Asian palm oil refining capacity that is covered by zero-deforestation commitments.
- These pledges are not yet adequate to prevent the conversion of natural habitats, as the focus lies on eliminating illegal deforestation from supply chains. Accompanied by insufficient transparency and a limited scope of sanction mechanisms, traders still accept soy linked to legal deforestation. This is an issue in the agricultural frontier areas of the Cerrado.
- Leading consumer goods companies have committed to zero net deforestation in agri-commodity supply chains by 2020. This increases the pressure on commodity traders to adopt and strengthen similar assurances, and address policy and implementation gaps in the short term.
- Consequently, soy producers involved in deforestation face increasing market access risk. Those that supply traders with a zero-deforestation commitment risk losing market access if involved in illegal deforestation. In the near future, the risk of losing market access may also increase due to legal deforestation.
- Soy producers face the highest risks among the three major stakeholders (growers, traders and investors). These major risks include a loss of customers and stranded assets. Medium risks are additional logistics expenses, storage costs, financing costs. Low risk stems from reputational damage. These can result in destruction of enterprise value.
- Traders have more advanced ESG policies and lower risk exposure than producers. Medium risk involves the loss of customers and reputational damage, low risks include increased refinancing costs and processing overcapacity. These too can translate into loss of value.
- Investors have a high likelihood of low severity risks from non-performing loans, reduced interest incomes, reduced access to funds, worse solvency position and financial and reputational damage that could lead to value loss.
Download the full report here.